P R O S P E C T U S
3,250,000 Shares
AVIATION SALES
[LOGO] COMPANY
Common Stock
----------
All of the shares of Common Stock offered hereby are being sold by
Aviation Sales Company (the "Company"). Prior to this offering (the
"Offering"), there has not been a public market for the Common Stock of the
Company. See "Underwriting" for information relating to the factors considered
in determining the initial public offering price. The Company's Common Stock has
been approved for listing on The New York Stock Exchange under the symbol "AVS,"
subject to official notice of issuance.
- -----------------------------------------------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
- -----------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=============================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------------------------------------
Per Share $19.00 $1.33 $17.67
- -----------------------------------------------------------------------------
Total(3) $61,750,000 $4,322,500 $57,427,500
=============================================================================
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses of the Offering, estimated at $600,000.
(3) The Company has granted the several Underwriters a 30-day option to
purchase up to 487,500 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised
in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $71,012,500, $4,970,875, and
$66,041,625, respectively. See "Use of Proceeds" and "Certain
Transactions."
----------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject
to certain conditions. It is expected that certificates for the shares of
Common Stock offered hereby will be available for delivery on or about
July 2, 1996, at the office of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
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Smith Barney Inc.
Alex. Brown & Sons
INCORPORATED
Sanders Morris Mundy
June 26, 1996
<PAGE>
[PHOTOS]
[Picture of warehouse facility and computer terminal]
Aviation Sales Company is a recognized worldwide leader in the aircraft spare
parts redistribution market, selling spare parts for Boeing, McDonnell Douglas,
Lockheed and Airbus aircraft, and Pratt & Whitney, General Electric and Rolls
Royce jet engines.
With over 35 million individual parts in inventory and a worldwide network of
sales personnel and independent representatives, the Company sells to over 1,000
customers, including commercial passenger airlines, air cargo carriers,
maintenance and repair facilities and other redistributors.
Offering inventory management services including purchasing services, repair
management, warehouse management, aircraft disassembly services and consignment
and leasing of aircraft spare parts, Aviation Sales Company is a leader in
"TOTAL INVENTORY SOLUTIONS" designed to meet the diverse needs of its customers.
AVIATION SALES COMPANY
A LEADER IN "TOTAL INVENTORY SOLUTIONS"
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL
INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
OVER-ALLOTMENT OPTION.
THE COMPANY IS A NEWLY FORMED DELAWARE CORPORATION. THE OPERATIONS OF THE
BUSINESS DESCRIBED IN THIS PROSPECTUS WERE PREVIOUSLY CONDUCTED BY ASC
ACQUISITION PARTNERS, L.P. D/B/A AVIATION SALES COMPANY (THE "PARTNERSHIP") AND
ARE NOW BEING CONDUCTED BY THE COMPANY. UNLESS THE CONTEXT OTHERWISE REQUIRES,
REFERENCES TO THE "COMPANY" THROUGHOUT THIS PROSPECTUS, INCLUDING THE FINANCIAL
INFORMATION CONTAINED HEREIN, REFER TO THE OPERATIONS OF THE PARTNERSHIP (AND
ITS PREDECESSOR, AJT CAPITAL PARTNERS) PRIOR TO THE OFFERING AND THE OPERATIONS
OF THE COMPANY AND ITS SUBSIDIARIES THEREAFTER. SEE "HISTORY OF THE COMPANY,"
"USE OF PROCEEDS" AND "CERTAIN TRANSACTIONS."
THE COMPANY
The Company is a recognized worldwide leader in the aircraft spare parts
redistribution market and provides a wide range of value-added inventory
management services to its customers. The Company sells aircraft spare parts
to major commercial passenger airlines, air cargo carriers, maintenance and
repair facilities and other redistributors throughout the world. Parts sold
by the Company include rotable and expendable airframe and engine components
for commercial airplanes, including Boeing, McDonnell Douglas, Lockheed and
Airbus aircraft and Pratt & Whitney, General Electric and Rolls Royce jet
engines. The inventory management services offered by the Company include
purchasing services, repair management, warehouse management, aircraft
disassembly services and the consignment and leasing of aircraft spare parts.
During 1995, the Company generated operating revenues of $113.8 million,
operating income of $18.6 million and, after giving pro forma effect to
income taxes, net income of $6.3 million ($9.7 million as adjusted). Of such
revenues, approximately 60% were derived from sales to domestic customers and
approximately 40% were derived from sales to international customers.
The Company believes that the annual worldwide market for aircraft spare
parts is approximately $10.0 billion, of which approximately $1.3 billion
reflects sales of aircraft spare parts in the redistribution market, and that
the redistribution market will continue to grow in the future. Factors
causing the expansion of the redistribution market include the increasing
size and age of the worldwide airline fleet and the increasing pressures on
airlines and maintenance and repair facilities to control their costs.
The redistribution market is highly fragmented, with a limited number of
large, well-capitalized companies selling a broad range of aircraft spare
parts, and numerous smaller competitors servicing specialized niches. The
Company believes that it is one of the largest redistributors of aircraft
spare parts in the world and one of a select number of redistributors well
positioned to fully service the aircraft spare parts requirements of its
customers. The size of the Company's owned inventory (with over 485,000 line
items and over 35 million individual parts currently in stock), the strength
of its management information systems (which currently contain data on more
than 3.6 million line items), its ability to provide comprehensive service to
its customers and its available capital base provide competitive advantages
to the Company.
BUSINESS STRATEGY
/bullet/ INTERNAL GROWTH. The Company's strategy is to increase revenues
and operating income through continued customer penetration in
its existing markets and expansion into new markets. The Company
intends to achieve this by continuing to increase the size and
breadth of its inventory and by continuing to expand its
marketing efforts to its worldwide customer base. The Company
will also continue to offer its customers a broad array of
inventory management services, allowing its customers to reduce
their costs of operations by outsourcing some or all of their
inventory management functions and to take advantage of
opportunities to maximize the value of their spare parts
inventory.
3
<PAGE>
/bullet/ CAPITALIZE ON LARGE BULK PURCHASE OPPORTUNITIES. The Company
believes that opportunities will arise on a regular basis to make
large "bulk" purchases of inventory at favorable prices. Bulk
inventory purchases allow the Company to obtain large inventories
of aircraft spare parts at a lower cost than can ordinarily be
obtained by purchasing such parts on an individual basis,
resulting in higher gross margins on sales of such parts. Since
1992, the Company has evaluated a number of bulk purchase
opportunities and successfully completed two large bulk inventory
acquisitions. The Company believes that its market presence,
experience in evaluating bulk inventory acquisitions,
sophisticated management information systems and capital strength
enable it to quickly analyze and complete large bulk purchase
opportunities to the extent that the economics of such purchases
are considered favorable.
/bullet/ PURSUE ACQUISITIONS OF COMPLEMENTARY BUSINESSES. A key element of
the Company's strategy involves growth through acquisitions of other
companies, assets or product lines that would complement or expand
the Company's existing aircraft spare parts redistribution and
inventory management services business. The Company believes that
acquisitions will enable it to leverage its fixed costs of
operations and further expand the products and services which it can
offer to its customers. The Company is currently evaluating a number
of acquisition opportunities and is at varying stages of negotiation
with respect to such acquisitions. No commitments or binding
agreements have been entered into to date and accordingly no
assurance can be given that any of the acquisitions currently being
considered will be consummated. None of such acquisitions, if
consummated, would constitute a material acquisition for the
Company under applicable accounting rules.
INDUSTRY TRENDS
/bullet/ REDUCTION IN NUMBER OF APPROVED VENDORS. In order to reduce
purchasing costs and streamline purchasing decisions, airline
purchasing departments have been reducing the number of their
"approved" suppliers. During the last few years, several major
airlines have reduced their supplier lists from as many as 50 to
a core group of five to ten suppliers. In each such case, the
Company was one of the suppliers selected. The Company believes
that this trend will continue in the future and that, due to its
market presence and reputation for quality, the Company will
continue to be selected as an approved supplier.
/bullet/ CONSOLIDATION OF THE REDISTRIBUTION MARKET. As a result of
reductions in the supplier base by airline purchasing
departments, there has been and the Company believes there will
continue to be a consolidation in the redistribution market. The
Company further believes that only those redistributors such as
the Company, with extensive inventories, adequate capital and the
ability to provide the documentation of traceability necessary to
comply with applicable regulatory and customer requirements, will
survive the consolidation of the redistribution market.
/bullet/ INCREASED OUTSOURCING OF INVENTORY MANAGEMENT FUNCTIONS. Airlines
incur substantial expenditures in connection with fuel, labor and
aircraft ownership. Further, airlines have come under increasing
pressure during the last decade to reduce the costs associated
with providing air transportation services. While several of the
expenditures required to operate an airline are beyond the direct
control of airline operators (e.g., the price of fuel and labor
costs), the Company believes that obtaining replacement parts from
the redistribution market and outsourcing inventory management
functions are areas in which airline operators can reduce their
operating costs. Outsourcing inventory management functions allows
these activities to be handled more inexpensively and efficiently by
a redistributor like the Company that can achieve economies of scale
unavailable to individual airlines. The Company believes that its
offering of a broad array of inventory management services to its
customers, in conjunction with the sale of aircraft spare parts,
will give the Company a significant competitive advantage in serving
its customers.
In addition to the inventory management services described above,
customers are increasingly seeking to consign inventories or to
lease aircraft spare parts. By consigning inventories to a
4
<PAGE>
redistributor such as the Company, customers are able to distribute
their aircraft spare parts to a larger number of prospective
inventory buyers, allowing the customer to maximize the value of its
inventory. Consignment also enables the Company to offer for sale
significant parts inventory at minimal capital cost to the Company.
Additionally, over the last few years, several airlines have chosen
to lease inventories of aircraft spare parts in order to preserve
capital while maintaining adequate spare parts support. The Company
believes that this trend to lease aircraft spare parts will continue
in the future and that it has a competitive advantage in providing
this leasing service due to its ability to maximize the residual
value of the leased parts after termination of the lease through
sales of the parts in the ordinary course of its business.
COMPANY HISTORY AND ORGANIZATION
The Company commenced operations in February 1992 through the acquisition
by AJT Capital Partners, a Delaware general partnership d/b/a Aerospace
International Services ("AIS") of the aircraft spare parts inventory and
certain other assets owned by the Estate of Eastern Air Lines, Inc. ("the
Eastern Inventory"). Between February 1992 and December 1994, the Company's
primary business was the marketing and sale of the Eastern Inventory. In
December 1994, the Company acquired the assets and business of the Aviation
Sales Company business unit ("ASC") from Aviall Services, Inc. The Company
believed that the combination of AIS, with its extensive Eastern Inventory,
and ASC, with its industry leading market position, reputation for quality,
experienced sales and marketing staff and superior management information
systems, would create a more formidable competitor in the aircraft spare parts
redistribution market. Since acquiring ASC, the Company has significantly
increased revenues by increasing its sales and marketing efforts and by
offering its customers a wide array of inventory management services.
Immediately prior to the effectiveness of the Registration Statement of which
this Prospectus forms a part, all but one of the parties holding interests in
the Partnership contributed their interests in the Partnership to the Company in
exchange for shares of Common Stock. Simultaneously, one of the parties holding
an interest in the Partnership contributed its interest in the Partnership to
the Company in exchange for shares of Common Stock and an amount equal to the
proceeds to be received by the Company from the Underwriters for 500,000 shares
of Common Stock sold in the Offering, plus up to 75,000 additional shares of
Common Stock (and/or the proceeds in respect of the sale of such shares to the
extent the over-allotment option is exercised). See "Use of Proceeds" and
"Certain Transactions." After the Offering, the operations of the business will
be conducted by the Company.
The Company's principal executive offices are located at 6905 N.W. 25th
Street, Miami, Florida 33122. The Company's telephone number is (305)
592-4055.
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common Stock offered .............. 3,250,000 shares (1)
Common Stock to be outstanding
after the Offering ............... 7,750,000 shares (1)(2)
Use of Proceeds ................... To repay indebtedness and to pay an obligation to one of
the Company's principal stockholders incurred in
connection with the formation of the Company. See "Use of
Proceeds."
New York Stock Exchange symbol ... "AVS"
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<FN>
(1) Does not include up to 487,500 shares of Common Stock that may be sold by
the Company pursuant to the Underwriters' over-allotment option. See
"Underwriting."
(2) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to
the Company's Stock Option Plans. See "Management--Stock Option Plans."
</FN>
</TABLE>
5
<PAGE>
SUMMARY FINANCIAL DATA
THE SUMMARY FINANCIAL DATA SET FORTH BELOW IS DERIVED FROM AND SHOULD BE
READ IN CONJUNCTION WITH THE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THE PRO FORMA FINANCIAL DATA INCLUDED HEREIN IS PRESENTED FOR
INFORMATIONAL PURPOSES ONLY AND MAY NOT REFLECT THE COMPANY'S FUTURE RESULTS
OF OPERATIONS AND FINANCIAL POSITION OR WHAT THE RESULTS OF OPERATIONS AND
FINANCIAL POSITION OF THE COMPANY WOULD HAVE BEEN HAD SUCH TRANSACTIONS
ACTUALLY OCCURRED AS OF THE DATES INDICATED. AMOUNTS PRESENTED ARE IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------- --------------------------------------
1994 1995 1996
-------------------------- -------------------------- --------------------------
1993 ACTUAL COMBINED(1) ACTUAL AS ADJUSTED(2) 1995 ACTUAL AS ADJUSTED(2)
----------- -------------- ----------- ---------- -------------- --------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues ... $23,429 $28,191 $89,335 $113,803 $113,803 $28,451 $32,898 $32,898
Gross profit .......... 12,267 16,174 29,396 42,489 42,489 11,797 11,710 11,710
Income from operations 2,885 5,649 1,611 18,573 18,573 6,034 4,992 4,992
Interest and other
expenses, net ....... 6,041 4,458 8,348 8,287 2,617 2,083 1,923 525
----------- -------------- ----------- ---------- -------------- --------- ---------- --------------
Net income (loss)
before taxes ........ (3,156) 1,191 (6,737) 10,286 15,956 3,951 3,069 4,467
Income taxes(3) ....... -- -- -- 4,012 6,223(4) 1,541 1,197 1,742(4)
----------- -------------- ----------- ---------- -------------- --------- ---------- --------------
Net income (loss) ..... $(3,156) $ 1,191 $(6,737) $ 6,274 $ 9,733(5) $ 2,410 $ 1,872 $ 2,725(5)
=========== ============== =========== ========== ============== ========= ========== ==============
Net income per
share(6) ............ $ 1.25 $ 1.26(5) $ .48 $ .37 $ .35(5)
========== ============== ========= ========== ==============
</TABLE>
MARCH 31, 1996
---------------------------
AS
BALANCE SHEET DATA: ACTUAL ADJUSTED(2)
------------ -------------
Accounts receivable ........................... $ 26,211 $ 26,211
Inventories .................................... 53,347 53,347
Working capital .................................... 47,444 63,961
Total assets .......................................100,255 102,155(7)
Total debt ..................................... 67,122 21,105
Stockholders' equity .............................. 17,127 65,044(7)(8)
- ----------
(1) Reflects the pro forma combined historic results of the Company assuming
the acquisition of ASC had occurred on January 1, 1994. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 3 to Notes to the Company's Consolidated Financial Statements.
(2) Adjusted for the sale of 3,250,000 shares by the Company in the Offering and
the application of the net proceeds therefrom as if the closing of the
Offering and the consummation of the Amended Credit Facility had occurred at
the beginning of the applicable period for Statement of Income Data and on
March 31, 1996 for Balance Sheet Data. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(3) Pro forma adjustments as if the Company had been taxed as a C-corporation
since the beginning of the applicable period for the 1995 and 1996
financial data presented. See "History of the Company."
(4) Excludes $3,000 representing the deferred tax benefit to be realized by
the Company as a result of the contribution of partnership interests
described in "Certain Transactions" and Note 15 to Notes to the Company's
Consolidated Financial Statements. This benefit will be recorded in the
quarter in which the contribution of partnership interests occurs.
(5) Excludes extraordinary expenses arising from the write-off of deferred
financing costs incurred in connection with borrowings to finance the
acquisition of ASC, which will be repaid with the proceeds of the Offering.
This expense will be recorded in the quarter in which the Offering is
completed and would have been approximately $1,600 for the year ended
December 31, 1995 and approximately $1,300 for the three months ended March
31, 1996. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--The Acquisition Loans" and
"--Liquidity and Capital Resources."
(6) Weighted average shares outstanding are 5,000,000 for 1995 and first
quarter 1996 and 7,750,000 for 1995 and first quarter 1996 as adjusted.
See Notes 14 and 15 to Notes to the Company's Consolidated Financial
Statements.
(7) Includes $3,000 representing the deferred tax benefit to be realized by
the Company as a result of the contribution of partnership interests
described in Note 4 above and $1,100 for the write-off of deferred
financing costs as of March 31, 1996 described in Note 5 above.
(8) Gives effect to a $1,718 estimated distribution to the partners of the
Partnership representing 40% of the income before provision for income taxes
of the Company for the three months ended March 31, 1996 and additional
amounts due to the partners related to the Partnership's 1995 net income,
and a $350 facility fee payable to certain parties related to several of the
partners of the Partnership. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--The Acquisition Loans,"
"--Liquidity and Capital Resources" and "Certain Transactions."
6
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK
FACTORS, TOGETHER WITH THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY.
EFFECTS OF THE ECONOMY ON THE OPERATIONS OF THE COMPANY
Since the Company's customers consist of airlines, maintenance and repair
facilities that service airlines and other aircraft spare parts
redistributors, the Company's business is impacted by the economic factors
which affect the airline industry. When such factors adversely affect the
airline industry, they tend to reduce the overall demand for aircraft spare
parts, causing downward pressure on pricing and increasing the credit risk
associated with doing business with airlines. Additionally, factors such as
the price of fuel affect the aircraft spare parts market, since older
aircraft (into which aircraft spare parts are most often placed) become less
viable as the price of fuel increases. There can be no assurance that
economic and other factors which might affect the airline industry will not
have an adverse impact on the Company's results of operations.
RISKS REGARDING THE COMPANY'S INVENTORY
The Company's inventory consists principally of new, overhauled,
serviceable and repairable aircraft parts that are purchased from many
sources. Before parts may be installed in an aircraft, they must meet certain
standards of condition established by the Federal Aviation Administration
("FAA") and/or the equivalent regulatory agencies in other countries.
Specific regulations vary from country to country, although regulatory
requirements in other countries generally coincide with FAA requirements.
Parts must also be traceable to sources deemed acceptable by such agencies.
See "Business--Government Regulation and Traceability." Parts owned or
acquired by the Company may not meet applicable standards or standards may
change in the future, causing parts which are already contained in the
Company's inventory to be scrapped or modified. Aircraft manufacturers may
also develop new parts to be used in lieu of parts already contained in the
Company's inventory. In all such cases, to the extent that the Company has
such parts in its inventory, their value may be reduced.
GOVERNMENT REGULATION
The aviation industry is highly regulated in the United States by the FAA
and in other countries by similar agencies. While the Company's business is
not regulated, the aircraft spare parts which it sells to its customers must
be accompanied by documentation which enables the customer to comply with
applicable regulatory requirements. There can be no assurance that new and
more stringent government regulations will not be adopted in the future or
that any such new regulations, if enacted, would not have an adverse impact
on the Company. See "Business--Government Regulation and Traceability."
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results are affected by many factors, including
the timing of orders from large customers, the timing of expenditures to
purchase inventory in anticipation of future sales, the timing of bulk
inventory purchases, and the mix of available aircraft spare parts contained,
at any time, in the Company's inventory. A large portion of the Company's
operating expenses are relatively fixed. Since the Company typically does not
obtain long-term purchase orders or commitments from its customers, it must
anticipate the future volume of orders based upon the historic purchasing
patterns of its customers and upon its discussions with its customers as to
their future requirements. Cancellations, reductions or delays in orders by a
customer or group of customers could have a material adverse effect on the
Company's business, financial condition and results of operations. For a
discussion of the impact of the timing of bulk inventory purchases on operating
results between the first six months of 1995 and the first six months of 1996,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Industry Overview and Trends."
7
<PAGE>
GROWTH STRATEGY AND RISKS RELATING TO FUTURE ACQUISITIONS
A key element of the Company's strategy involves growth through the
acquisition of additional inventories of aircraft spare parts and the
acquisition of other companies, assets or product lines that would complement
or expand the Company's existing aircraft spare parts redistribution and
inventory management services business. The Company's ability to grow by
acquisition is dependent upon, and may be limited by, the availability of
suitable aircraft parts inventories, acquisition candidates and capital, and
by restrictions contained in the Company's credit agreements. In addition,
acquisitions involve risks that could adversely affect the Company's
operating results, including the assimilation of the operations and personnel
of acquired companies, the potential amortization of acquired intangible
assets and the potential loss of key employees of acquired companies. There
can be no assurance that the Company will be able to consummate acquisitions
on satisfactory terms. The Company is currently evaluating a number of
acquisition opportunities and is at varying stages of negotiation with respect
to such acquisitions. No commitments or binding agreements have been entered
into to date and accordingly no assurance can be given that any of the
acquisitions currently being considered will be consummated. None of such
acquisitions, if consummated, would constitute a material acquisition for the
Company under applicable accounting rules. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Company Strategy."
RELIANCE ON EXECUTIVE OFFICERS AND KEY EMPLOYEES
The continued success of the Company is dependent to a significant degree
upon the services of its executive officers and upon the Company's ability to
attract and retain qualified personnel experienced in the various phases of
the Company's business. The Company has employment agreements with all of its
executive officers. The ability of the Company to operate successfully could
be jeopardized if one or more of its executive officers were unavailable and
capable successors were not found. The employment agreements between the
Company and its executive officers are individually terminable by each
executive officer upon a change of control of the Company. See "Management."
COMPETITION
There are numerous suppliers of aircraft spare parts in the aviation
market worldwide and, through inventory listing services, customers have
access to a broad array of suppliers. These include major aircraft
manufacturers, airline and aircraft service companies, and aircraft spare
parts redistributors. Certain of the Company's competitors have substantially
greater financial and other resources than the Company. There can be no
assurance that competitive pressures will not materially and adversely affect
the Company's business, financial condition or results of operations. See
"Business--Competition."
PRODUCT LIABILITY
The Company's business exposes it to possible claims for personal injury
or death which may result from the failure of an aircraft spare part sold by
it. While the Company maintains what it believes to be adequate liability
insurance to protect it from such claims, and while no material claims have,
to date, been made against the Company, no assurance can be given that claims
will not arise in the future or that such insurance coverage will be
adequate. Additionally, there can be no assurance that insurance coverages
can be maintained in the future at an acceptable cost. Any such liability not
covered by insurance could have a material adverse effect on the financial
condition of the Company. See "Business--Product Liability and Legal
Proceedings."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
7,750,000 shares of Common Stock. Of these shares, the Common Stock sold in
the Offering will be freely tradable without restriction or limitation under
the Securities Act of 1933, as amended (the "Securities Act"), unless
purchased by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act.
8
<PAGE>
The Company, its executive officers, directors and stockholders, have agreed
that, for a period of 180 days from the date of this Prospectus, they will not,
without the prior written consent of Smith Barney Inc., sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase or
otherwise transfer or dispose of, any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock,
subject to certain exceptions. The sale of a substantial number of shares of
Common Stock in the public market following the Offering, or the perception that
such sales could occur, could adversely affect the market price of the Common
Stock and/or impair the Company's ability in the future to raise additional
capital through the sale of its equity securities. See "Shares Eligible for
Future Sale."
DILUTION
Investors in the Offering will experience immediate and substantial
dilution in the net tangible book value of the shares of Common Stock
purchased in the Offering. See "Dilution."
ABSENCE OF PUBLIC MARKET; DIVIDEND POLICY
Prior to the Offering, there has been no public market for the shares of
Common Stock offered hereby and there can be no assurance that an active
trading market will develop or be sustained subsequent to the Offering. The
initial public offering price of the Common Stock has been determined in
negotiations among the Company and the representatives of the Underwriters
(the "Representatives") and may not be indicative of the prices that may
prevail in the public market. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price. There
can be no assurance that the market price of the Common Stock will not
decline below the initial public offering price. Additionally, the Company
does not anticipate paying dividends on its Common Stock in the foreseeable
future. See "Dividend Policy."
PRICE VOLATILITY
The market price of the Common Stock could be subject to significant
fluctuations in response to variations in quarterly operating results and
other factors. From time to time in recent years, the securities markets have
experienced significant price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of particular
companies. These broad fluctuations may adversely affect the market price of
the Common Stock.
POTENTIAL INFLUENCE BY CERTAIN STOCKHOLDERS
Upon completion of the Offering, two of the Company's stockholders will
own 29.0% and 20.3%, respectively, of the outstanding Common Stock and the
Company's executive officers will own an aggregate of 8.7% of the outstanding
Common Stock. While each of these stockholders is an independent party, if
these parties were to act together as a group, they would have the ability to
control the election of all of the members of the Company's Board of
Directors and, therefore, to control the business, policies and affairs of
the Company. See "Principal Stockholders."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain provisions
that may have the effect of discouraging certain transactions involving an
actual or threatened change of control of the Company. See "Description of
Capital Stock--Certain Provisions of the Certificate and Bylaws" for a
description of these provisions. In addition, the Board of Directors of the
Company has the authority to issue up to 1,000,000 shares of preferred stock
in one or more series and to fix the preferences, rights and limitations of
any such series without stockholder approval. See "Description of Capital
Stock--Preferred Stock." The ability to issue preferred stock could have the
effect of discouraging unsolicited acquisition proposals or making it more
difficult for a third party to gain control of the Company, or otherwise
could adversely affect the market price of the Common Stock.
9
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 3,250,000 shares of Common Stock
offered hereby are estimated (after deducting underwriting discounts and
commissions and offering expenses) to be approximately $56.8 million ($65.4
million if the over-allotment option is exercised in full).
The Company intends to use the net proceeds to repay (i) all subordinated
debt due to certain of its stockholders and a related facility fee ($7.4
million), (ii) all amounts outstanding under one of the Company's term loans
("Term Loan B") ($15.0 million), (iii) a portion ($15.0 million) of the amount
outstanding under a second of the Company's term loans ("Term Loan A") ($35.0
million) and (iv) amounts due to J/T Aviation Partners ("J/T") in connection
with the formation of the Company ($8.7 million). The remaining amount will
be used to reduce the amount outstanding under the Company's revolving credit
facility ($15.8 million). For a description of the debt to be repaid with the
proceeds, and the terms under which J/T will receive proceeds, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--The
Acquisition Loans," "--Liquidity and Capital Resources," "Certain Transactions"
and the Company's Consolidated Financial Statements and the Notes thereto
included elsewhere in this Prospectus.
Proceeds received by the Company upon the exercise of the over-allotment
option (assuming it is exercised in full) will be used to repay additional
amounts outstanding under the Company's revolving credit facility and under Term
Loan A ($7.3 million in the aggregate) and to pay amounts due to J/T in lieu of
shares of Common Stock that would otherwise have been issued upon formation of
the Company ($1.3 million).
DIVIDEND POLICY
The Company does not intend to pay any cash dividends with respect to its
Common Stock in the foreseeable future. Rather, the Company intends, after
the consummation of the Offering, to retain its earnings, if any, for use in
the operation of its business. Furthermore, the Company's ability to declare
or pay dividends on its Common Stock is limited by the terms of its credit
agreements with financial institutions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
10
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
and the net tangible book value per share of the Company after the Offering
constitutes the dilution to investors in the Offering. Net tangible book
value per share is determined by dividing the net tangible book value of the
Company (tangible assets less total liabilities) by the number of outstanding
shares of Common Stock.
At March 31, 1996, the net tangible book value of the Company was $14.3
million, or $2.86 per share of Common Stock. After giving effect to the sale of
3,250,000 shares of Common Stock in the Offering (less underwriting discounts
and commissions and estimated expenses of the Offering), the pro forma net
tangible book value of the Company at March 31, 1996 would have been $62.2
million or $8.03 per share, representing an immediate increase in net tangible
book value of $5.17 per share to existing stockholders and an immediate dilution
of $10.97 per share to new investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
Public offering price ............................. $19.00
Net tangible book value before Offering ........ $2.86(1)
Increase attributable to new investors ......... 5.17
-----------
Pro forma net tangible book value after Offering 8.03
---------
Dilution to new investors ........................ $10.97
=========
- ----------
(1) Computed by dividing net tangible book value at March 31, 1996 by the sum of
4,500,000 shares of Common Stock to be issued to partners upon the
contribution to the Company of their interests in the Partnership and
500,000 shares of Common Stock to be sold by the Company in the Offering,
the net proceeds of which will be paid to J/T. See "Certain Transactions"
and Note 15 to Notes to the Company's Consolidated Financial Statements.
The following table sets forth with respect to existing stockholders and
new investors, a comparison of the number of shares of Common Stock acquired
from the Company, the percentage ownership of such shares, the total
consideration paid, the percentage of total consideration paid and the
average price per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
AMOUNT(2) PERCENT AMOUNT PERCENT PER SHARE
------------ ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1) ....... 5,000,000 64.5% $ 7,693,146 11.1% $ 1.54
New investors .......... 3,250,000(3) 41.9% 61,750,000 88.9% 19.00
--------- -----------
7,750,000 $69,443,146
===========
<FN>
(1) Shares purchased includes 4,500,000 shares of Common Stock issued to
partners upon the contribution to the Company or their interests in the
Partnership and 500,000 shares of Common Stock sold by the Company in the
Offering, the net proceeds of which will be paid to J/T. Total consideration
is not reduced by the proceeds to be received by J/T upon the sale of
500,000 shares by the Company. See "Certain Transactions" and Note 15 to
Notes to the Company's Consolidated Financial Statements.
(2) The 500,000 shares sold by the Company in the Offering, the net proceeds of
which are to be paid to J/T, are included in the shares purchased by both
the existing stockholders and new investors, but are only included once in
the total number of shares.
(3) If the over-allotment option is exercised in full, the number of shares of
Common Stock held by new investors will be 3,737,500.
</FN>
</TABLE>
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Partnership at
March 31, 1996, as adjusted to give effect to formation of the Company, and
as further adjusted at that date to give effect to the sale by the Company of
3,250,000 shares of Common Stock in the Offering and the application of the net
proceeds therefrom. This table should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
------------------------------------------
AS FURTHER
ACTUAL AS ADJUSTED ADJUSTED
---------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Current debt(1):
Current portion of Term Loan A .............................. $10,000 $10,000 $ --
Revolving credit facility ................................... 7,622 7,622 1,105
---------- ---------- -------
Total current debt ........................................ 17,622 17,622 1,105
---------- ---------- -------
Long-term debt(1):
Term Loan A ................................................. 27,500 27,500 20,000
Term Loan B ................................................. 15,000 15,000 --
Subordinated debt ........................................... 7,000 7,000 --
---------- ---------- -------
Total long-term debt ...................................... 49,500 49,500 20,000
---------- ---------- -------
Total debt .................................................... 67,122 67,122 21,105
---------- ---------- -------
Due to stockholders(2) ........................................ -- 10,811 --
---------- ---------- -------
Partners' capital ............................................. 17,127 -- --
---------- ---------- -------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued ................................... -- -- --
Common stock, $.001 par value, 30,000,000 shares authorized;
4,500,000 shares outstanding, actual and as adjusted (3)(4);
7,750,000 shares outstanding, as further adjusted(4) ...... -- 5 8
Additional paid-in capital .................................... -- 6,311 65,036
---------- ---------- -------
Total stockholders' equity .................................. -- 6,316 65,044(5)(6)
---------- ---------- -------
Total capitalization ...................................... $84,249 $84,249 $86,149
========== ========== =======
<FN>
- ----------
(1) For a description of the term loan and revolving credit facilities, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--The Acquisition Loans" and "--Liquidity and Capital
Resources."
(2) Gives effect to an $8,743 liability to J/T incurred in connection with the
formation of the Company, a $1,718 liability for the estimated distribution
to the partners of the Partnership representing 40% of the income before
provision for income taxes for the three months ended March 31, 1996 and
additional amounts due to the partners related to the Partnership's 1995 net
income, and a $350 facility fee payable to certain parties related to
several of the partners of the Partnership. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--The Acquisition
Loans," "--Liquidity and Capital Resources" and "Certain Transactions."
(3) Does not include 500,000 shares of Common Stock sold by the Company in
the Offering, the net proceeds of which will be paid to J/T. See "Certain
Transactions."
(4) Excludes 800,000 shares of Common Stock reserved for issuance pursuant to
the Company's Stock Option Plans. See "Management--Stock Option Plans."
(5) Includes an adjustment of approximately $1,100 for the write-off of deferred
financing costs as of March 31, 1996 incurred in connection with borrowings
to finance the acquisition of ASC, which will be repaid with the proceeds of
the Offering. This expense will be recorded in the quarter in which the
Offering is completed. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition--Liquidity and Capital Resources."
(6) Includes $3,000 representing the deferred tax benefit to be realized by the
Company as a result of the contribution of partnership interests as
described in Note 15 to Notes to the Company's Consolidated Financial
Statements. This benefit will be recorded in the quarter in which the
contribution of partnership interests occurs.
</FN>
</TABLE>
12
<PAGE>
HISTORY OF THE COMPANY
The operations of the Company were initially conducted by AIS. AIS was
formed in February 1992 to acquire the Eastern Inventory. In December 1994,
AIS organized the Partnership to acquire ASC from Aviall Services, Inc.
("Aviall") and to operate the business of AIS and ASC on a going forward
basis. Simultaneously with the ASC acquisition, AIS contributed substantially
all of its assets to the Partnership.
ASC was founded in 1971, initially to acquire aircraft which were
disassembled so that their component parts could be redistributed to airlines
and repair agencies. ASC was subsequently acquired by Ryder Systems, Inc.
("Ryder") in 1982. Ryder provided the financial strength to allow ASC to
participate in capital intensive transactions such as aircraft purchases and
leasing. Ryder also provided significant working capital to ASC in support of
development of proprietary management information systems, digital imaging
systems and other technology that established ASC as a leader in the aircraft
parts redistribution industry.
In June 1993, Ryder announced its intention to spin-off all of its
aviation-related business units into a new public company, Aviall.
Concurrently, Aviall announced that it would sell several of these businesses
to raise capital to repay debt, one of which was ASC. The Company believed
that a combination of AIS, with its extensive Eastern Inventory, and ASC,
with its industry leading market position, reputation for quality,
experienced sales and marketing staff and superior management information
systems, would create a more formidable competitor in the aircraft spare parts
redistribution market. During late 1993 and early 1994 AIS negotiated with
Aviall with respect to this purchase, and on August 14, 1994, AIS entered
into an asset purchase agreement with Aviall to purchase the assets of ASC.
This transaction was completed on December 2, 1994 (effective November 30,
1994) and since December 1994, the operations of the business have been
conducted by the Partnership. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Immediately prior to the effectiveness of the Registration Statement of which
this Prospectus forms a part, all but one of the parties holding interests in
the Partnership contributed their interests in the Partnership to the Company in
exchange for shares of Common Stock. Simultaneously, one of the parties holding
an interest in the Partnership contributed its interest in the Partnership to
the Company in exchange for shares of Common Stock and an amount equal to the
proceeds to be received by the Company for 500,000 shares of Common Stock sold
in the Offering, plus up to 75,000 additional shares of Common Stock (and/or the
proceeds in respect of the sale of such shares to the extent the over-allotment
option is exercised). See "Use of Proceeds" and "Certain Transactions."
After the Offering, operations of the business will be conducted by the
Company, which is a newly organized Delaware corporation, and by its wholly
owned subsidiaries, Aviation Sales Operating Company (and its wholly owned
subsidiary, Aviation Sales Leasing Company) and Aviation Sales Finance
Company. Substantially all of the operating assets of the Company are owned by
Aviation Sales Operating Company and its subsidiary. Unless the context
otherwise requires, references to the "Company" refer to the operations of the
Company and its subsidiaries.
13
<PAGE>
SELECTED FINANCIAL DATA
THE FOLLOWING SELECTED FINANCIAL DATA HAS BEEN DERIVED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS. THE FINANCIAL STATEMENTS OF THE COMPANY AS
OF DECEMBER 31, 1992, 1993, 1994 AND 1995, FOR THE PERIOD FROM INCEPTION
(FEBRUARY 28, 1992) TO DECEMBER 31, 1992, AND FOR THE YEARS ENDED DECEMBER
31, 1993, 1994 AND 1995 HAVE BEEN AUDITED BY ARTHUR ANDERSEN LLP, INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS, AS INDICATED IN THEIR REPORT INCLUDED ELSEWHERE
HEREIN. THE FINANCIAL DATA AS OF MARCH 31, 1996 AND FOR THE THREE MONTH
PERIODS ENDED MARCH 31, 1995 AND 1996 ARE DERIVED FROM THE UNAUDITED
STATEMENTS OF THE COMPANY WHICH, IN THE OPINION OF MANAGEMENT, INCLUDE ALL
ADJUSTMENTS (CONSISTING OF ONLY NORMAL RECURRING ADJUSTMENTS) NECESSARY FOR A
FAIR PRESENTATION OF THE INFORMATION SET FORTH THEREIN. THE RESULTS OF
OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1996 ARE NOT NECESSARILY
INDICATIVE OF THE RESULTS THAT MAY BE EXPECTED FOR THE YEAR ENDING DECEMBER
31, 1996. THE COMBINED AND AS ADJUSTED FINANCIAL DATA SET FORTH BELOW IS
UNAUDITED AND IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY AND MAY NOT
REFLECT THE COMPANY'S FUTURE RESULTS OF OPERATIONS AND FINANCIAL POSITION OR
WHAT THE RESULTS OF OPERATIONS AND FINANCIAL POSITION OF THE COMPANY WOULD
HAVE BEEN HAD THE TRANSACTIONS ACTUALLY OCCURRED AS OF THE DATES INDICATED.
SEE ALSO "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
INCEPTION ------------------------------------------------------------ ---------------------------------
(FEBRUARY 28, 1992) 1994 1995 1996
TO ----------------------- ------------------------- -----------------------
DECEMBER 31, 1992 1993 ACTUAL COMBINED(1) ACTUAL AS ADJUSTED(2) 1995 ACTUAL AS ADJUSTED(2)
----------------- -------- --------- ------------ --------- --------------- -------- ------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
INCOME DATA:
Operating revenues . $32,227 $23,429 $28,191 $89,335 $113,803 $113,803 $28,451 $32,898 $32,898
Cost of sales ...... 16,697 11,162 12,017 59,939 71,314 71,314 16,654 21,188 21,188
------- ------- ------- ------- -------- -------- ------- ------- -------
Gross profit ....... 15,530 12,267 16,174 29,396 42,489 42,489 11,797 11,710 11,710
------- ------- ------- ------- -------- -------- ------- ------- -------
Operating expenses
Operating ......... 2,970 3,121 2,900 10,228 8,989 8,989 2,057 2,343 2,343
Selling ........... 3,590 1,845 2,043 4,663 4,820 4,820 1,095 1,589 1,589
General and
administrative ... 5,057 4,199 5,167 10,341 8,641 8,641 2,295 2,329 2,329
Depreciation and
amortization ..... 2,063 217 415 2,553 1,466 1,466 315 457 457
------- ------- ------- ------- -------- -------- ------- ------- -------
Total operating
expenses .......... 13,680 9,382 10,525 27,785 23,916 23,916 5,762 6,718 6,718
------- ------- ------- ------- -------- -------- ------- ------- -------
Income from
operations ........ 1,850 2,885 5,649 1,611 18,573 18,573 6,034 4,992 4,992
Interest and other
expenses, net .... 3,806 6,041 4,458 8,348 8,287 2,617 2,083 1,923 525
------- ------- ------- ------- -------- -------- ------- ------- -------
Net income (loss)
before taxes ...... (1,956) (3,156) 1,191 (6,737) 10,286 15,956 3,951 3,069 4,467
Income taxes(3) .... -- -- -- -- 4,012 6,223(4) 1,541 1,197 1,742(4)
------- ------- ------- ------- -------- -------- ------- ------- -------
Net income (loss) .. $(1,956) $(3,156) $ 1,191 $(6,737) $ 6,274 $ 9,733(5) $ 2,410 $ 1,872 $ 2,725(5)
======= ======= ======= ======= ======== ======== ======= ======= =======
Net income per
share(6) .......... $ 1.25 $ 1.26(5) $ .48 $ .37 $ .35(5)
======== ======== ======= ======= =======
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
14
<PAGE>
<TABLE>
<CAPTION>
(Selected Financial Data continued)
DECEMBER 31, MARCH 31,
--------------------------------------------- --------------------------
1996
--------------------------
1992 1993 1994 1995 ACTUAL AS ADJUSTED
--------- --------- ---------- ---------- ---------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Accounts receivable . $ 4,705 $ 4,166 $16,980 $23,824 $ 26,211 $ 26,211
Inventories .......... 44,473 34,025 52,765 48,957 53,347 53,347
Working capital ...... 33,946 24,519 51,871 46,689 47,444 63,961
Total assets ......... 55,688 42,401 89,265 93,337 100,255 102,155(7)
Total debt ........... 44,472 31,992 69,152 62,043 67,122 21,105
Stockholders' equity.. 6,044 2,888 7,079 14,058 17,127 65,044(7)(8)
<FN>
- ----------
(1) Reflects the pro forma combined historic results of the Company assuming
the acquisition of ASC occurred on January 1, 1994. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 3 to Notes to the Company's Consolidated Financial Statements.
(2) Adjusted for the sale of 3,250,000 shares by the Company in the Offering and
the application of the net proceeds therefrom as if the closing of the
Offering and the consummation of the Amended Credit Facility had occurred at
the beginning of the applicable period for Statement of Income Data and on
March 31, 1996 for Balance Sheet Data. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
(3) Pro forma adjustments as if the Company had been taxed as a C-corporation
since the beginning of the applicable period for the 1995 and 1996 financial
data presented. See "History of the Company."
(4) Excludes $3,000 representing the deferred tax benefit to be realized by the
Company as a result of the contribution of partnership interests described
in "Certain Transactions" and Note 15 to Notes to the Company's Consolidated
Financial Statements. This benefit will be recorded in the quarter in which
the contribution of partnership interests occurs.
(5) Excludes extraordinary expenses arising from the write-off of deferred
financing costs incurred in connection with borrowings to finance the
acquisition of ASC, which will be repaid with the proceeds of the Offering.
This expense will be recorded in the quarter in which the Offering is
completed and would have been approximately $1,600 for the year ended
December 31, 1995 and approximately $1,300 for the three months ended March
31, 1996. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--The Acquisition Loans" and
"--Liquidity and Capital Resources."
(6) Weighted average shares outstanding are 5,000,000 for 1995 and 1996 and
7,750,000 for 1995 and 1996 as adjusted. See Notes 14 and 15 to Notes to the
Company's Consolidated Financial Statements.
(7) Includes $3,000 representing the deferred tax benefit to be realized by the
Company as a result of the contribution of partnership interests described
in Note 4 above and $1,100 for the write-off of deferred financing costs as
of March 31, 1996 described in Note 5 above.
(8) Gives effect to a $1,718 estimated distribution to the partners of the
Partnership representing 40% of the income before provision for income taxes
of the Company for the three months ended March 31, 1996 and additional
amounts due to the partners related to the Partnership's 1995 net income,
and a $350 facility fee payable to certain parties related to several of the
partners of the Partnership. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--The Acquisition Loans,"
"--Liquidity and Capital Resources" and "Certain Transactions."
</FN>
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO. THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING INFORMATION WHICH
INVOLVES RISKS AND UNCERTAINTIES. THE ACTUAL RESULTS COULD DIFFER FROM THE
RESULTS ANTICIPATED HEREIN.
OVERVIEW
The Company commenced operations in February 1992 through the acquisition
of the Eastern Inventory, for an aggregate purchase price of $55.2 million.
Between February 1992 and December 1994, the Company's primary business was
the marketing and sale of the Eastern Inventory.
In December 1994, the Company completed the acquisition of certain assets
and assumed certain liabilities of ASC from Aviall for an aggregate purchase
price of $46.8 million. The Company believed that the combination of ASC,
with its leading market position, reputation for quality, experienced sales
and marketing staff and superior management information systems, and AIS,
with its extensive Eastern Inventory, would create a more formidable
competitor in the aircraft spare parts redistribution market. Since acquiring
ASC in December 1994, the Company has significantly increased revenues and
expanded the services which it offers to its customers.
RESULTS OF OPERATIONS
Operating revenues consist primarily of gross sales, net of allowances for
returns and other adjustments. Cost of sales consists primarily of product
costs, freight charges, commissions to outside sales representatives and an
inventory provision for damaged and obsolete products. Product costs consist
of the acquisition cost of the products and any costs associated with
repairs, overhaul or certification.
Operating revenues and gross profit depend in large measure on the volume
and timing of bookings received during the quarter and the mix of aircraft
spare parts contained in the Company's inventory. Revenues and gross profit
can be impacted by the timing of bulk inventory purchases. In general, bulk
inventory purchases allow the Company to obtain large inventories of aircraft
spare parts at a lower cost than can ordinarily be obtained by purchasing
such parts on an individual basis.
Two examples of the impact which a large bulk inventory acquisition can
have on results of operations are illustrated by the Company's acquisition of
the Eastern Inventory and the Company's acquisition of the large inventory
acquired in the ASC acquisition. In connection with the ASC acquisition, the
Company's operating revenues increased during the first two quarters of 1995
following the purchase due to the availability of such inventory.
Additionally, as a result of the lower cost of goods sold associated with
such inventory, the Company's gross profit increased during such periods.
Gross margin for the first half of 1996 is not expected to be favorably
impacted by a bulk inventory purchase in the same manner as gross margin was
impacted during the first half of 1995. The Company believes that the gross
margin experienced during the first quarter of 1996 is more indicative of the
ongoing results of the Company.
16
<PAGE>
THREE MONTHS ENDED MARCH 31, 1995 V. THREE MONTHS ENDED MARCH 31, 1996
The following table sets forth certain information relating to the
Company's operations for the periods indicated:
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1995 1996
--------------------- ---------------------
$ % $ %
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Operating revenues ............ $28,451 100.0% $32,898 100.0%
Cost of sales ................. 16,654 58.5 21,188 64.4
---------- --------- ---------- ---------
Gross profit ................. 11,797 41.5 11,710 35.6
---------- --------- ---------- ---------
Operating expenses
Operating .................... 2,057 7.2 2,343 7.1
Selling ...................... 1,095 3.8 1,589 4.8
General and administrative .. 2,295 8.1 2,329 7.1
Depreciation and amortization 315 1.1 457 1.4
---------- --------- ---------- ---------
Total ....................... 5,762 20.3 6,718 20.4
---------- --------- ---------- ---------
Income from operations ........ $ 6,034 21.2% $ 4,992 15.2%
========== ========= ========== =========
The Company's operating revenues increased by $4.4 million, or 15.6%, from
the quarter ended March 31, 1995 to the quarter ended March 31, 1996. During
this period, domestic sales increased 15.5% from $17.4 million to $20.1
million and international sales increased 15.3% from $11.1 million to $12.8
million. Operating revenues increased due to the addition of new sales
personnel, increased customer penetration, increased investment in and
availability of inventory and the expansion of services offered to customers.
See "Business--Operations."
Gross profit remained unchanged and gross margin declined from 41.5% for
the first quarter of 1995 to 35.6% for the first quarter of 1996 due to a
change in the mix of inventories sold. Following the bulk purchase of
inventory associated with the acquisition of ASC in December 1994, the
Company actively sold a portion of ASC's inventory to meet current customer
demand and to better match inventory levels to meet anticipated product
demand.
The Company's aggregate operating expenses increased $1.0 million from the
first quarter of 1995 to the first quarter of 1996. Aggregate operating
expenses as a percent of operating revenues increased slightly from 20.3% of
revenues in the first quarter of 1995 to 20.4% of revenues in the first
quarter of 1996. The increase in absolute dollars from the first quarter of
1995 to the first quarter of 1996 is due to higher selling and operating
expenses as a result of the higher sales levels from the first quarter of
1995 to the first quarter of 1996. Lower general and administrative expenses
as a percentage of operating revenues were the result of economies of scale.
As a result of the above factors, the Company's income from operations
declined $1.0 million from the first quarter of 1995 to the first quarter of
1996.
17
<PAGE>
COMBINED YEAR ENDED DECEMBER 31, 1994 V. YEAR ENDED DECEMBER 31, 1995
The following table sets forth certain information relating to the
Company's operations for the periods indicated. The information for 1994
reflects the pro forma combined historic results of the Company assuming the
acquisition of ASC had occurred January 1, 1994. See Note 3 to Notes to the
Company's Consolidated Financial Statements.
YEAR ENDED DECEMBER 31,
---------------------------------------------
COMBINED
1994 1995
--------------------- ----------------------
$ % $ %
---------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Operating revenues ............. $89,335 100.0% $113,803 100.0%
Cost of sales .................. 59,939 67.1 71,314 62.7
---------- --------- ----------- ---------
Gross profit .................. 29,396 32.9 42,489 37.3
Operating expenses:
Operating ..................... 10,228 11.4 8,989 7.9
Selling ....................... 4,663 5.2 4,820 4.2
General and administrative ... 10,341 11.6 8,641 7.6
Depreciation and amortization 2,553 2.9 1,466 1.3
---------- --------- ----------- ---------
Total ........................ 27,785 31.1 23,916 21.0
---------- --------- ----------- ---------
Income from operations ......... $ 1,611 1.8% $ 18,573 16.3%
========== ========= =========== =========
The Company's operating revenues increased by $24.5 million, or 27.4%,
from Combined 1994 to 1995. During this period, domestic sales increased
7.8%, from $63.2 million to $68.1 million and international sales increased
75.1%, from $26.1 million to $45.7 million. Operating revenues increased due
to the addition of new sales personnel, increased customer penetration and
the expansion of services offered to customers. See "Business--Operations."
Gross profit increased $13.1 million, or 44.5%, from Combined 1994 to
1995. The increase in gross profit from Combined 1994 to 1995 was primarily
attributable to the increase in sales. Following the acquisition of ASC in
December 1994, the Company actively sold portions of ASC's inventory to meet
current customer demand and to better match inventory levels to anticipated
product demand. The gross margin during this period increased from 32.9% for
Combined 1994 to 37.3% for 1995, primarily as a result of the bulk purchase
of inventory associated with the acquisition of the assets and business of
ASC.
The Company's aggregate operating expenses for 1995 were lower, both in
absolute dollars and as a percentage of operating revenues, than in Combined
1994. Operating expenses, general and administrative expenses and
depreciation and amortization expenses each declined in both actual dollars
and as a percentage of sales due to consolidations and other efficiencies
achieved as ASC was integrated into the Company's operations during 1995.
Selling expenses increased slightly in absolute dollars as a result of higher
sales levels from Combined 1994 to 1995, but declined as a percentage of
operating revenues due to the reasons described above.
As a result of the above factors, the Company's income from operations
increased by $17.0 million from Combined 1994 to 1995.
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YEAR ENDED DECEMBER 31, 1994 V. YEAR ENDED DECEMBER 31, 1995
The following table sets forth certain information relating to the
Company's operations for the periods indicated:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1995
--------------------- ----------------------
$ % $ %
---------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
Operating revenues .............. $28,191 100.0% $113,803 100.0%
Cost of sales ................... 12,017 42.6 71,314 62.7
---------- --------- ----------- ---------
Gross profit ................... 16,174 57.4 42,489 37.3
Operating expenses:
Operating ...................... 2,900 10.3 8,989 7.9
Selling ........................ 2,043 7.2 4,820 4.2
General and administrative .... 5,167 18.3 8,641 7.6
Depreciation and amortization . 415 1.5 1,466 1.3
---------- --------- ----------- ---------
Total ......................... 10,525 37.3 23,916 21.0
---------- --------- ----------- ---------
Income from operations .......... 5,649 20.0 18,573 16.3
Interest and other expenses, net 4,458 15.8 8,287 7.3
---------- --------- ----------- ---------
Net income ...................... $ 1,191 4.2% $ 10,286 9.0%
========== ========= =========== =========
The Company's operating revenues for 1995 increased 303.7% over 1994,
primarily due to the inclusion in 1995 of one full year of sales from ASC,
compared to one month in 1994.
The Company's gross profit increased by $26.3 million from 1994 to 1995
due to the increase in operating revenues. However, there was a decline in
the gross margin from 57.4% to 37.3% which was primarily attributable to the
change in the nature of the operation of the business, from 1994, when the
Company's primary business was the liquidation of the Eastern Inventory, to
1995, when the Company's primary business was the purchasing and sale of
aircraft spare parts and the providing of inventory management services on a
day-to-day basis through the operation of ASC.
The Company's operating expenses for 1995 increased $13.4 million, or
127.2%, compared to 1994 due to the increase in operating revenues. Operating
expenses as a percentage of operating revenues were 21.0% for 1995, compared
to 37.3% for 1994. The decrease in operating expenses as a percentage of
operating revenues was primarily due to the economies of scale derived from
the increased revenues as a result of the acquisition of ASC.
As a result of the above factors, income from operations for 1995
increased $12.9 million over 1994. Interest expense, amortization of deferred
financing costs and loan administration fees increased 85.9% from $4.5
million in 1994 to $8.3 million in 1995, primarily as a result of the debt
incurred to finance the acquisition of ASC. The Company's net income
increased by $9.1 million from 1994 to 1995.
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YEAR ENDED DECEMBER 31, 1993 V. YEAR ENDED DECEMBER 31, 1994
The following table sets forth certain information relating to the
Company's operations for the periods indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994
----------------------- ---------------------
$ % $ %
----------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
Operating revenues ............ $23,429 100.0% $28,191 100.0%
Cost of sales ................. 11,162 47.6 12,017 42.6
----------- ---------- ---------- ---------
Gross profit ................. 12,267 52.4 16,174 57.4
Operating expenses:
Operating .................... 3,121 13.3 2,900 10.3
Selling ...................... 1,845 7.9 2,043 7.2
General and administrative .. 4,199 17.9 5,167 18.3
Depreciation and amortization 217 0.9 415 1.5
----------- ---------- ---------- ---------
Total ....................... 9,382 40.1 10,525 37.3
----------- ---------- ---------- ---------
Income from operations ........ 2,885 12.3 5,649 20.0
Other income .................. 203 0.9 -- --
Interest and other expenses,
net 6,244 26.7 4,458 15.8
----------- ---------- ---------- ---------
Net (loss) income ............. $(3,156) (13.5%) $ 1,191 4.2%
=========== ========== ========== =========
The Company's operating revenues for 1994 increased $4.8 million, or
20.3%, over 1993, primarily due to the inclusion in 1994 of one month's
operating revenues of ASC, which was acquired on December 2, 1994. For the
same reason, the Company's gross profit for 1994 increased by $3.9 million
compared to 1993. The gross margin increased from 52.4% to 57.4% due to the
bulk inventory purchase associated with the acquisition of ASC.
The Company's operating expenses for 1994 increased $1.1 million, or
12.2%, over 1993. The increase in operating expenses was primarily due to
costs associated with the acquisition of ASC and the settlement of certain
litigation during 1994. The decrease in operating expenses as a percentage of
revenues resulted from economies of scale derived as a result of increased
operating revenues from 1993 to 1994.
As a result of the above factors, the Company's income from operations
increased $2.8 million from period to period. Interest expense, amortization
of deferred financing costs and loan administration fees decreased by $1.8
million from $6.2 million in 1993 to $4.5 million in 1994. This decrease
reflects reduced borrowings, offset, in part, by the write-off during 1994 of
deferred financing costs as a result of the retirement of outstanding debt
associated with the acquisition of the Eastern Inventory. The Company
experienced net income of $1.2 million in 1994 as compared to a net loss of
$3.2 million in 1993.
THE ACQUISITION LOANS
In December 1994, to complete the acquisition of ASC and to refinance debt
incurred in connection with the acquisition of the Eastern Inventory, the
Company borrowed $65.4 million from certain financial institutions and $7.0
million from certain stockholders (collectively, the "Acquisition Loans").
The portion of the Acquisition Loans which is due to financial institutions
is composed of two term loans ("Term Loan A" and "Term Loan B") and the
revolving credit facility described under "Liquidity and Capital Resources"
below. Term Loan A in the original principal amount of $45.0 million is
repayable in 18 consecutive equal quarterly installments of $2.5 million,
commencing August 31, 1995, with the final installment due November 30, 1999.
Term Loan A bears interest at prime plus 1.5% (9.75% at March 31, 1996). Term
Loan B is in the original principal amount of $15.0 million and bears interest
at prime plus 2.0% (10.25% at March 31, 1996). Term Loan B is repayable in two
equal installments of $7.5 million each,
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due on May 31, 2000, and November 30, 2000. At March 31, 1996, the outstanding
principal balances of Term Loan A and Term Loan B were $37.5 million and $15.0
million, respectively.
On December 1, 1994, the Company entered into an interest rate cap
agreement which provides that the interest rate on $30.0 million of its term
loans will not exceed 9.0% through December 2, 1997. In exchange for this
interest rate limitation, the Company agreed to make quarterly payments to
its lenders ranging from $57,000 to $186,000, depending on the level of the
prime rate. Quarterly payments totaling $228,000 and $57,000, respectively,
were made during 1995 and the first quarter of 1996, which are included in
interest expense, amortization of deferred financing costs and loan
administration fees in the Company's Consolidated Financial Statements.
In addition, in December 1994, the Company entered into a subordinated loan
agreement whereby the Company borrowed $7.0 million from certain parties related
to several of its stockholders (the "Subordinated Debt"). The Subordinated Debt
is payable in a single lump sum on the earlier of June 2, 2001, or six months
after the term loans borrowed from financial institutions in connection with the
Acquisition Loans have been paid in full. The Subordinated Debt bears interest
at prime plus 5.0% (13.25% at March 31, 1996) and upon the earlier to occur of
June 2, 2001 or the repayment of the Subordinated Debt in full, the Partnership
will pay a facility fee of $350,000.
The Company intends to repay (i) all of the Subordinated Debt, (ii) all of
Term Loan B, (iii) a portion of Term Loan A, and (iv) a portion of the amount
outstanding under its revolving credit facility with the proceeds of the
Offering. See "Use of Proceeds."
LIQUIDITY AND CAPITAL RESOURCES
Since its formation, the Company has been financed primarily with its cash
flow from operations, and in 1994 and for the first quarter of 1996, with its
cash flow from financing activities. Cash flow from operations was $12.9 million
in 1993, $12.1 million in 1994 and $14.0 million in 1995. During the three
months ended March 31, 1996, the Company used cash of $4.7 million in its
operating activities. During 1994 and for the first quarter of 1996, $35.6 and
$5.1 million, respectively, of cash flow was provided by financing activities.
The Company's primary uses of cash to date have been investing activities
and the repayment of indebtedness. Cash used in investing activities was de
minimus in 1993, $47.1 million in 1994, $4.7 million in 1995 and $300,000
during the three months ended March 31, 1996. Cash provided by financing
activities in 1994 was utilized to complete the acquisition of ASC. Cash used
in financing activities was $12.5 million and $10.5 million for the years
ended December 31, 1993 and 1995, respectively.
During the first quarter of 1996, the Company used cash of $4.7 million in
its operating activities primarily as a result of increased purchases of
inventory to meet future customer demand and increased accounts receivable
resulting from increased sales during the quarter ended March 31, 1996. Cash
flow provided by financing activities for the quarter ended March 31, 1996 of
$5.1 million resulted from an increase in the Company's revolving line of
credit, partially offset by a $2.5 million principal payment on Term Loan A.
The Company presently has a revolving credit facility (collectively with
the term loans, the "Credit Facility") with certain financial institutions
which provides working capital of up to $20.0 million with interest at prime
plus 1.5% subject to an availability calculation based on the eligible
borrowing base. The eligible borrowing base includes certain receivables and
inventories of the Company. The revolving credit facility terminates on
November 30, 1999. At March 31, 1996, the Company had availability under the
Credit Facility of approximately $11.8 million.
The Credit Facility contains certain financial covenants regarding the
financial performance of the Company and certain other covenants including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the suspension of the Credit Facility and
repayment of all debt in the event of a material adverse change in the business
or a change in control. In addition, the Credit Facility requires mandatory
repayments from excess cash flow. Substantially all of the Company's assets are
pledged as collateral for amounts borrowed. At March 31, 1996, the Company was
in compliance with all of its requirements under the Credit Facility.
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<PAGE>
In conjunction with the repayment of indebtedness from the proceeds of the
Offering, the Company has entered into an Amended and Restated Credit Facility
(the "Amended Credit Facility"), which amendment will become effective upon the
closing of the Offering. The Amended Credit Facility will be comprised of (i) a
term loan facility (the "Term Loan") in an original principal amount of $20
million, and (ii) a $50.0 million revolving loan, letter of credit and
acquisition loan facility, subject to an availability calculation based on the
eligible borrowing base (the "Revolving Credit Facility"). The letter of credit
portion of the Revolving Credit Facility will be subject to a $10.0 million
sublimit and the acquisition loan portion of the Revolving Credit Facility will
be subject to a $30.0 million sublimit with the imposition of certain borrowing
criteria based on the satisfaction of certain debt ratios. The unused portion of
the acquisition loan portion of the Revolving Credit Facility will expire on the
second anniversary of the closing date of the Amended Credit Facility. The
interest rate on the Amended Credit Facility will be, at the option of the
Company, (i) prime plus a margin, or (ii) LIBOR plus a margin, where the margin
determination is made based upon the Company's financial performance over the
prior 12 month period (ranging from 0.25% to 1.25% in the event prime is
utilized, or 1.75% to 2.75% in the event LIBOR is utilized). Upon consummation
of the Offering, borrowings under the Amended Credit Facility will initially
accrue interest at either prime plus 0.25% or LIBOR plus 1.75%.
The Term Loan will amortize in equal quarterly installments and will
terminate on November 30, 1999. Interim payments under the Revolving Credit
Facility will be made daily from collections of the Company's accounts
receivable and the Revolving Credit Facility will terminate on November 30,
1999. The Amended Credit Facility will contain similar financial and other
covenants of the Company and similar mandatory prepayment events as set forth in
the existing Credit Facility and will be secured by a lien on substantially all
of the assets of the Company. However, in contrast to the Credit Facility, the
Amended Credit Facility will not require the application of excess cash flows.
Events of default will also be similar to the Credit Facility; provided however
that an event of default based on a change of control will pertain to a change
in more than 50% of the members of the Board of Directors of either the Company
or its Aviation Sales Operating Company subsidiary in place on the closing date
of the Amended Credit Facility.
During 1996, the Company expects to incur capital expenditures of
approximately $1.0 million ($363,000 of which was expended during the first
quarter of 1996), the majority of which will be used to make enhancements to
the Company's management information systems, telecommunication systems and
other capital equipment and improvements. The Company anticipates that funds
for these capital expenditures will be provided from cash flow from
operations. Additionally, immediately prior to the Offering, the Partnership
distributed to its partners 40% of its 1996 net income through the
closing of the Offering and additional amounts due to the partners relating to
the Partnership's 1995 net income. These distributions were approximately $3.0
million and were paid from borrowings under the revolving portion of the Credit
Facility.
The contemplated repayment of indebtedness with the net proceeds of the
Offering is expected to improve the Company's liquidity by reducing both the
Company's interest expense and the principal amount of the indebtedness
required to be repaid in the future. The Company believes that cash flow from
operations and borrowing availability under the Amended Credit Facility will
be sufficient to satisfy the Company's anticipated working capital
requirements over the next two years.
As part of its growth strategy, the Company intends to pursue acquisitions
of bulk inventories of aircraft spare parts and complementary businesses. See
"Business-Company Strategy." Financing for such acquisitions will be provided
from operations and from the proceeds of the Amended Credit Facility. The
Company may also issue additional debt and/or equity securities in connection
with one or more of these acquisitions. The Company is currently evaluating a
number of acquisition opportunities and is at varying stages of negotiation with
respect to such acquisitions. No commitments or binding agreements have been
entered into to date and accordingly no assurance can be given that any of the
acquisitions currently being considered will be consummated. None of such
acquisitions, if consummated, would constitute a material acquisition for the
Company under applicable accounting rules.
22
<PAGE>
BUSINESS
GENERAL
The Company is a recognized worldwide leader in the aircraft spare parts
redistribution market and provides a wide range of value-added inventory
management services to its customers. The Company sells aircraft spare parts
to major commercial passenger airlines, air cargo carriers, maintenance and
repair facilities and other redistributors throughout the world. Parts sold
by the Company include rotable and expendable airframe and engine components
for commercial airplanes, including Boeing, McDonnell Douglas, Lockheed and
Airbus aircraft and Pratt & Whitney, General Electric and Rolls Royce jet
engines. The inventory management services offered by the Company include
purchasing services, repair management, warehouse management, aircraft
disassembly services and consignment and leasing of inventories of aircraft
parts. During 1995, the Company generated operating revenues of $113.8
million, operating income of $18.6 million and, after giving pro forma effect
to income taxes, net income of $6.3 million ($9.7 million as adjusted). Of such
revenues, approximately 60% were derived from sales to domestic customers and
approximately 40% were derived from sales to international customers.
INDUSTRY OVERVIEW AND TRENDS
The Company believes that the annual worldwide market for aircraft spare
parts is approximately $10.0 billion, of which approximately $1.3 billion
reflects annual sales of aircraft spare parts in the redistribution market.
The redistribution market is highly fragmented, with a limited number of
large, well-capitalized companies selling a broad range of aircraft spare
parts, and numerous smaller competitors servicing specialized niches. The
Company believes that the significant trends impacting the redistribution
market will continue to increase its overall size while reducing the number
of competitors. These trends are as follows:
GROWTH IN MARKET FOR AIRCRAFT SPARE PARTS. According to Boeing's 1996
Market Outlook (the "Boeing Report"), the worldwide fleet of commercial
airplanes is expected to double from 11,066 airplanes at the end of 1995 to
23,081 airplanes by 2015. Further, the Boeing Report projects that cargo jet
aircraft will increase from 1,219 airplanes in 1995 to 2,260 airplanes by
2015. Seventy percent of the airplanes delivered to cargo operators are
expected to be used aircraft converted from commercial passenger service.
Additionally, the Company believes that the number of planes in service for
more than 10 years is continuing to increase, and these older planes are the
primary market for redistributors. Finally, cost considerations are forcing
many airlines and repair and maintenance facilities which had historically
purchased their inventory requirements from new parts manufacturers to
utilize aircraft spare parts sold by redistributors. The Company believes
that all of these factors will increase the demand for aircraft spare parts
from the redistribution market.
REDUCTION IN NUMBER OF APPROVED VENDORS. In order to reduce purchasing
costs and streamline purchasing decisions, airline purchasing departments
have been reducing the number of their "approved" suppliers. During the last
few years, several major airlines have reduced their supplier lists from as
many as 50 to a core group of five to ten suppliers. In each such case to
date, the Company was one of the suppliers selected. The Company believes
that this trend will continue in the future and that, due to its market
presence and reputation for quality, the Company will continue to be selected
as an approved supplier.
CONSOLIDATION OF REDISTRIBUTION MARKET. As a result of reductions in the
supplier base by airline purchasing departments, there has been and the
Company believes there will continue to be a consolidation in the
redistribution market. The Company further believes that only those
redistributors such as the Company, with extensive inventories, adequate
capital and the ability to provide the documentation of traceability
necessary to comply with applicable regulatory and customer requirements,
will survive the consolidation of the redistribution market.
INCREASED OUTSOURCING OF INVENTORY MANAGEMENT FUNCTION. Airlines incur
substantial expenditures in connection with fuel, labor and aircraft
ownership. Further, airlines have come under
23
<PAGE>
increasing pressure during the last decade to reduce the costs associated
with providing air transportation services. While several of the expenditures
required to operate an airline are beyond the direct control of airline
operators (e.g., the price of fuel and labor costs), the Company believes
that obtaining replacement parts from the redistribution market and
outsourcing inventory management functions are areas in which airlines can
reduce their operating costs. Outsourcing inventory management functions
allows these functions to be handled more inexpensively and efficiently by a
redistributor like the Company that can achieve economies of scale
unavailable to individual airlines. Several smaller and start-up airlines and
air cargo operators do not presently own an inventory of aircraft spare
parts, but rather have entered into agreements with redistributors for the
supply of all or a portion of their aircraft spare parts requirements.
Additionally, other airlines, including several large airlines, have begun to
outsource portions of their purchasing services, repair management and
warehouse management. The Company believes that its offering of a broad array
of inventory management services to its customers, in conjunction with the
sale of aircraft spare parts, will give the Company a significant competitive
advantage in servicing its customers.
INCREASING EMPHASIS ON TRACEABILITY. Due to concerns regarding unapproved
aircraft spare parts, regulatory authorities have increased the level of
documentation which must be maintained on aircraft spare parts. This
requirement has, in turn, been extended by end-users to the vendors of the
parts. The sophistication required to track the history of an inventory
consisting of thousands of aircraft spare parts is considerable and has
required companies to invest significantly in information systems technology.
The Company has the benefit of the investment made by ASC in technology and
intends to continue to maintain its systems to allow it to effectively
compete in the redistribution market. The high cost of required technology to
effectively compete in the redistribution market has made entry into and
survival in the aircraft spare parts redistribution market increasingly
difficult and expensive.
INCREASED CONSIGNMENT. Certain of the Company's customers adjust inventory
levels on a periodic basis by disposing of excess aircraft spare parts.
Traditionally, larger airlines have used internal purchasing agents to manage
such dispositions. The Company believes that major airlines and other owners
of aircraft spare parts, in order to concentrate on their core businesses and
to more effectively redistribute their excess parts inventories, are
increasingly entering into long-term consignment agreements with
redistributors. By consigning inventories to a redistributor such as the
Company, customers are able to distribute their aircraft spare parts to a
larger number of prospective inventory buyers, allowing the customer to
maximize the value of its inventory. Consignment also enables the Company to
offer for sale significant parts inventory at minimal capital cost to the
Company. Consignment agreements are generally entered into on a long-term
basis and often consist of entire airplanes which are disassembled for sale
of the individual parts. In the Boeing Report it is noted that 5,408 aircraft
will be removed from active commercial service between 1994 and 2014. Many of
these aircraft will be disassembled in order to sell their parts.
LEASING. Over the last few years, several smaller and start-up airlines
have chosen to lease inventories of aircraft spare parts in order to preserve
capital while maintaining adequate spare parts support. The Company believes
that this trend to lease aircraft spare parts will continue in the future and
that it has a competitive advantage in providing this leasing service due to
its ability to maximize the residual value of the leased parts after
termination of the lease through sales of the parts in the ordinary course of
its business.
COMPETITIVE STRENGTHS
The Company believes that its primary competitive strengths are the
following:
LEADING MARKET POSITION. The Company is a recognized worldwide leader in
the aircraft spare parts redistribution market. Further, the Company believes
that it has one of the largest owned inventories of aircraft spare parts
among redistributors, with over 485,000 line items and over 35 million
individual parts currently in stock.
PROPRIETARY INFORMATION SYSTEMS. The Company's management information
systems collect and report data regarding inventory turnover and
traceability, pricing, market availability, customer
24
<PAGE>
demographics and other important data utilized by the Company. The Company
currently maintains data on over 3.6 million line items. Databases are
continually maintained on original equipment manufacturer recommended
upgrades or replacements, including airworthiness directives, for all
inventory components. State-of-the-art electronic data scanning and document
image storage technology are utilized for accurate and rapid retrieval of
inventory documents that are required under applicable regulatory guidelines.
COMPREHENSIVE CUSTOMER SERVICE. The Company believes that its customer
service efforts are critical to its long-term success. The Company's
management information systems allow rapid response to customer requests and
provide the opportunity to locate a required aircraft spare part if not
already present in the Company's inventory. The Company's Miami facility
operates on a seven day a week, 24-hour a day basis to provide timely support
in meeting customer aircraft spare parts requirements. The Company believes
that its South Florida location gives it a competitive advantage in servicing
its customers in North and South America, and Europe.
AVAILABLE CAPITAL. The Company believes that its strong capital position
provides a significant competitive advantage. The Company's capital base
allows it to timely fund bulk purchases and be a viable provider of inventory
management services to its customers. The Company also believes that the
financial sophistication of its management team and the experience of its
management in accessing the capital markets provide a distinct competitive
advantage to the Company.
COMPANY STRATEGY
The Company believes that it is one of a limited number of companies with
the breadth of inventory, technical and financial expertise, computer
information systems and financial strength to satisfy customer demands and be
profitable in the consolidating aircraft spare parts redistribution market.
The basic components of the Company's business strategy are the following:
INTERNAL GROWTH. The Company's strategy is to increase operating revenues
and operating income through continued customer penetration in its existing
markets and expansion into new markets. The Company intends to achieve this
by continuing to increase the size and breadth of its inventory and by
continuing to expand its marketing efforts to its worldwide customer base.
The Company will also continue to offer its customers a broad array of
inventory management services allowing its customers to reduce their costs of
operations by outsourcing some or all of their inventory management functions
and to take advantage of opportunities to maximize the value of their spare
parts inventory. The Company seeks to maintain close working relationships
with its customers and to become their vendor of choice.
CAPITALIZE ON LARGE BULK PURCHASE OPPORTUNITIES. While there is no
predictability as to when opportunities to purchase large inventories in bulk
will become available in the aircraft spare parts industry, such
opportunities have historically become available on a regular basis. "Bulk"
purchase opportunities arise when airlines, in order to reduce capital
requirements, sell large amounts of inventory in a single transaction or when
inventories of aircraft spare parts are sold in conjunction with bankruptcy
proceedings. Bulk inventory purchases allow the Company to obtain large
inventories of aircraft spare parts at a lower cost than can ordinarily be
obtained by purchasing on an individual basis, resulting generally in higher
gross margins on sales of such parts. Since 1992, the Company has evaluated a
number of bulk purchase opportunities and has successfully completed two
large bulk inventory purchases. Because of its market presence, the Company
is usually solicited for a bid when bulk inventories become available for
purchase anywhere in the world. The Company believes that its market
presence, experience in evaluating bulk acquisitions, sophisticated
management information systems and capital strength enable the Company to
quickly analyze and complete large bulk purchases opportunities to the extent
that the economics of such purchases are considered favorable. The Company
further believes that future economic downturns may provide the Company with
the opportunity to acquire additional aircraft spare parts inventories at
favorable prices.
PURSUE ACQUISITIONS OF COMPLEMENTARY BUSINESSES. A key element of the
Company's strategy involves growth through acquisitions of other companies,
assets or product lines that would complement
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<PAGE>
or expand the Company's existing aircraft spare parts redistribution and
inventory management services business. The Company believes that
acquisitions will enable it to leverage its fixed costs of operations and
further expand the products and services which it can offer to its customers.
The Company is currently evaluating a number of acquisition opportunities and is
at varying stages of negotiation with respect to such acquisitions. No
commitments or binding agreements have been entered into to date and accordingly
no assurance can be given that any of the acquisitions currently being
considered will be consummated. None of such acquisitions, if consummated, would
constitute a material acquisition for the Company under applicable accounting
rules.
AIRCRAFT SPARE PARTS
Aircraft spare parts can be categorized by their ongoing ability to be
repaired and returned to service. The general categories are as follows: (i)
rotable; (ii) repairable; and (iii) expendable. A rotable is a part which is
removed periodically as dictated by an operator's maintenance procedures or
on an as needed basis and is typically repaired or overhauled and re-used an
indefinite number of times. An important subset of rotables is life limited
parts. A life limited rotable has a designated number of allowable flight
hours and/or cycles (one take-off and landing generally constitutes one
cycle) after which it is rendered unusable. A repairable is similar to a
rotable except that it can only be repaired a limited number of times before
it must be discarded. An expendable is generally a part which is used and not
thereafter repaired for further use.
Aircraft spare parts conditions are classified within the industry as (i)
factory new, (ii) new surplus, (iii) overhauled, (iv) serviceable, and (v) as
removed. A factory new or new surplus part is one that has never been
installed or used. Factory new parts are purchased from manufacturers or
their authorized distributors. New surplus parts are purchased from excess
stock of airlines, repair facilities or other redistributors. An overhauled
part has been completely disassembled, inspected, repaired, reassembled and
tested by a licensed repair facility. An aircraft spare part is classified
serviceable if it is repaired by a licensed repair facility rather than
completely disassembled as in an overhaul. A part may also be classified
serviceable if it is removed by the operator from an aircraft or engine while
operating under an approved maintenance program and is functional and meets
any manufacturer or time and cycle restrictions applicable to the part. A
factory new, new surplus, overhauled or serviceable part designation
indicates that the part can be immediately utilized on an aircraft. A part in
as removed condition requires functional testing, repair or overhaul by a
licensed facility prior to being returned to service in an aircraft.
OPERATIONS
The Company's core business is the buying and selling of aircraft spare
parts. The Company also provides value-added inventory management services to
its customers. These value-added services have become a more significant part
of the Company's business over the last year and the Company believes that
they provide significant opportunities for expansion of the Company's
business in the future.
INVENTORY SALES
The daily operations of the Company encompass inventory sales, brokering and
exchanging aircraft spare parts. The Company advertises its available
inventories held for sale or exchange on the Inventory Locator Service
("ILS") and the Airline Inventory Redistribution System ("AIRS") electronic
databases. Buyers of aircraft spare parts can access the ILS and AIRS
databases and determine the companies which have the desired inventory
available. The Company estimates that 70% of its daily sales activity results
from an ILS or AIRS inquiry. All major airlines and repair agencies subscribe
to one or both of these databases and accordingly, the Company maintains
continual on-line direct access with them. The Company also maintains direct
Electronic Data Interchanges ("EDI") with significant customers. These
programs provide for the electronic exchange of pricing and availability from
the Company to the customer in response to an electronic request for
quotation. ILS and AIRS do not, however, list price information relating to
particular parts. Knowledge of the value of particular parts comes only from
experience in the industry.
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The Company currently has over 485,000 line items in stock with market
availability, pricing and historical data available on more than 3.6 million
line items. The Company sells new, overhauled and serviceable replacement parts
from its inventory and by buying them at the request of its customer against a
specific order, usually purchasing the parts for its own account and selling
them to its customer. In addition, the Company offers a customer exchange
program for rotables. In an exchange transaction, the Company "exchanges" a new
surplus, overhauled or serviceable component taken from stock with a customer's
as-removed unit which has failed. The Company receives an exchange fee for
completing the transaction, plus reimbursement from the customer for the cost to
overhaul or repair the as-removed unit. If the as-removed part cannot be
repaired, it is returned to the customer and the exchange transaction is
converted to an outright sale at a sales price agreed upon at the time the
exchange transaction was negotiated.
INVENTORY MANAGEMENT SERVICES
The Company is meeting the outsourcing requirements of its customers
through providing a number of inventory management services. These services
assist airlines in streamlining their inventory management operations while
utilizing their capital more efficiently and reducing their costs. Through
the offering of various services, the Company believes it can provide an
inventory management program geared to a customer's particular requirements.
CONSIGNMENT. By consigning inventories to a redistributor such as the
Company, customers are able to distribute their aircraft spare parts to a
larger number of prospective inventory buyers, allowing the customer to
maximize the value of its inventory. Consignment also enables the Company to
offer for sale significant parts inventory at minimal capital cost to the
Company. The Company presently has several consignment agreements in place
with major airlines, and its revenues from consignment arrangements have
increased significantly over the last few years.
PURCHASING SERVICES AND REPAIR MANAGEMENT. The Company provides services
whereby it purchases spare parts for several smaller and start-up airlines.
These arrangements allow the Company's customers to take advantage of the
Company's greater purchasing power. The Company also provides repair
management services to certain of its customers, whereby the Company receives
a fee for managing a customer's required spare parts repair requirements. The
Company believes that it is well positioned to offer these repair management
services, since a significant portion of component repair cost relates to the
procurement of the parts to be utilized in the repair. Additionally, because
of its size, the Company procures significant repair services for its own
account, and maintains comprehensive databases on repair and replacement
parts cost, allowing it to capitalize on favorable pricing for repair
services available only to large users of repair services. This permits the
Company to offer these services on a cost-effective basis to its customers.
LEASING. The Company (through its subsidiary, Aviation Sales Leasing
Company) provides long-term leasing of inventories of aircraft spare parts to
airline customers. An increasing number of smaller and start-up airlines have
chosen to lease aircraft spare parts in order to preserve capital while
maintaining adequate spare parts support. The Company believes that it has a
competitive advantage in aircraft spare parts leasing due to its ability to
maximize the residual value of the parts after termination of the lease
through sales of the parts in the ordinary course of its business. As of
March 31, 1996, the Company had $11.6 million of inventories on long-term
lease, $9.3 million of which were maintained outside the United States.
AIRCRAFT DISASSEMBLY. The Company provides "teardown" services at its
Ardmore, Oklahoma facility, both in connection with consignment arrangements
and for the purpose of returning disassembled aircraft spare parts directly
to a customer. The Company expects that the increasing number of older
aircraft will increase the demand for aircraft spare parts and result in
expanded opportunities for aircraft disassembly.
WAREHOUSE MANAGEMENT. The Company provides warehouse management services
which allow a customer to avoid the costs associated with the operation of
its own inventory warehouse facility by
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maintaining inventory at the Company's warehouse facility. The Company also will
manage a customer's inventory at the customer's own facility.
SALES AND MARKETING; CUSTOMERS
The Company utilizes inside salespersons, regional field salespersons,
independent contract representatives and overseas sales offices in its sales
and marketing efforts. The Company's Executive Vice President-Sales and
Marketing directs the Company's global sales force. The Company employs a
regional vice president for each of North America, South America, Europe and
the Far East. The Company's outside sales force is responsible for obtaining
new customers and maintaining relationships with existing customers. The
majority of the Company's day-to-day sales are accomplished through the
Company's inside sales force.
The Company staffs its South Florida facility to provide sales and
delivery services seven days a week, 24 hours a day. This service is critical
to provide support to airline customers which, at any time, may have an
aircraft grounded in need of a particular part. The Company's South Florida
location, with easy access to Miami International Airport and Fort Lauderdale
International Airport, assists the Company in providing reliable and timely
delivery of purchased products.
The Company has over 1,000 customers, which include commercial passenger
airlines, air cargo carriers, maintenance and repair facilities and other
aircraft parts redistribution companies. During 1995, the Company's top 10
and top 100 customers accounted for approximately 23% and 69%, respectively,
of operating revenues, and no single customer accounted for more than 10% of
operating revenues.
MANAGEMENT INFORMATION SYSTEMS
The Company has developed a proprietary management information system
which is an important component of its business and a significant factor in
the Company's leading position in the redistribution market. The Company's
management information systems collect and report data regarding inventory
turnover and traceability, pricing, market availability, customer
demographics and other important data used by the Company. The Company
currently maintains marketing data on and is able to estimate the value of
more than 3.6 million line items. The Company also maintains databases on
recommended upgrades or replacements including airworthiness directives.
Access to such information gives the Company the best possible opportunity to
avoid purchases of aircraft spare parts which might be deemed unusable. In
addition, the data maintained by the Company allows it to provide its
customers with information with respect to obsolescence and
interchangeability of parts. The Company utilizes electronic data scanning
and document image storage technology for accurate and rapid retrieval of
inventory traceability documents that must accompany all sales. These
documents are required by the Company's customers in order for them to comply
with applicable regulatory guidelines. The Company believes that its
continued investment in the development of information systems is a key
factor in maintaining its competitive advantage.
COMPETITION
The aircraft spare parts redistribution market is highly fragmented.
Competition in the redistribution market is generally based on price,
availability of product and quality, including traceability. The Company's
major competitors include AAR Corp., The AGES Group and The Memphis Group.
There is also substantial competition, both domestically and overseas, from
smaller, independent dealers who generally participate in niche markets.
Several of the Company's competitors have greater financial and other
resources than the Company.
GOVERNMENT REGULATION AND TRACEABILITY
The FAA regulates the manufacture, repair and operation of all aircraft
and aircraft parts operated in the United States. Its regulations are
designed to insure that all aircraft and aviation equipment are continuously
maintained in proper condition to ensure safe operation of the aircraft.
Similar rules apply
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in other countries. All aircraft must be maintained under a continuous condition
monitoring program and must periodically undergo thorough inspection and
maintenance. The inspection, maintenance and repair procedures for the various
types of aircraft and equipment are prescribed by regulatory authorities and can
be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Presently, whenever necessary with respect to a
particular part, the Company utilizes FAA and/or Joint Aviation Authority
certified repair stations to repair and certify parts to ensure worldwide
marketability. The operations of the Company may in the future be subject to new
and more stringent regulatory requirements. In that regard, the Company closely
monitors the FAA and industry trade groups in an attempt to understand how
possible future regulations might impact the Company. See "Risk Factors--Risks
Regarding the Company's Inventory" and "--Government Regulation."
An important factor in the aircraft spare parts redistribution market
relates to the documentation or traceability that is supplied with an
aircraft spare part. The Company requires all of its suppliers to provide
adequate documentation as dictated by the appropriate regulatory authority.
The Company utilizes electronic data scanning and storage techniques to
maintain complete copies of all documentation. Documentation required
includes, where applicable, (i) a maintenance release from a certified
airline or repair facility signed and dated by a licensed airframe and/or
powerplant mechanic who repaired the aircraft spare part and an inspector
certifying that the proper methods, materials, and workmanship were used,
(ii) a "teardown" report detailing the discrepancies and corrective actions
taken during the last shop repair, and (iii) an invoice or purchase order
from an approved source.
EMPLOYEES
As of March 31, 1996, the Company employed approximately 235 persons. None
of the Company's employees are covered by collective bargaining agreements.
The Company believes that its relations with its employees are good.
PROPERTIES
The Company's executive offices are located in Miami, Florida. All of the
Company's properties are maintained on a regular basis and are adequate for
the Company's present requirements. The Company may, in the future,
consolidate its inventory into a single warehouse facility, if it is cost
effective to do so and if required to support the Company's growth.
The following table identifies the principal properties utilized by the
Company. All properties are leased. See "Certain Transactions."
APPROXIMATE
FACILITY DESCRIPTION LOCATION SQUARE FOOTAGE
- -------------------- ------------ --------------
Corporate Headquarters and Central Warehouse Miami, FL 166,000
Aircraft Disassembly and Storage Ardmore, OK 130,000
Warehouse Pearland, TX 100,000
Warehouse Miami, FL 40,000
Warehouse Miami, FL 10,000
Regional Purchasing Office Van Nuys, CA 6,300
PRODUCT LIABILITY AND LEGAL PROCEEDINGS
The Company's business exposes it to possible claims for personal injury
or death which may result from a failure of aircraft spare parts sold by it.
The Company takes what it believes are adequate precautions to ensure the
quality and traceability of the aircraft spare parts which it sells and
maintains what it believes is adequate liability insurance to protect it from
such claims. See "Risk Factors--Product Liability."
The Company is not presently involved in any material legal proceedings.
From time to time the Company may be named as a defendant in suits for
product defects, breach of warranty, breach of implied warranty of
merchantability, or other actions relating to products which it distributes
which are manufactured by others. The Company believes that this exposure is
adequately covered by its products liability insurance.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
NAME AGE POSITION
- ---- --- --------
Dale S. Baker ....... 38 President, Chief Executive Officer and
Chairman of the Board
Harold M. Woody .... 50 Executive Vice President--Sales and Marketing
and Director
Michael A. Saso .... 42 Senior Vice President--Purchasing
Joseph E. Civiletto 36 Vice President and Chief Financial Officer
James D. Innella ... 37 Vice President and Chief Operating Officer
Robert Alpert ....... 46 Director
Tim Watkins ......... 53 Director
Kazutami Okui ....... 55 Director
Sam Humphreys ....... 35 Director
DALE S. BAKER has been the President and Chief Executive Officer of the
Company since February 1992. Prior thereto, Mr. Baker was Senior Vice
President and Manager in GE Capital's Corporate Investment Finance Group.
HAROLD M. WOODY has been the Executive Vice President--Sales and Marketing
of the Company since February 1992. Prior thereto, from 1989 to 1992, Mr.
Woody was Senior Vice President--Sales and Marketing for Japan Fleet
Service(S) Pte. Ltd. and from 1987 to 1989, Mr. Woody was Executive Vice
President of ASC.
MICHAEL A. SASO has been the Senior Vice President--Purchasing of the
Company since December 1994. From 1986 until December 1994, Mr. Saso served
as Vice President--Purchasing for ASC.
JOSEPH E. CIVILETTO has been the Vice President and Chief Financial
Officer of the Company since February 1992. Prior thereto from 1982 to 1992,
Mr. Civiletto held various financial, planning and audit positions with Baker
Hughes Inc. and Arthur Andersen LLP.
JAMES D. INNELLA has been the Vice President and Chief Operating Officer
of the Company since December 1994. Prior thereto: (i) from July 1993 to
December 1994, Mr. Innella served as General Manager of ASC; (ii) from 1991
to July 1993, Mr. Innella was a Director of Operations for Ryder Airlines
Services; and (iii) from 1988 to 1991, Mr. Innella was the Director of
Operations and Purchasing for Aviparts, Inc., a subsidiary of Ryder Airlines
Services.
ROBERT ALPERT is a private investor. In addition to his investment in the
Company, Mr. Alpert has invested significantly in business ventures in the
steel, environmental and waste industries, and oil service industries.
TIM WATKINS has served as the President and Chief Executive Officer of
Japan Fleet Service(S) Pte. Ltd. since 1989. Prior thereto, Mr. Watkins was
President and Chief Executive Officer of Ryder's Aviation Sales and Leasing
Division.
KAZUTAMI OKUI has served as the General Manager of the Electronics and
Aircraft Department of Tomen Corporation, located in Tokyo, Japan, for more
than five years.
SAM HUMPHREYS is Vice Chairman of U.S. Delivery Systems, Inc. ("U.S.
Delivery"). He has served in various capacities at U.S. Delivery since April
1994. From March 1993 to March 1994, Mr. Humphreys served as an executive
officer of Envirofil, Inc., an environmental services company. Prior thereto,
he was a partner in the law firm of Andrews & Kurth.
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The officers of the Company are elected by the Board of Directors to serve
until their successors are elected and qualified. The directors of the
Company are elected at the annual meeting of the stockholders. The
Certificate of Incorporation and Bylaws of the Company provide for a Board of
Directors divided into three classes, as nearly equal in size as possible,
with staggered terms of three years. As a result, approximately one-third of
the Board will be elected each year. Messrs. Okui and Humphreys will serve
until the 1997 Annual Meeting of Stockholders, Messrs. Alpert and Watkins
will serve until the 1998 Annual Meeting of Stockholders, and Messrs. Baker
and Woody will serve until the 1999 Annual Meeting of Stockholders.
The Company's Certificate of Incorporation and Bylaws provide for the
indemnification of, and advancement of expenses to, directors and officers of
the Company. The Company has entered into agreements to provide
indemnification for its directors and certain officers in addition to the
indemnification provided for in the Certificate of Incorporation.
The Company intends to appoint at least one additional independent member
to its Board of Directors following the completion of the Offering.
COMMITTEES
The Board of Directors intends to establish an Audit Committee and a
Nominating and Compensation Committee. The Audit Committee will recommend the
independent accountants appointed by the Board of Directors to audit the
financial statements of the Company, which includes an inspection of the
books and accounts of the Company, and will review with such accountants the
scope of their audit and their report thereon, including any questions and
recommendations that may arise relating to such audit and report of the
Company's internal accounting and auditing procedures. The Nominating and
Compensation Committee will review and approve the compensation of executive
officers, evaluate possible director nominees and make recommendations
concerning such nominees to the Board of Directors, and recommend to the
Chairman and the Board the composition of the Board committees and nominees
for officers of the Company.
DIRECTOR COMPENSATION
The Company intends to pay directors of the Company who are not employed
by the Company an annual retainer fee at the rate of $12,000 per year, $1,000
for each meeting of the Board of Directors attended and $1,000 for each
committee meeting attended.
In addition, all directors will receive on an annual basis mandatory stock
option grants under the 1996 Director Stock Option Plan for serving on the
Board. Five-year options to purchase 5,000 shares of Common Stock will be
automatically granted to each director on July 1 of each year, starting July 1,
1997, at an option exercise price equal to the closing price of the Common Stock
on such date. Existing directors, upon the organization of the Company, have
each been granted five-year options to purchase 10,000 shares of Common Stock,
all of which are immediately exercisable, at an option exercise price equal to
the initial public offering price. Additionally, directors appointed to the
Board in the future will be granted options to purchase 10,000 shares of Common
Stock when they are appointed to the Board, at an option exercise price equal to
the closing price of the Common Stock on the date of their appointment to the
Board.
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SUMMARY COMPENSATION TABLES
The following table shows remuneration paid or accrued by the Company
during the year ended December 31, 1995 and for each of the two preceding
years, to the Chief Executive Officer and to each of the four most highly
compensated executive officers of the Company, other than the Chief Executive
Officer, for services in all capacities while they were employees of the
Company, and the capacities in which the services were rendered.
SALARY BONUS
NAME YEAR ($) ($)
- ---- ---- ------ -----
Dale S. Baker(1) 1995 237,500 118,750
1994 175,000 --
1993 175,000 --
Harold M. Woody(2) 1995 212,500 106,250
1994 175,000 --
1993 175,000 --
Michael A. Saso(3) 1995 125,000 62,500
1994 8,231 --
Joseph E. Civiletto 1995 130,000 65,000
1994 90,000 --
1993 80,000 --
James D. Innella(3) 1995 125,000 62,500
1994 9,105 --
(1) Mr. Baker also receives $5,000 per year for life insurance premiums. See
"--Employment Agreements" below.
(2) During 1993 and 1994, Mr. Woody was employed by Japan Fleet Service(S) Pte.
Ltd. ("JFS"). The compensation set forth above was paid to JFS in return for
Mr. Woody's services.
(3) Compensation for 1994 reflects one month of service.
No long-term compensation awards were made to management during the three
years ended December 31, 1995.
During 1994, Messrs. Baker, Woody, Civiletto and Innella received payments
of $250,000, $75,000, $50,000 and $25,000, respectively, in connection with
and as a result of the acquisition of ASC by the Company. Additionally, see
"Certain Transactions" and "Principal Stockholders" for information regarding
management's current ownership interest in the Company.
STOCK OPTION PLANS
In connection with the organization of the Company, the Company's Board of
Directors and shareholders adopted two stock option plans (the "Plans").
Pursuant to the 1996 Director Stock Option Plan (the "Director Plan"), options
to acquire a maximum of the greater of 150,000 shares or 2% of the number of
shares of Common Stock outstanding may be granted to directors of the Company.
Pursuant to the 1996 Stock Option Plan (the "1996 Plan"), options to acquire a
maximum of the greater of 650,000 shares of Common Stock or 8% of the number of
shares of Common Stock outstanding may be granted to executive officers,
employees (including employees who are directors), independent contractors and
consultants of the Company. Options to purchase 171,600 shares at an exercise
price equal to the initial public offering price have been granted under the
Plans, 97,200 of which will be immediately exercisable. See "Principal
Stockholders."
The Plans will be administered by the Compensation Committee of the Board of
Directors. The Compensation Committee will determine which persons will receive
options and the number of options to be granted to such persons. The Director
Plan also provides for annual mandatory grants of options
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to directors. See "Management--Director Compansation." The Compensation
Committee will also interpret the provisions of the Plans and make all other
determinations that it may deem necessary or advisable for the administration of
the Plans.
Pursuant to the Plans, the Company may grant Incentive Stock Options
("ISOs") as defined in Section 422(b) of the Internal Revenue Code of 1986,
as amended (the "Code"), and Non-Qualified Stock Options ("NQSOs"), not
intended to qualify under Section 422(b) of the Code. The price at which the
Company's Common Stock may be purchased upon the exercise of options granted
under the Plans will be required to be at least equal to the per share fair
market value of the Common Stock on the date particular options are granted.
Options granted under the Plans may have maximum terms of not more than 10
years and are not transferable, except by will or the laws of descent and
distribution. None of the ISOs under the Plans may be granted to an
individual owning more than 10% of the total combined voting power of all
classes of stock issued by the Company unless the purchase price of the
Common Stock under such option is at least 110% of the fair market value of
the shares issuable on exercise of the option determined as of the date the
option is granted, and such option is not exercisable more than five years
after the grant date.
Generally, options granted under the Plans may remain outstanding and may
be exercised at any time up to three months after the person to whom such
options were granted is no longer employed or retained by the Company or
serving on the Company's Board of Directors.
Pursuant to the Plans, unless otherwise determined by the Compensation
Committee, one-third of the options granted to an individual are exercisable
upon grant, one-third are exercisable on the first anniversary of such grant and
the final one-third are exercisable on the second anniversary of such grant.
However, options granted under the Plans shall become immediately exercisable if
the holder of such options is terminated by the Company or is no longer a
director of the Company, as the case may be, subsequent to certain events which
are deemed to be a "change in control" of the Company. A "change in control" of
the Company generally is deemed to occur when (i) any person becomes the
beneficial owner of or acquires voting control with respect to more than 20% of
the Common Stock (or 35% if such person is a holder of Common Stock on the
effective date of the Offering); (ii) a change occurs in the composition of a
majority of the Company's Board of Directors during a two-year period, provided
that a change with respect to a member of the Company's Board of Directors shall
be deemed not to have occurred if the appointment of a member of the Company's
Board of Directors is approved by a vote of at least 75% of the individuals who
constitute the then existing Board of Directors; or (iii) the Company's
stockholders approve the sale of all or substantially all of the Company's
assets.
ISOs granted under the Plans are subject to the restriction that the
aggregate fair market value (determined as of the date of grant) of options
which first become exercisable in any calendar year cannot exceed $100,000.
The Plans provide for appropriate adjustments in the number and type of
shares covered by the Plans and options granted thereunder in the event of
any reorganization, merger, recapitalization or certain other transactions
involving the Company.
EMPLOYMENT AGREEMENTS
Effective December 2, 1994, the Company entered into an employment
agreement with Mr. Baker (the "Employment Agreement"). The Employment
Agreement provides for an annual base salary of $237,500 (to be increased
annually by a cost of living adjustment). In addition, the Company agreed to
provide Mr. Baker with all employee benefits established by the Company, and
to pay Mr. Baker an additional sum of $5,000 per year for insurance premiums
to maintain a whole life insurance policy. The Employment Agreement requires
Mr. Baker to use his best efforts to perform the duties of President and
Chief Executive Officer.
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<PAGE>
Mr. Woody has an employment agreement with the Company to serve as
Executive Vice President--Sales and Marketing, under which he is entitled to
an annual base salary of $212,500 (to be increased annually by a cost of
living adjustment), and all employee benefits established by the Company.
The employment agreements between the Company and Messrs. Baker and Woody
each provide for an initial term expiring on December 31, 1999. Thereafter, the
respective agreements each shall run for successive one-year periods unless
terminated by the Company upon six months' prior written notice, or by Messrs.
Baker or Woody upon three months' prior written notice.
Mr. Saso has an employment agreement with the Company to serve as Senior
Vice President--Purchasing under which he is entitled to an annual base salary
of $185,000 (to be increased annually by a cost of living adjustment), and all
employee benefits established by the Company. The agreement provides for an
initial term expiring on May 31, 2001, running for successive one-year terms
thereafter, unless terminated by the Company upon six months' prior written
notice, or by Mr. Saso upon three months' prior written notice.
Mr. Civiletto has an employment agreement with the Company to serve as
Vice President and Chief Financial Officer under which he is entitled to an
annual base salary of $130,000 (to be increased annually by a cost of living
adjustment), and all employee benefits established by the Company. The
agreement provides for an initial term expiring on December 31, 1997, running
for successive one-year terms thereafter, unless terminated by the Company
upon six months' prior written notice, or by Mr. Civiletto upon three months'
prior written notice.
Mr. Innella has an employment agreement with the Company to serve as Vice
President and Chief Operating Officer under which he is entitled to an annual
base salary of $150,000 (to be increased annually by a cost of living
adjustment), and all employee benefits established by the Company. The agreement
provides for an initial term expiring on May 31, 2001, running for successive
one-year terms thereafter, unless terminated by the Company upon six months'
prior written notice, or by Mr. Innella upon three months' prior written notice.
Each of Messrs. Baker, Woody, Saso, Civiletto and Innella has further
agreed in his respective employment agreement that he shall refer to the
Company all opportunities in the aerospace industry relating to parts
purchasing, leasing, financing, repair, distribution and manufacturing, and
aircraft purchasing, leasing and financing to which he might become exposed
in carrying out his duties and responsibilities.
Each of the employment agreements for Messrs. Baker, Woody, Saso,
Civiletto and Innella also provides for participation in the Company's EBITDA
Incentive Compensation Plan whereby each of them has the opportunity to earn
an incentive bonus of between 20% and 50% of their base salary. Further, each
of the employment agreements provides that in the event of (i) a change in
the control of the Company including the vesting of decision-making authority
in one of the Company's current principal stockholders; (ii) the sale of all
or substantially all of the assets of the Company to a third party for which
the executive officer does not continue in employment; or (iii) the merger or
consolidation of the Company with an entity for which the executive officer
does not continue in employment, the employment agreement shall be terminable
by the executive officer upon 90 days' notice and one year's base salary
shall be payable to the executive officer as a termination fee.
Section 162(m) of the Code generally disallows an income tax deduction to
public companies for compensation over $1.0 million paid in a year to any one
of the chief executive officer or the four most highly compensated other
executive officers, to the extent that this compensation is not "performance
based" within the meaning of Section 162(m). As a result of this limitation,
there can be no assurance that all of the compensation paid to the Company's
executive officers in the future will be deductible.
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CERTAIN TRANSACTIONS
As of December 2, 1994, the Company entered into a 20-year lease with
Aviation Properties, a Delaware general partnership ("Aviation Properties"),
pursuant to which the Company leases its corporate headquarters and warehouse
in Miami, Florida (the "Miami Property"). The Company makes annual payments
under such lease in the amount of approximately $892,990. The sole partners
of Aviation Properties are (i) AVAC Corporation, a Delaware corporation
("AVAC"), and (ii) J/T Aviation Partners, a Delaware general partnership
("J/T"). The sole stockholder and president of AVAC is Robert Alpert, a
principal stockholder of the Company. J/T is also a principal stockholder of
the Company. See "Principal Stockholders."
Immediately prior to the effectiveness of the Registration Statement of which
this Prospectus forms a part, the partners each contributed their respective
interests in the Partnership to the Company, which was formed for the purpose of
succeeding to the assets, liabilities and business of the Partnership. In
exchange for Mr. Alpert's contribution, Mr. Alpert received 2,249,000 shares of
Common Stock and in exchange for management's contribution, management, in the
aggregate, received 675,000 shares of Common Stock. In exchange for J/T's
contribution, J/T received (i) 1,501,000 shares of Common Stock, (ii) an amount
equal to the net proceeds to be received by the Company from the Underwriters
for 500,000 of the shares of Common Stock sold in the Offering ($8,743,000) and
(iii) an amount equal to 15.38% of the proceeds received by the Company from the
Underwriters for any shares of Common Stock sold pursuant to the exercise of the
Underwriters' over-allotment option and to the extent such option is not
exercised in full, 15.38% of the 487,500 shares of Common Stock subject to such
option (up to 75,000 shares) which are not purchased by the Underwriters. See
"Principal Stockholders."
In connection with Aviation Properties' purchase of the Miami Property,
the Company and Aviation Properties entered into a loan agreement (the "Loan
Agreement") whereby the Company made a $2,465,519 loan to Aviation
Properties, which loan bears interest at 8% per annum, with principal and
interest due in a single payment on December 2, 2004.
As of December 2, 1994, the Company entered into a six-year lease with
Aviation Properties of Texas, a Delaware general partnership ("AVTEX"),
pursuant to which the Company leases a warehouse in Pearland, Texas. The
Company makes annual payments under such lease in the amount of $114,468. The
sole partners of AVTEX are AVAC and J/T.
The Company believes the terms of the Loan Agreement and the terms of the
leases with Aviation Properties and AVTEX are no less favorable than could be
obtained from an unaffiliated third party.
The Company is obligated to pay a fee of $50,000 per quarter to an entity
controlled by Mr. Alpert for consulting services. The Company's obligation to
pay this fee will expire at the end of February 1997. The Company believes
the terms of the consulting agreement are no less favorable than could be
obtained from an unaffiliated third party.
As of December 2, 1994, the Company entered into the Subordinated Debt
Agreement with RCP Management L.P., a Texas limited partnership controlled by
Mr. Alpert ("RCP"), Japan Fleet Service Co., Ltd., a Japanese corporation ("JFS
Japan") and Tomen America, Inc., a New York corporation ("Tomen America")
(collectively, RCP, JFS Japan and Tomen America are hereinafter, the "Lenders").
JFS Japan and Tomen Corporation ultimately own all of the partnership interests
in J/T. Under the terms of the Subordinated Debt Agreement, the Lenders made a
$7.0 million loan (the "Subordinated Debt") to the Company which is subordinated
in the right of payment to the Acquisition Loans and which is to be repaid by
the Company upon the earlier of (i) June 2, 2001, or (ii) the date which is six
months after the Acquisition Loans have been paid in full. The Subordinated Debt
bears interest at prime plus 5% and is payable quarterly (13.25% at March 31,
1996) and upon the earlier to occur of June 2, 2001 or the repayment of the
Subordinated Debt in full, the Partnership will pay a facility fee of $350,000.
The Company intends to repay the Subordinated Debt, and the related facility
fee, in full with the net proceeds of the Offering. See "Use of Proceeds" and
"Principal Stockholders."
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At January 1, 1995, Messrs. Baker, Woody, Saso, Civiletto and Innella were
granted options (the "Options") by the partners of the Partnership (AVAC and
J/T) to purchase an aggregate of 13.5% of the outstanding limited partnership
interests in the Partnership for an exercise price greater than the fair
market value of the interests in the Partnership at that date. At January 1,
1996, the Options were exercised in full by delivery to AVAC and J/T of full
recourse promissory notes (the "Notes") in the aggregate principal amounts
set forth below, representing the payment in full of the exercise price of
the Options:
LIMITED PARTNER'S
PERCENTAGE INTEREST IN
PARTNERSHIPACQUIRED PRINCIPAL AMOUNT
NAME UPON EXERCISE OF OPTIONS OF NOTES
- ---- ------------------------ ----------------
Dale S. Baker ....... 6.0% $638,678.75
Harold M. Woody .... 4.0% 425,785.83
James D. Innella ... 1.5% 159,669.69
Michael A. Saso .... 1.5% 159,669.69
Joseph E. Civiletto 0.5% 53,223.23
Management's interests in the Partnership are subject to a first priority
pledge to the lenders under the Credit Facility and a second priority pledge to
AVAC and J/T to secure the repayment of their respective Notes. The Notes bear
interest at the rate of 8.0% per annum, with principal and interest due and
payable on the earlier of January 1, 2001 or from the net proceeds available
upon the sale of any portion of the collateral securing the Notes. Immediately
prior to the Offering, management contributed their interests in the Partnership
to the Company in exchange for shares of the Common Stock. At such time,
management pledged their shares of the Common Stock to secure the repayment of
their respective Notes. The exercise price of the Options after giving effect to
the exchange of Partnership interests for shares of Common Stock would have
effectively been $2.13 per share. See "Principal Stockholders" for a description
of the shares of Common Stock owned by each of the members of the Company's
management after completion of the Offering.
36
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this Prospectus, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by (a) each of
the Company's directors, (b) all executive officers and directors of the Company
as a group, and (c) all persons known by the Company to own beneficially more
than 5% of the Company's Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING(1) THE OFFERING(1)
------------------------ ------------------------
NAME SHARES PERCENT+ SHARES PERCENT+
- ---------------------------------------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Robert Alpert(2)(7) 2,259,000 50.1 2,259,000 29.1
J/T Aviation Partners(3) 1,576,000 35.0 1,576,000 20.3
Dale S. Baker(4)(5)(7) 310,000 6.9 310,000 4.0
Harold M. Woody(4)(7) 210,000 4.7 210,000 2.7
Tim Watkins(6)(7) 10,000 * 10,000 *
Kazutami Okui(6)(7) 10,000 * 10,000 *
Sam Humphreys(7) 10,000 * 10,000 *
Michael A. Saso(4) 75,000 1.7 75,000 *
James D. Innella(4)(8) 76,666 1.7 76,666 *
Joseph E. Civiletto(4)(9) 28,333 * 28,333 *
All directors and executive officers as
a group (9 persons)(6)(10) 2,988,999 65.5 2,988,999 38.2
<FN>
- ----------
* Less than one percent (1%)
+ Based upon 4,500,000 shares outstanding prior to the Offering and 7,750,000
shares outstanding after the Offering, plus all currently exercisable
options, as applicable.
(1) Each person named in the table has the sole voting and investment power
with respect to the shares beneficially owned.
(2) Shares are owned of record by three corporate entities controlled by Mr.
Alpert.
(3) J/T is a general partnership with three general partners. The ultimate
beneficial owners of the partnership interests in J/T are Tomen Corporation
and Japan Fleet Service(S) Pte. Ltd. Assumes no exercise of the
over-allotment option. If the over-allotment option is exercised in full,
shares beneficially owned will be 1,501,000 (18.4% of the shares of Common
Stock outstanding after the Offering). See "Certain Transactions" and Note
15 to Notes to the Company's Consolidated Financial Statements.
(4) Shares shown as beneficially owned, except for currently exercisable
options, are pledged to secure payment of the Notes representing the
purchase price paid for their interest in the Company. See "Certain
Transactions."
(5) A portion of these shares (35,000 shares) are owned by the Dale S. Baker
Family Limited Partnership.
(6) Messrs. Watkins and Okui disclaim beneficial ownership of the shares owned
by J/T.
(7) Includes five-year options to purchase 10,000 shares at an option exercise
price equal to the initial public offering price. See "Management--Director
Compansation."
(8) Includes five-year options to purchase 1,666 shares at an option exercise
price equal to the initial public offering price. Excludes five-year options
to purchase 3,334 shares at an option exercise price equal to the initial
public offering price, which options are not currently vested.
(9) Includes five-year options to purchase 3,333 shares at an option exercise
price equal to the initial public offering price. Excludes five-year options
to purchase 6,667 shares at an option exercise price equal to the initial
public offering price, which options are not currently vested.
(10)Includes five-year options to purchase 64,999 shares at an option exercise
price equal to the initial public offering price.
</FN>
</TABLE>
37
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital consists of 30,000,000 shares of Common
Stock, par value $.001 per share, and 1,000,000 shares of preferred stock,
par value $.01 per share (the "Preferred Stock"). None of the Preferred Stock
is outstanding.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record on all matters presented to stockholders, including the election of
directors. In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share equally and
ratably in the assets of the Company, if any, remaining after paying all
debts and liabilities of the Company and the liquidation preferences of any
outstanding Preferred Stock. The Common Stock has no preemptive rights or
cumulative voting rights and no redemption, sinking fund or conversion
provisions.
Holders of Common Stock are entitled to receive dividends if, as and when
declared by the Board of Directors out of funds legally available therefore,
subject to the dividend and liquidation rights of any Preferred Stock that
may be issued and outstanding and subject to any dividend restrictions in the
Company's credit facilities. No dividend or other distribution (including
redemptions or repurchases of shares of capital stock) may be made if after
giving effect to such distribution, the Company would not be able to pay its
debts as they become due in the usual course of business, or if the Company's
total assets would be less than the sum of its total liabilities plus the
amount that would be needed at the time of a liquidation to satisfy the
preferential rights of any holders of Preferred Stock. See "Dividend Policy."
All of the shares offered hereby, when issued and sold, will be validly
issued, fully paid and nonassessable.
The transfer agent and registrar for the Common Stock will be Continental
Stock Transfer & Trust Company.
PREFERRED STOCK
The Board of Directors is authorized, without further stockholder action,
to divide any or all shares of the authorized Preferred Stock into series and
fix and determine the designations, preferences and relative rights and
qualifications, limitations or restrictions thereon of any series so
established, including voting powers, dividend rights, liquidation
preferences, redemption rights and conversion privileges. As of the date of
this Prospectus, the Board of Directors has not authorized any series of
Preferred Stock, and there are no plans, agreements or understandings for the
authorization or issuance of any shares of Preferred Stock. The issuance of
Preferred Stock with voting rights or conversion rights may adversely affect
the voting power of the Common Stock, including the loss of voting control to
others. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change of control of the Company.
CERTAIN PROVISIONS OF THE CERTIFICATE AND BYLAWS
GENERAL. A number of provisions of the Company's Certificate of
Incorporation ("Certificate") and Bylaws ("Bylaws") concern matters of
corporate governance and the rights of stockholders. Certain of these
provisions, as well as the ability of the Board of Directors to issue shares
of Preferred Stock and to set the voting rights, preferences and other terms
thereof, may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the Board of Directors (including
takeovers which certain stockholders may deem to be in their best interests).
To the extent takeover attempts are discouraged, temporary fluctuations in
the market price of the Common Stock, which may result from actual or rumored
takeover attempts, may be inhibited. These provisions, together with the
classified Board of Directors and the ability of the Board to issue Preferred
Stock without further stockholder action, also could delay or frustrate the
removal of incumbent directors or
38
<PAGE>
the assumption of control by stockholders, even if such removal or assumption
would be beneficial to stockholders of the Company. These provisions also
could discourage or make more difficult a merger, tender offer or proxy
contest, even if they could be favorable to the interests of stockholders,
and could potentially depress the market price of the Common Stock. The Board
of Directors believes that these provisions are appropriate to protect the
interests of the Company and all of its stockholders.
ISSUANCE OF RIGHTS. The Certificate authorizes the Board of Directors to
create and issue rights (the "Rights") entitling the holders thereof to purchase
from the Company shares of capital stock or other securities. The times at
which, and the terms upon which, the Rights are to be issued may be determined
by the Board of Directors and set forth in the contracts or instruments that
evidence the Rights. The authority of the Board of Directors with respect to the
Rights includes, but is not limited to, the determination of (i) the initial
purchase price per share of the capital stock or other securities of the Company
to be purchased upon exercise of the Rights, (ii) provisions relating to the
times at which and the circumstances under which the Rights may be exercised or
sold or otherwise transferred, either together with or separately from, any
other securities of the Company, (iii) antidilutive provisions which adjust the
number or exercise price of the Rights or amount or nature of the securities or
other property receivable upon exercise of the Rights, (iv) provisions which
deny the holder of a specified percentage of the outstanding securities of the
Company the right to exercise the Rights and/or cause the Rights held by such
holder to become void, (v) provisions which permit the Company to redeem the
Rights and (vi) the appointment of a rights agent with respect to the Rights.
MEETINGS OF STOCKHOLDERS. The Bylaws provide that a special meeting of
stockholders may be called only by the Board of Directors unless otherwise
required by law. The Bylaws provide that only those matters set forth in the
notice of the special meeting may be considered or acted upon at that special
meeting, unless otherwise provided by law. In addition, the Bylaws set forth
certain advance notice and informational requirements and time limitations on
any director nomination or any new business which a stockholder wishes to
propose for consideration at an annual meeting of stockholders.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT. The Certificate provides that
any action required or permitted to be taken by the stockholders of the
Company at an annual or special meeting of stockholders must be effected at a
duly called meeting and may not be taken or effected by a written consent of
stockholders in lieu thereof.
INDEMNIFICATION AND LIMITATION OF LIABILITY. The Bylaws provide that
directors and officers of the Company shall be, and in the discretion of the
Board of Directors non-officer employees may be, indemnified by the Company
to the fullest extent authorized by Delaware law, as it now exists or may in
the future be amended, against all expenses and liabilities reasonably
incurred in connection with service for or on behalf of the Company. The
Bylaws also provide that the right of directors and officers to
indemnification shall be a contract right and shall not be exclusive of any
other right possessed or hereafter acquired under any bylaw, agreement, vote
of stockholders or otherwise. The Certificate contains a provision permitted
by Delaware law that generally eliminates the personal liability of directors
for monetary damages for breaches of their fiduciary duty, including breaches
involving negligence or gross negligence in business combinations, unless the
director has breached his or her duty of loyalty, failed to act in good
faith, engaged in intentional misconduct or a knowing violation of law, paid
a dividend or approved a stock repurchase in violation of the Delaware
General Corporation Law or obtained an improper personal benefit. This
provision does not alter a director's liability under the federal securities
laws. In addition, this provision does not affect the availability of
equitable remedies, such as an injunction or rescission, for breach of
fiduciary duty.
AMENDMENT OF THE CERTIFICATE. The Certificate provides that an amendment
thereof must first be approved by a majority of the Board of Directors and (with
certain exceptions) thereafter approved by the holders of a majority of the
total votes eligible to be cast by holders of voting stock with respect to such
amendment or repeal; provided however, that the affirmative vote of 80% of the
total votes eligible to be cast by holders of voting stock, voting together as a
single class, is required to amend provisions relating to the establishment of
the Board of Directors and amendments to the Certificate.
39
<PAGE>
AMENDMENT OF BYLAWS. The Certificate provides that the Bylaws may be
amended or repealed by the Board of Directors or by the stockholders. Such
action by the Board of Directors requires the affirmative vote of a majority
of the directors then in office. Such action by the stockholders requires the
affirmative vote of the holders of at least two-thirds of the total votes
eligible to be cast by holders of voting stock with respect to such amendment
or repeal at an annual meeting of stockholders or a special meeting called
for such purposes, unless the Board of Directors recommends that the
stockholders approve such amendment or repeal at such meeting, in which case
such amendment or repeal shall only require the affirmative vote of a
majority of the total votes eligible to be cast by holders of voting stock
with respect to such amendment or repeal.
STATUTORY BUSINESS COMBINATION PROVISION
The Company has elected that it will exclude itself from coverage of
Section 203 of the Delaware General Corporation Law ("Section 203"). Section 203
provides, with certain exceptions, that a Delaware corporation may not engage in
any of a broad range of business combinations with a person or affiliate, or
associate of such person, who is an "interested stockholder" for a period of
three years from the date that such person became an interested stockholder
unless: (i) the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the board of directors
of the corporation before the person becomes an interested stockholder, (ii) the
interested stockholder acquired 85% or more of the outstanding voting stock of
the corporation in the same transaction that makes it an interested stockholder
(excluding shares owned by persons who are both officers and directors of the
corporation, and shares held by certain employee stock ownership plans); or
(iii) on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors and by
the holders of at least 66 2/3 % of the corporation's outstanding voting stock
at an annual or special meeting, excluding shares owned by the interested
stockholder. Under Section 203, an "interested stockholder" is defined (with
certain limited exceptions) as any person that is (i) the owner of 15% or more
of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and was the owner of 15% or more of the outstanding
voting stock of the corporation at any time within the three-year period
immediately prior to the date on which it is sought to be determined whether
such person is an interested stockholder.
40
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
After completion of this Offering, the Company will have 7,750,000 shares
of Common Stock outstanding (8,162,500 if the Underwriters' overallotment
option is exercised in full). Of these shares the 3,250,000 shares of Common
Stock offered hereby (3,737,500 if the Underwriters' over-allotment option is
exercised in full), will be freely tradeable without restriction or further
registration under the Securities Act, unless purchased by "affiliates" of
the Company, as that term is defined in Rule 144, described below. All of the
remaining 4,500,000 shares of Common Stock outstanding upon completion of
this Offering are "Restricted Securities," as that term is defined in Rule
144 under the Securities Act.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated in accordance with the Rule), including an
affiliate of the Company, who has beneficially owned Restricted Securities for
at least two years would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the outstanding
shares of Common Stock or the reported average weekly trading volume for the
four weeks preceding the sale. Sales under Rule 144 are also subject to certain
manner of sale restrictions and notice requirements and to the availability of
current public information concerning the Company. Persons who have not been
affiliates of the Company for at least three months and who have held their
shares for more than three years are entitled to sell Restricted Securities
without regard to the volume, manner of sale, notice and public information
requirements of Rule 144.
The Company, its executive officers, directors and stockholders have agreed
that for a period of 180 days from the date of this Prospectus, they will not,
without the prior written consent of Smith Barney Inc., sell, offer to sell,
solicit an offer to buy, contract to sell, grant any option to purchase or
otherwise transfer or dispose of, any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock,
subject to certain exceptions.
Beginning 180 days after the closing of the Offering, each of the current
stockholders of the Company will generally have the right to require the
Company to file a registration statement under the Securities Act in order to
register an underwritten public offering of all or any part of the Restricted
Securities held by it. In addition, in the event that the Company proposes to
register any of its securities under the Securities Act, either for its own
account or for the account of other security holders, the current
stockholders will be entitled to notice of such registration and be entitled
to include its Restricted Securities in such registration, subject to certain
marketing and other limitations.
Prior to this Offering, there has been no market for the shares of Common
Stock and no prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of such shares for sale
will have on the market prices prevailing from time to time. The possibility
that substantial amounts of shares of Common Stock may be sold in the public
market may adversely affect prevailing market prices for the shares of Common
Stock and/or may impair the Company's ability to raise equity capital in the
future.
41
<PAGE>
UNDERWRITING
Upon the terms and subject to the conditions of the Underwriting
Agreement, dated the date hereof, each of the Underwriters named below has
severally agreed to purchase from the Company, and the Company has agreed to
sell to such Underwriter, the respective number of shares of Common Stock set
forth opposite the name of such Underwriter.
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
Smith Barney Inc. .................................... 743,334
Alex. Brown & Sons Incorporated ...................... 743,333
Sanders Morris Mundy ................................. 743,333
Dillon, Read & Co. Inc. .............................. 140,000
Oppenheimer & Co., Inc. .............................. 140,000
PaineWebber Incorporated ............................. 140,000
C.L. King & Associates, Inc. ......................... 75,000
Cleary Gull Reiland & McDevitt Inc. .................. 75,000
Gabelli & Company, Inc. .............................. 75,000
Murphy, Marseilles, Smith & Nammack, Inc. ............ 75,000
Raymond James & Associates, Inc. ..................... 75,000
The Robinson-Humphrey Company, Inc. .................. 75,000
Southeast Research Partners .......................... 75,000
William Blair & Company, L.L.C. ...................... 75,000
-----------
Total ............................................... 3,250,000
===========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to
take and pay for all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any such shares are
purchased.
The Underwriters propose to offer part of the shares of Common Stock
directly to the public at the public offering price set forth on the cover
page of this Prospectus and part of the shares to certain dealers at a price
that represents a concession not in excess of $0.79 per share under the public
offering price. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. The
Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 487,500 shares of
the Common Stock at the price to public set forth on the cover page of this
Prospectus minus the underwriting discount and commissions. The Underwriters
may exercise such option solely for the purpose of covering over-allotments,
if any, in connection with the Offering of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth
opposite each Underwriter's name in the preceding table bears to the total
number of shares listed in such table.
The Company, its executive officers, directors and stockholders have
agreed that, for a period of 180 days from the date of this Prospectus, they
will not, without the prior written consent of Smith Barney Inc., sell, offer to
sell, solicit an offer to buy, contract to sell, grant any option to purchase or
otherwise transfer or dispose of, any shares of Common Stock or any securities
convertible into, or exercisable or exchangeable for, shares of Common Stock,
subject to certain exceptions.
The Company and the Underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the Securities Act.
42
<PAGE>
Prior to the Offering, there has not been any public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
shares of Common Stock included in the Offering has been determined by
negotiations among the Company and the Representatives. Among the factors
considered in determining such price were the history of and prospects for
the Company's business and the industry in which it competes, an assessment
of the Company's management and the present state of the Company's
development, the past and present revenues and earnings of the Company, the
prospects for the growth of the Company's revenues and earnings, the current
state of the economy in the United States and the current level of economic
activity in the industry in which the Company competes and in related or
comparable industries, and currently prevailing conditions in the securities
markets, including current market valuations of publicly traded companies
that are comparable to the Company.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company by Akerman, Senterfitt & Eidson, P.A., Miami,
Florida, and for the Underwriters by Latham & Watkins, New York, New York.
EXPERTS
The financial statements and schedule of the Partnership as of December
31, 1994 and 1995 and for each of the three years in the period ended
December 31, 1995 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said reports.
The combined financial statements of Aviation Sales Company (a division of
Aviall Services, Inc.) as of November 30, 1994 and for the year ended
December 31, 1993 and for the eleven months ended November 30, 1994, have
been included in this Prospectus and the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein or in the Registration Statement, and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP refers to a change in accounting for post
retirement benefits other than pensions in 1993.
ADDITIONAL INFORMATION
This Prospectus constitutes a part of the Registration Statement filed by
the Company with the Securities and Exchange Commission (the "Commission")
under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement and related exhibits and schedules for further information with
respect to the Company and the Common Stock offered hereby. Any statements
contained herein concerning the provisions of any document are not
necessarily complete, and in each such instance reference is made to the copy
of such document filed as an exhibit to the Registration Statement. Each such
statement is qualified in its entirety by such reference. The Registration
Statement and the exhibits and schedules forming a part thereof can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
DC 20549, and should also be available for inspection and copying at the
following regional offices of the Commission: 7 World Trade Center, New York,
New York 10048; and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, DC 20549, at prescribed rates.
43
<PAGE>
AVIATION SALES COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE COMPANY
<S> <C>
Report of Independent Certified Public Accountants ......................................... F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 and March 31, 1996 (unaudited) .. F-3
Consolidated Statements of Income for the Three Years Ended December 31, 1995
and the Three Months Ended March 31, 1995 and March 31, 1996 (unaudited) ................. F-4
Consolidated Statements of Partners' Capital for the Three Years Ended December 31, 1995 .. F-5
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1995
and the Three Months Ended March 31, 1995 and March 31, 1996 (unaudited) ................. F-6
Notes to Consolidated Financial Statements ................................................. F-8
AVIATION SALES COMPANY BUSINESS UNIT
Report of Independent Certified Public Accountants ......................................... F-22
Combined Balance Sheet at November 30, 1994 ................................................ F-23
Combined Statements of Operations and Changes in Aviall Investment for the
December 31, 1993 and the Eleven Months Ended November 30, 1994 .......................... F-24
Combined Statements of Cash Flows for the Year Ended December 31, 1993 and
the Eleven Months Ended November 30, 1994 .................................................. F-25
Notes to Combined Financial Statements ..................................................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of
ASC Acquisition Partners, L.P.:
We have audited the accompanying consolidated balance sheets of ASC
Acquisition Partners, L.P. (a Delaware Limited Partnership) and subsidiary,
as of December 31, 1994 and 1995, and the related consolidated statements of
income, partners' capital and cash flows for each of the three years in the
period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ASC
Acquisition Partners, L.P. and subsidiary, as of December 31, 1994 and 1995,
and the results of their operations and their changes in partners' capital
and cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 19, 1996 (except with respect
to the matters discussed in Note 16,
as to which the date is May 2, 1996).
F-2
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
PRO FORMA
MARCH 31, MARCH 31,
1994 1995 1996 1996
----------- ------------ ------------- --------------
(UNAUDITED) (UNAUDITED)
(NOTE 15)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................ $ 1,482,279 $ 253,307 $ 283,520 $ 283,520
Accounts receivable, net of allowance for doubtful
accounts of $2,625,809 in 1994, $1,951,395 in
1995 and $1,876,407 in 1996 (unaudited) ........ 16,979,559 23,824,362 26,210,782 26,210,782
Inventories (Note 1) ............................. 52,765,203 48,956,682 53,347,383 53,347,383
Prepaid expenses ................................. 56,868 56,963 352,914 352,914
------------ ------------ ------------- -------------
Total current assets ........................... 71,283,909 73,091,314 80,194,599 80,194,599
------------ ------------ ------------- -------------
SPARE PARTS ON LEASE, net of accumulated
amortization of $69,444 in 1994, $1,024,904 in
1995 and $1,327,148 in 1996 (unaudited) ......... 9,930,556 11,697,151 11,394,907 11,394,907
------------ ------------ ------------- -------------
FIXED ASSETS:
Property and equipment (Note 7) .................. 2,224,159 3,121,702 3,484,303 3,484,303
Less--Accumulated depreciation ................... (749,203) (1,259,658) (1,414,219) (1,414,219)
------------ ------------ ------------- -------------
Total fixed assets ............................. 1,474,956 1,862,044 2,070,084 2,070,084
------------ ------------ ------------- -------------
AMOUNTS DUE FROM AFFILIATES ....................... 2,971,139 3,031,198 2,997,364 2,997,364
------------ ------------ ------------- -------------
OTHER ASSETS:
Deposits and other ............................... 20,043 682,469 795,422 795,422
Deferred financing costs, net (Note 1) ........... 3,584,316 2,972,454 2,802,505 2,802,505
------------ ------------ ------------- -------------
Total other assets ............................. 3,604,359 3,654,923 3,597,927 3,597,927
------------ ------------ ------------- -------------
Total assets ................................... $ 89,264,919 $ 93,336,630 $ 100,254,881 $ 100,254,881
============ ============ ============= =============
LIABILITIES, PARTNERS' CAPITAL AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................. $ 6,720,475 $ 10,453,278 $ 10,495,062 $ 10,495,062
Accrued expenses ................................. 3,744,722 4,080,634 2,878,691 2,878,691
Accrued interest payable ......................... 665,538 794,800 782,934 782,934
Other liabilities, vendor-held parts (Note 9) .... 1,129,538 1,030,228 972,349 972,349
Notes payable, current maturities--
Senior (Note 8) ................................. 5,000,000 10,000,000 10,000,000 10,000,000
Other, revolver (Note 8) ........................ 2,152,208 42,808 7,621,576 7,621,576
------------ ------------ ------------- -------------
Total current liabilities ...................... 19,412,481 26,401,748 32,750,612 32,750,612
------------ ------------ ------------- -------------
LONG-TERM LIABILITIES:
Deferred income (Note 6) ......................... 773,740 877,315 877,315 877,315
Notes payable--
Senior (Note 8) ................................. 55,000,000 45,000,000 42,500,000 42,500,000
Subordinated debt (Note 8) ...................... 7,000,000 7,000,000 7,000,000 7,000,000
------------ ------------ ------------- -------------
Total long-term liabilities .................... 62,773,740 52,877,315 50,377,315 50,377,315
------------ ------------ ------------- -------------
DUE TO PARTNERS (NOTE 15) ......................... -- -- -- 10,810,600
------------ ------------ ------------- -------------
COMMITMENTS AND CONTINGENCIES
(Notes 11 and 12)
PARTNERS' CAPITAL ................................. 7,078,698 14,057,567 17,126,954 --
------------ ------------ ------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding ................... -- -- -- --
Common stock, $.001 par value 30,000,000 shares
authorized, 4,500,000 shares outstanding ....... -- -- -- 4,500
Additional paid-in capital ....................... -- -- -- 6,311,854
------------ ------------ ------------- -------------
Total equity ................................... 7,078,698 14,057,567 17,126,954 6,316,354
------------ ------------ ------------- -------------
Total liabilities and partners' capital ........ $ 89,264,919 $ 93,336,630 $ 100,254,881 $ 100,254,881
============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
F-3
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Sales of aircraft parts, net .... $ 23,428,896 $ 27,799,227 $ 108,434,709 $ 26,961,969 $ 30,722,843
Rentals from leases and other ... -- 391,752 5,368,174 1,488,841 2,175,303
------------ ------------- ------------- ------------ ------------
23,428,896 28,190,979 113,802,883 28,450,810 32,898,146
COST OF SALES .................... 11,161,617 12,016,623 71,314,263 16,654,197 21,187,943
------------ ------------- ------------- ------------ ------------
12,267,279 16,174,356 42,488,620 11,796,613 11,710,203
------------ ------------- ------------- ------------ ------------
OPERATING EXPENSES:
Operating ....................... 3,120,670 2,900,168 8,988,894 2,056,853 2,342,764
Selling ......................... 1,844,739 2,043,147 4,820,081 1,095,148 1,589,428
General and administrative ...... 4,199,120 5,167,245 8,640,423 2,294,962 2,328,851
Depreciation and amortization ... 217,395 414,618 1,465,915 315,346 456,805
------------ ------------- ------------- ------------ ------------
9,381,924 10,525,178 23,915,313 5,762,309 6,717,848
------------ ------------- ------------- ------------ ------------
INCOME FROM OPERATIONS ........... 2,885,355 5,649,178 18,573,307 6,034,304 4,992,355
OTHER (EXPENSES) INCOME:
Other income .................... 202,822 -- -- -- --
Interest expense, amortization of
deferred financing costs
and loan administration fees .. (6,243,889) (4,458,664) (8,287,584) (2,083,454) (1,922,968)
------------ ------------- ------------- ------------ ------------
NET INCOME (LOSS) ................ $ (3,155,712) $ 1,190,514 $ 10,285,723 $ 3,950,850 $ 3,069,387
============ ============= ============= ============ ============
PRO FORMA DATA
(Unaudited) (Notes 14 and 15):
Historical income before
income taxes ................... $ 10,285,723 $ 3,950,850 $ 3,069,387
PRO FORMA ADJUSTMENT TO REFLECT
INCOME TAXES ................... (4,011,432) (1,540,832) (1,197,061)
------------- ------------ ------------
PRO FORMA NET INCOME ............. $ 6,274,291 $ 2,410,018 $ 1,872,326
============= ============ ============
PRO FORMA NET INCOME
PER SHARE ...................... $ 1.25 $ 0.48 $ 0.37
============= ============ ============
PRO FORMA WEIGHTED AVERAGE SHARES
OUTSTANDING .................... 5,000,000 5,000,000 5,000,000
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
FOR THE THREE YEARS ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
AVIATION
J/T AJT SALES
RCP AVIATION CAPITAL AVAC MANAGEMENT
MANAGEMENT PARTNERS PARTNERS CORPORATION COMPANY TOTAL
------------ ----------- ----------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AS OF
DECEMBER 31, 1992 .... $ 3,142,826 $ 2,901,070 $ -- $ -- $ -- $ 6,043,896
Net loss ............ (1,640,970) (1,514,742) -- -- -- (3,155,712)
----------- ----------- ----------- ----------- --------- ------------
BALANCE AS OF
DECEMBER 31, 1993 .... 1,501,856 1,386,328 -- -- -- 2,888,184
Net income .......... 437,732 534,622 69,744 141,441 6,975 1,190,514
Contribution of net
assets of AJT ..... (1,939,588) (1,790,389) 3,729,977 -- -- --
Capital contributions -- 1,404,000 -- 1,521,000 75,000 3,000,000
----------- ----------- ----------- ----------- --------- ------------
BALANCE AS OF
DECEMBER 31, 1994 .... -- 1,534,561 3,799,721 1,662,441 81,975 7,078,698
Net income .......... -- 3,850,975 2,057,145 4,171,889 205,714 10,285,723
Distribution to
partners .......... -- (1,238,086) (661,371) (1,341,260) (66,137) (3,306,854)
----------- ----------- ----------- ----------- --------- ------------
BALANCE AS OF
DECEMBER 31, 1995 .... $ -- $ 4,147,450 $ 5,195,495 $ 4,493,070 $ 221,552 $ 14,057,567
=========== =========== =========== =========== ========= ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------ ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING
ACTIVITIES:
Net income (loss) ......................... $ (3,155,712) $ 1,190,514 $ 10,285,723 $ 3,950,850 $ 3,069,387
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities--
Depreciation and amortization .......... 2,687,362 1,197,540 2,132,522 483,097 626,754
Provision for doubtful accounts ......... 155,000 110,000 360,000 75,000 160,000
(Increase) decrease in accounts
receivable, net ....................... 383,852 1,261,264 (7,204,803) (8,922,016) (2,546,420)
Decrease in notes receivable ............ 276,396 -- -- -- --
(Increase) decrease in inventories ...... 10,056,688 3,616,958 4,330,960 2,582,931 (4,390,701)
(Increase) decrease in prepaid expenses . (28,544) 109,286 (95) (110,661) (295,950)
(Increase) decrease in deposits ......... (2,263) 185,505 (662,426) (89,001) (112,953)
Increase (decrease) in accounts payable,
accrued expenses, vendor-held parts and
deferred income ....................... 2,569,618 4,432,342 4,740,341 2,393,311 (1,229,905)
------------ ------------ ------------ ----------- -----------
Net cash provided by (used in)
operating activities ................ 12,942,397 12,103,409 13,982,222 363,511 (4,719,788)
------------ ------------ ------------ ----------- -----------
CASH FLOW FROM INVESTING
ACTIVITIES:
Purchase of certain assets of the Aviation
Sales Company business unit ............. -- (44,076,495) (1,060,538) -- --
Purchases of equipment, net ............... (33,133) (534,565) (897,544) (312,437) (362,601)
Purchase of spare parts on lease .......... -- -- (2,722,054) -- --
Due from affiliates ....................... -- (2,465,519) (60,059) 24,525 33,834
------------ ------------ ------------ ----------- -----------
Net cash used in investing activities . (33,133) (47,076,579) (4,740,195) (287,912) (328,767)
------------ ------------ ------------ ----------- -----------
CASH FLOW FROM FINANCING
ACTIVITIES:
Issuance of senior debt ................... -- 60,000,000 -- --
Repayment of senior debt .................. -- -- (5,000,000) -- (2,500,000)
Net issuance (repayment) of senior
revolving facility ...................... 333,445 1,818,763 (2,109,400) (1,096,244) 7,578,768
Repayment of senior notes payable ......... (13,001,807) (23,180,282) -- -- --
Issuance of subordinated debt--
AIS partnership ......................... 200,000 4,200,000 -- -- --
Repayment of senior and junior
subordinated debt--AIS partnership ...... -- (11,400,000) -- -- --
Advances from partners--AIS partnership ... -- 376,364 -- -- --
Repayments to partners--AIS partnership ... -- (376,364) -- -- --
Issuance of subordinated debt--
ASC partnership ......................... -- 7,000,000 -- -- --
Contributions from (distributions to)
partners--ASC partnership ............... -- 3,000,000 (3,306,854) -- --
Payment of financing fees ................. -- (3,719,867) -- -- --
Payment of deferred fees .................. -- (2,135,000) (54,745) (7,461) --
Repayments of other debt .................. (11,670) (11,461) -- -- --
------------ ------------ ------------ ----------- -----------
Net cash provided by (used in)
financing activities ................ (12,480,032) 35,572,153 (10,470,999) (1,103,705) 5,078,768
------------ ------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .............................. 429,232 598,983 (1,228,972) (1,028,106) 30,213
CASH AND CASH EQUIVALENTS,
beginning of period ...................... 454,064 883,296 1,482,279 1,482,279 253,307
------------ ------------ ------------ ----------- -----------
CASH AND CASH EQUIVALENTS,
end of period ............................ $ 883,296 $ 1,482,279 $ 253,307 $ 454,173 $ 283,520
============ ============ ============ =========== ===========
</TABLE>
F-6
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------- ---------------------------
1993 1994 1995 1995 1996
----------- ------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Purchase of net assets from Aviation
Sales Company business unit--
Accounts receivable ................... $ -- $ 14,184,533 $ -- $ -- $ --
Inventories ............................. -- 22,357,509 (522,439) -- --
Spare parts on lease .................... -- 10,000,000 -- -- --
Fixed assets ............................ -- 750,000 -- -- --
Accounts payable ........................ -- (2,441,807) 1,582,977 -- --
Deferred income ......................... -- (773,740) -- -- --
----------- ------------ ------------ ---------- ----------
Cash paid ............................ $ -- $ 44,076,495 $ 1,060,538 $ -- $ --
=========== ============ ============ ========== ==========
Transfer of building to AVTEX--
Net book value of building .............. $ -- $ 1,772,567 $ -- $ -- $ --
Mortgage by AVTEX ....................... -- (1,266,947) -- -- --
----------- ------------ ------------ ---------- ----------
Due from affiliate ................... $ -- $ 505,620 $ -- $ -- $ --
=========== ============ ============ ========== ==========
Interest paid ............................ $ 3,712,578 $ 4,231,428 $ 7,717,005 $1,585,633 $1,725,588
=========== ============ ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND OPERATIONS
ASC Acquisition Partners, L.P. (ASC or the Partnership), a Delaware
limited partnership, d/b/a Aviation Sales Company, was formed on November 30,
1994, by Aviation Sales Management Company (ASMC or the General Partner), a
Delaware corporation, AJT Capital Partners, a Delaware general partnership
d/b/a Aerospace International Services (AIS), AVAC Corporation (AVAC), a
Delaware corporation, and J/T Aviation Partners (J/T), a Delaware general
partnership. ASMC was incorporated on October 25, 1994. The shareholders of
ASMC are AVAC and J/T. AIS was formed on February 28, 1992, between RCP
Management L.P. (RCP or the Managing Partner), a Texas limited partnership,
and J/T. The Partnership is engaged in the business of acquiring,
maintaining, marketing and leasing aircraft and aircraft engine spare parts.
The Partnership's products are distributed in the United States and abroad to
commercial airlines, air cargo carriers, distributors, maintenance
facilities, corporate aircraft operators and other aerospace companies.
On December 2, 1994 (effective November 30, 1994), AIS contributed
substantially all of its assets to the Partnership, and the Partnership
assumed certain liabilities of AIS, in consideration for an equity position
in the Partnership. For accounting purposes, the Partnership and AIS are
considered related parties as the ultimate ownership interests of the
Partnership interests are held by parties who own substantially the same
ownership percentage of AIS. As a result, the combination was accounted for
in a manner similar to a pooling of interest. Accordingly, the accompanying
financial statements include the accounts and operations of AIS for the years
ended December 31, 1993, 1994 and 1995, at the historical net book value of
AIS and also include the historic results of operations of the business
acquired from Aviall Services, Inc., as described below from December 1,
1994 through December 31, 1995. Prior to the combination with AIS, the
Partnership did not have any operations.
On December 2, 1994 (effective November 30, 1994), AIS transferred an
office and warehouse building with a net book value of $1,772,567 to Aviation
Properties of Texas (AVTEX), a Delaware general partnership which was formed
on November 30, 1994 between AVAC and J/T; in addition, AVTEX assumed from
AIS the mortgage liability of $1,266,947 on such facility and agreed to pay
the Partnership $505,620. No gain or loss was recognized on this transaction.
The Partnership entered into a six-year lease with AVTEX for use of the
building for an annual use payment of $114,468 (see Note 12).
On December 2, 1994 (effective November 30, 1994), the Partnership
completed the acquisition of certain assets and assumed certain liabilities
of the Aviation Sales Company business unit from Aviall Services, Inc. (the
ASC Acquisition). The assets acquired include certain aircraft spare parts
inventory, certain aircraft spare parts leased to third parties, accounts
receivable, property and equipment and other tangible assets. The Partnership
also assumed certain obligations of Aviall Services, Inc., to former
employees and certain trade liabilities. This acquisition was accounted for
following the purchase method of accounting. As discussed further in Notes 3
and 8, on December 2, 1994, the Partnership entered into a credit agreement
with four banks providing $60,000,000 in term loans and up to $20,000,000
under a revolving credit facility. The Partnership used $65,400,517 borrowed
pursuant to this credit agreement together with $3,000,000 in partner
contributions and $7,000,000 of new subordinated debt payable to partners of
the Partnership to fund the ASC Acquisition and to retire existing debt
assumed from AIS.
On February 28, 1992, AIS acquired certain aircraft spare parts inventory
owned by Eastern Air Lines, Inc. (the EAL Inventory) and certain outstanding
accounts receivable for $55,165,000. AIS
F-8
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:--(CONTINUED)
financed the acquisition with a combination of capital contributions and the
issuance of senior and subordinated indebtedness. Eastern Air Lines, Inc.
(EAL), had previously filed a voluntary petition under Chapter 11 of the
United States Bankruptcy Code. The EAL Inventory consisted of avionics and
electrical components, flight control units and landing gear, airframe parts,
interior furnishings, rotables and expendable parts.
INTERIM CONDENSED FINANCIAL STATEMENTS
In the opinion of the management of ASC, the accompanying unaudited
condensed consolidated financial statements of ASC and subsidiary contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of ASC as of March 31, 1996, and the
results of its operations for the three months ended March 31, 1995 and 1996.
The results of operations and cash flows for the three months ended March 31,
1996 are not necessarily indicative of the results of operations or cash
flows which may be reported for the remainder of 1996.
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission for reporting on Form 10-Q. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
ASC and its 99% owned subsidiary, Aviation Sales Leasing Company, L.P.
(ASLC), a Delaware limited partnership. All significant intercompany
transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all deposits with an original maturity of three
months or less to be cash equivalents. Cash and cash equivalents at December
31, 1994 and 1995, include cash held by ASC in demand deposit accounts.
REVENUE RECOGNITION
Sales of aircraft spare parts are recognized as revenues when the product
is shipped and title has passed to the customer. The Partnership records
reserves for estimated sales returns in the period sales are made.
F-9
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:--(CONTINUED)
INVENTORIES
Inventories, which consist primarily of aviation parts, are stated at the
lower of cost or market. In instances where bulk purchases of inventory items
are made, cost is determined on the specific identification basis and is
based upon an allocation by management of the bulk purchase price to the
individual components. Expenditures required for the recertification of parts
are capitalized as inventory cost as incurred and are expensed as the parts
associated with the recertification are sold.
SPARE PARTS ON LEASE
The Partnership, primarily through ASLC, leases spare part inventories to
the airline industry on a worldwide basis through operating leases. Operating
lease income is recognized on a straight-line basis over the term of the
underlying leases. The cost of spare parts on lease are amortized,
principally on a straight-line basis, down to the estimated remaining net
realizable value over the lease term or the economic life of the spare parts
inventory.
PROPERTY AND EQUIPMENT
For financial reporting purposes, the Partnership provides for
depreciation of property and equipment using the straight-line method at
annual rates sufficient to amortize the cost of the assets during their
estimated useful lives. For tax purposes, the Partnership generally uses
accelerated depreciation methods.
Maintenance and repair expenditures are charged to expense as incurred,
and expenditures for betterments and major renewals are capitalized. The
carrying amounts of assets which are sold or retired and the related
accumulated depreciation are removed from the accounts in the year of
disposal, and any resulting gain or loss is reflected in income. Such gains
or losses were not significant during the years ended December 31, 1993, 1994
and 1995 and for the quarter ended March 31, 1996.
AMORTIZATION
The costs associated with obtaining financing for the Partnership's
acquisitions are included in the accompanying balance sheets as deferred
financing costs and are being amortized over the initial terms of the loans
to which such costs relate. Amortization expense for the years ended December
31, 1993, 1994 and 1995 and for the three months ended March 31, 1995 and
1996 (unaudited) was $2,354,248, $781,103, $666,607, $167,751 and $169,949,
respectively.
INCOME TAXES
The Partnership does not pay income taxes (see Note 14). The Partnership
agreement provides that distributions to the partners for taxes can be made
from available funds on a quarterly basis. The senior loan agreement
prohibits distributions to the partners should the Partnership be in
noncompliance with certain loan covenants.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior-year financial
statements to conform to current-year presentations.
F-10
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 2--INITIAL PARTNERSHIP CAPITALIZATION:
The Partnership was formed on November 30, 1994 and was capitalized as
follows: (a) $75,000 initial cash contribution from ASMC for a two percent
general partner interest, (b) $1,521,000 initial cash contribution from AVAC
for a 40.56 percent limited partner interest, (c) $1,404,000 initial cash
contribution from J/T for a 37.44 percent limited partner interest and
$3,729,977 net asset contribution from AIS for a 20 percent limited partner
interest.
NOTE 3--ACQUISITIONS:
On December 2, 1994 (effective November 30, 1994), the Partnership
completed the ASC Acquisition for an estimated purchase price of $47,292,042,
of which $44,076,495 was paid in cash, $1,632,570 of accrued liabilities and
deferred income were assumed and $1,582,977 was claimed by the seller to be
payable to the seller. At December 31, 1994, the Partnership recorded
$1,582,977 of accrued liability relating to an additional purchase price
claimed by the seller. In August 1995, the seller and the Partnership agreed
to a reduced amount of additional purchase price of $1,060,538. The $522,439
reduction in purchase price was allocated to the assets acquired and
liabilities assumed during 1995.
In connection with the ASC Acquisition, the Partnership: (a) received
contributions from partners of $3,000,000, (b) issued senior notes payable to
banks (including senior revolving loans) of $65,400,517 and (c) issued
subordinated debt to partners of $7,000,000. In addition, the Partnership
used a portion of these proceeds to retire senior and subordinated debt it
had assumed from AIS as follows: (a) retirement of senior notes payable of
$15,575,504, and (b) retirement of subordinated debt, junior subordinated
debt and advances from partners of $11,776,364.
The following presents the unaudited pro forma results of operations of
the Partnership for the years ended December 31, 1994 and 1993, as if the ASC
Acquisition had occurred on January 1, 1993 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994
--------- --------
(UNAUDITED)
<S> <C> <C>
Pro forma operating revenues .............. $ 102,535 $ 89,335
========= ========
Restructuring charge ...................... $ (49,103) $ (4,450)
========= ========
Pro forma net loss ........................ $ (52,315) $ (6,737)
========= ========
</TABLE>
The pro forma results are based on the historic accounting results of the
Partnership assuming the Partnership had completed the ASC Acquisition on
January 1, 1993, and assumes (a) the issuance of approximately $44,076,000 of
senior bank loans, the proceeds of which were used principally to make such
acquisition, (b) the elimination of historical interest expense recorded by
the Aviation Sales Company business unit from Aviall Services, Inc., (c) the
elimination of historical depreciation expense on the office and warehouse
facility located in Miami, Florida, (d) rental expense on this office and
warehouse facility pursuant to the lease agreement with an affiliate of the
Partnership, and (e) the elimination of general and administration expenses
in excess of the amounts estimated to be incurred by the Partnership
operating the combined business as if such transactions had occurred on
January 1, 1993 (unaudited). In addition, the historical results of
operations of the Aviation Sales Company business unit for the year ended
December 31, 1993 include a $60,163,000 restructuring provision to write down
F-11
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 3--ACQUISITIONS:--(CONTINUED)
inventory and other assets to estimated realizable value, to write off
goodwill and to record severance and incentive compensation to certain groups
of employees (unaudited). The pro forma financial information for the year
ended December 31, 1993 reflects the elimination of $11,060,000 of the
$60,163,000 restructuring provision related to severance and incentive pay
and the write-off of goodwill (unaudited). The pro forma results presented
above are not necessarily indicative of the actual results that would have
occurred had the acquisition actually taken place at the beginning of the
period presented. In addition, the pro forma results are not intended to be
projections of future results of combined operations.
Effective November 30, 1994, the Partnership assigned its rights to
acquire the building and warehouse facility of Aviation Sales Company,
located in Miami, Florida, to Aviation Properties (AVPROP), a Delaware
general partnership which was formed on November 30, 1994, between AVAC and
J/T. The acquisition price paid by AVPROP for the building was $7,100,000.
AVPROP purchased this facility on December 2, 1994 for a total price of
$7,465,519, including acquisition-related expenses of $365,519. AVPROP
financed the purchase price with an interest-bearing note payable to the
Partnership of $2,465,519, which bears interest at 8 percent per year with
principal and interest due in a single payment on December 2, 2004, and a
$5,000,000 loan from AVAC and J/T. The Partnership entered into a 20-year
lease, as amended, with AVPROP for use of the building for an annual use
payment of $892,990 (see Note 12).
NOTE 4--ACCOUNTS RECEIVABLE:
The Partnership distributes products in the United States and abroad to
commercial airlines, air cargo carriers, distributors, maintenance
facilities, corporate aircraft operators and other aerospace companies. The
Partnership's credit risks consist of accounts receivable from customers in
the aviation industry. The Partnership performs periodic credit evaluations
of its customers' financial conditions and provides allowances for doubtful
accounts as required. No single customer represents greater than 10 percent
of total revenues for the years ended December 31, 1993, 1994 or 1995.
NOTE 5--INVENTORY ACQUIRED FROM SALES AGENT:
At the time it acquired the EAL Inventory, AIS entered into a management
agreement with a third party sales agent to provide certain sales and
marketing and related support services to AIS on a percentage of cost
reimbursement basis. The sales agent's responsibilities were subject to
certain price controls and criteria established by AIS. The management
agreement had an initial term of five years with extensions for additional
consecutive one-year periods.
On February 28, 1992, AIS advanced $7,500,000 to the sales agent and
charged the sales agent for reimbursement of fully earned facility fees of
$375,000 in exchange for a note receivable of $7,875,000 from the sales agent
(the Secured Loan). The Secured Loan bore interest at prime plus 2 1/2
percent and was secured by significantly all of sales agent's assets. In
addition to the Secured Loan, AIS advanced the sales agent $750,000 for
short-term working capital requirements.
On March 18, 1993, the sales agent filed a petition under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court for
the District of New Jersey. Subsequently, on September 7, 1993, the sales
agent's bankruptcy petition was converted to a Chapter 7 liquidation. On
April 27, 1993, prior to appointment of a trustee, the debtor in possession
for the estate of the sales
F-12
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 5--INVENTORY ACQUIRED FROM SALES AGENT:--(CONTINUED)
agent filed an adversary complaint against AIS in the United States
Bankruptcy Court claiming that certain contract termination and incentive
fees were due to the sales agent relating to the termination of the
management agreement. Although the management of the Partnership believed the
claim to be without merit, in order to resolve this matter, on January 22,
1996, the Partnership purchased this claim from the bankruptcy estate of the
sales agent for $12,000. On August 4, 1993, AIS was the successful bidder at
a bankruptcy auction for all of the inventories of the sales agent, which
inventories were conveyed to AIS by bill of sale dated August 11, 1993 in
settlement of the outstanding note receivable from the sales agent. In
connection with the bankruptcy and liquidation and lawsuits with the sales
agent, the Partnership incurred contract termination costs of $966,302,
$104,843 and $316,093, respectively, for the years ended December 31,
1993, 1994 and 1995, which are included in general and administrative
expense.
NOTE 6--SPARE PARTS ON LEASE:
In connection with the ASC Acquisition, the Partnership acquired certain
aircraft spare parts and assumed leases to third parties pursuant to
noncancelable operating leases ranging from three to five years.
Additionally, during 1995 the Partnership purchased certain aircraft spare
parts from a third party and leased back the inventory to the same party. The
leases generally provide for residual payments to the Partnership should the
parts be damaged or unlocatable at the expiration of the lease term. The cost
and accumulated amortization of the spare parts under the leases were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Aircraft spare parts at cost $10,000,000 $12,722,055 $12,722,055
Accumulated amortization .... (69,444) (1,024,904) (1,327,148)
----------- ----------- -----------
$ 9,930,556 $11,697,151 $11,394,907
=========== =========== ===========
</TABLE>
At December 31, 1994 and 1995, $9,930,556 and $9,316,198, respectively, of
spare part on lease were maintained in the Far East.
Deposits of $773,740 and $877,315 received from the lessees are recorded
as deferred income in the accompanying December 31, 1994 and 1995
consolidated balance sheets and will be applied in connection with final
settlement of these leases.
Future minimum lease receivables under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -------------------------
<S> <C>
1996 ............................................... $5,238,208
1997 ............................................... 1,878,495
1998 ............................................... 515,000
1999 ............................................... 510,000
2000 ............................................... 510,000
Thereafter ......................................... 869,833
----------
$9,521,536
==========
</TABLE>
F-13
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 7--PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- ------------
1994 1995 1996 USEFUL LIVES
------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Furniture, fixtures
and equipment .... $2,224,159 $3,121,702 $3,484,303 3-7 years
========== ========== ==========
</TABLE>
NOTE 8--NOTES PAYABLE AND LONG-TERM DEBT:
At December 31, 1994 and 1995 and at March 31, 1996, notes payable and
long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------------------------------------- ---------------------------
1994 1995 1996
--------------------------- ---------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
INTEREST INTEREST INTEREST
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------------- ----------- ------------- ---------- -------------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Senior bank loans--
Term Loan--A .............. $45,000,000 9.5% $ 40,000,000 10.33% $ 37,500,000 9.83%
Term Loan--B .............. 15,000,000 10.0% 15,000,000 10.83% 15,000,000 10.33%
Revolving credit facility 2,152,208 9.5% 42,808 -- 7,621,576 9.78%
Subordinated debt due
to partners of ASC ....... 7,000,000 13.0% 7,000,000 13.83% 7,000,000 13.33%
Less--Current maturities .. (7,152,208) (10,042,808) (17,621,576)
----------- ------------ ------------
Net long-term debt ......... $62,000,000 $ 52,000,000 $ 49,500,000
=========== ============ ============
</TABLE>
Term Loan A is repayable in 18 consecutive equal quarterly installments of
$2,500,000 commencing on August 31, 1995, with the final installment due
November 30, 1999. Term Loan A bears interest at prime plus 1.5 percent. Term
Loan B, in the original principal amount of $15,000,000, bears interest at
prime plus 2 percent. Term Loan B is repayable in two equal installments of
$7,500,000 each, due on May 31, 2000, and November 30, 2000. The revolving
credit facility provides working capital of up to $20,000,000 to the
Partnership with interest at prime plus 1.5 percent, subject to an
availability calculation of the Partnership's eligible borrowing base. In
addition, the Partnership is required to make mandatory repayments from
excess cash flows as defined. The eligible borrowing base includes certain
receivables and inventories of the Partnership. The revolving credit facility
terminates on November 30, 1999. At December 31, 1995 and March 31, 1996, the
Partnership had availability under the revolving credit facility of
approximately $19.0 and $11.8 million, respectively. The credit facility
contains certain financial covenants regarding the financial performance of
the Partnership, certain reporting requirements, a limitation on the amount
of annual capital expenditures and limitations on the incurrence of
additional debt and provides for the suspension of the revolving credit
facility and repayment of all debt in the event of a material adverse change
in the business or the general partner or a change in control. Substantially
all of the Partnership's assets are pledged as collateral for amounts
borrowed pursuant to the credit facility.
F-14
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 8--NOTES PAYABLE AND LONG-TERM DEBT:--(CONTINUED)
On December 1, 1994, the Partnership entered into an agreement which
provides that the prime interest rate on $30,000,000 of senior term loans
will not exceed 9 percent through December 2, 1997. In exchange for this
interest rate limitation, the Partnership agreed to make quarterly payments
to its lenders ranging from $57,000 to $186,000, depending on the level of
the prime rate, as defined. Quarterly payments totaling $228,000 and $57,000
were made during 1995 and the first quarter of 1996, which are included in
interest expense in the accompanying consolidated statements of income.
The Partnership entered into a subordinated loan agreement (the Subordinated
Debt) on December 2, 1994, whereby the Partnership borrowed $7,000,000 from the
partners which is payable in a single lump sum on the earlier of June 2, 2001,
or six months after amounts borrowed pursuant to the credit facility have been
paid in full (the Subordinated Debt). In December 1994, the Partnership paid
arrangement and facility fees totaling $560,000 pursuant to the Subordinated
Debt agreement which have been included in deferred financing costs. Upon the
earlier to occur of June 2, 2001 or the repayment of the Subordinated Debt in
full, the Partnership will pay to the partners an additional facility fee of
$350,000, provided that, if the Subordinated Debt is prepaid in full prior to
June 2, 1996, the Partnership will be released from its obligation to pay such
facility fee. The Subordinated Debt agreement provides that amounts borrowed
become due and payable should the Partnership default pursuant to the terms of
the credit facility. The Subordinated Debt bears interest at prime plus 5
percent. During the years ended December 31, 1994 and 1995 and for the quarter
ended March 31, 1996 the Partnership incurred interest expense of $84,389,
$975,868 and $233,000, respectively, in connection with the Subordinated Debt.
On December 9, 1993, AIS received $200,000 from its partners pursuant to
the terms of a junior subordinated note which bore interest at prime plus 5
percent in order to pay certain obligations then due. During 1994, AIS
received $4,576,364 from its partners which was used to fund a $3,000,000
deposit for the ASC Acquisition and to meet working capital needs. The
obligations to repay the junior subordinated note and these cash advances
were assumed by the Partnership and were repaid on December 2, 1994.
In February 1992, AIS entered into two senior loan and security agreements
(the Senior Loan Agreements) that provided funds for the acquisition of the
EAL Inventory. Amounts outstanding at December 2, 1994 were assumed and
repaid by the Partnership, and all liens were released.
AIS entered into a subordinated loan and security agreement in February
1992 which was subsequently assumed and repaid in full by the Partnership.
The four-year term note of $7,000,000 bore interest at prime plus 5 percent
which was payable quarterly.
On January 27, 1992, in connection with the acquisition of certain
warehouse facilities, AIS entered into a promissory note totaling $1,300,000.
The note matures January 27, 1997, bears interest at 8 percent and requires
monthly payments of principal and interest. The loan is secured by a mortgage
on certain land and warehouse/office facilities in Pearland, Texas. On
November 30, 1994, AIS transferred the facility, net of the promissory note
balance, to AVTEX, an affiliate of AIS. The Partnership entered into a
long-term lease agreement with AVTEX for use of the facility (as discussed in
Note 1).
NOTE 9--OTHER LIABILITIES, VENDOR-HELD PARTS:
In connection with the acquisition of the EAL Inventory, AIS acquired
certain identified aircraft inventories. These were acquired subject to
outstanding mechanics' liens for repairs that were ongoing
F-15
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
at the time of purchase. Management of AIS calculated these liens to total
$3,059,318 at acquisition. These inventories are held by the vendors and are
released to AIS or the Partnership upon settlement of the outstanding claims. At
December 31, 1994 and 1995, management of AIS and the Partnership estimates that
$1,129,538 and $1,030,228, respectively, of the vendor-held parts liability
remained outstanding.
NOTE 10--RELATED-PARTY TRANSACTIONS:
Under the terms of the ASC partnership agreement, AVAC is entitled to
receive a fee of $50,000 per quarter for consulting services. Prior to
December 2, 1994, under the terms of the AIS partnership agreement, the
Managing Partner was entitled to receive a quarterly administrative fee of
$50,000. Such fees have been accrued as general and administrative expense in
the accompanying statements of income as incurred and have been paid through
March 31, 1996.
RCP is an issuer of subordinated debt to the Partnership. AVAC is an
affiliated entity of RCP.
Tomen America, Inc., is an issuer of subordinated debt to the Partnership.
T/M Aviation (Japan), Inc., and TM Aviation (USA), Inc. hold an equity
interest in J/T, a minority partner in the Partnership. TM Aviation (Japan),
Inc., is a wholly owned subsidiary of Tomen Corporation. TM Aviation (USA),
Inc. is a wholly owned subsidiary of Tomen America, Inc., which is a wholly
owned subsidiary of Tomen Corporation.
Japan Fleet Service Co. Ltd., a Japanese corporation (JFS Japan), is an
issuer of subordinated debt to the Partnership and is an affiliate of J/T.
Japan Fleet Service (Delaware), Inc. (JFS Delaware) is a wholly owned
subsidiary of Japan Fleet Service (Europe) B.V. (JFS Europe) and holds an
equity interest in J/T. JFS Europe is 60 percent owned by Japan Fleet
Service(S) Pte Ltd. (JFS Singapore) and 40 percent owned by JFS Japan.
JFS Delaware had an option to acquire the office and warehouse facility
located in Pearland, Texas, along with any improvements thereon, for a price
of $1,400,000. On December 2, 1994, the Partnership purchased JFS Delaware's
option for $100,000.
In accordance with a management agreement between AIS and RCP, all
full-time, nontemporary personnel working for the benefit of AIS were
employed through Aircraft Spare Parts, Inc. (ASPI), which is an affiliate of
RCP. Effective December 2, 1994, ASMC replaced ASPI as the employer. The
Partnership reimburses ASMC and, prior to December 2, 1994, AIS reimbursed
ASPI for all of its related expenditures. During the years ended December 31,
1993 and 1994, Aircraft Spare Parts, Inc., was reimbursed by AIS
approximately $2,994,234 and $3,259,127, respectively, for personnel-related
costs. During 1994, ASMC was reimbursed approximately $404,274 by the
Partnership.
NOTE 11--COMMITMENTS AND CONTINGENCIES:
The Partnership is currently involved in various lawsuits and other
contingencies arising out of operations in the normal course of business. In
the opinion of management, the ultimate resolution of those claims and
lawsuits will not have a material adverse effect on the financial position or
results of operations of the Partnership.
On July 29, 1994, AIS filed an action against the Brazoria County, Texas,
Appraisal District seeking relief from ad valorem tax appraisals of certain
property for tax years 1993 and 1994. On February 7,
F-16
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 11--COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
1995, a settlement was reached in the matter, and the appraised value on the
property was reduced for 1993 and 1994. The settlement results in a reduction of
1993 property tax of $435,939 and a reduction of 1994 property tax of $33,964.
This reduction in tax liability of $469,903 was recorded in general and
administrative expense in 1994.
Subsequently, on August 29, 1995, the Pearland ISD, City of Pearland and the
County of Brazoria filed a cause of action against AIS seeking penalty and
interest of approximately $86,000 on the settlement previously reached on
February 7, 1995. Management of the Partnership believes that the settlement
entered on February 7, 1995 addressed all matters and that penalty and interest
are not due under the terms of the settlement. In the opinion of management, the
ultimate resolution of these claims and lawsuits will not have a material effect
on the financial position of the Partnership.
On June 18, 1993, the estate of EAL filed an action against AIS claiming
that certain errors were made by EAL in the calculation of credits received
by AIS against the purchase of the EAL Inventory at closing on February 28,
1992. On February 25, 1994, the Partnership filed a counterclaim against the
estate of EAL in United States Bankruptcy Court. In October 1994, the
Partnership and EAL agreed to settle all claims and mutually release all
parties. As a result of the settlement, the Partnership recorded additional
general and administrative expenses of $869,081 in October 1994.
The Partnership has certain employment agreements with officers and
employees dated December 1994, which extend from three to five years and are
renewable in one-year periods thereafter. The employment agreements provide
that such officers and employees may earn bonuses of up to 50 percent of
their base salaries provided the Partnership achieves certain financial
operating results as defined. Further, each of the employment agreements
provides that in the event of (i) a change in the control of the Partnership
including the vesting of decision-making authority in one of the
Partnership's current partners; (ii) the sale of all or substantially all of
the assets of the Partnership to a third party for which the executive
officer does not continue in employment; or (iii) the merger or consolidation
of the Partnership with an entity for which the executive officer does not
continue in employment, the employment agreement shall be terminable by the
executive officer upon 90 days' notice and one year's base salary shall be
payable to the executive officer as a termination fee.
At January 1, 1995, five officers and employees of the Partnership were
granted options (the "Options") by the partners of the Partnership to
purchase an aggregate of 13.5% of the outstanding limited partnership
interests in the Partnership for an aggregate exercise price of $1,437,027
which was greater than the fair market value of the interests in the
Partnership at that date. At January 1, 1996, the Options were exercised in
full by delivery to the partners of full recourse promissory notes
representing the payment in full of the exercise price of the Options.
The Partnership has purchase commitments to various airlines whereby the
Partnership sells aircraft inventory as agent for such airlines. Pursuant to
such agreements, the Partnership has commitments to various airlines
requiring the Partnership to purchase a minimum amount of inventory from such
airlines before February 1997. In the opinion of management, the
Partnership's commitments will be realized through future sales of aircraft
inventory owned by such airlines.
Effective January 1, 1995, the Partnership established a qualified defined
contribution plan for eligible employees. The Plan provides that employees
may contribute up to the maximum percent of pretax earnings as allowed by the
U.S. tax code and the Partnership may elect, at its discretion, to make
contributions to the Plan in any year. The Partnership contributed
approximately $197,000 to the Plan in 1995.
F-17
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 11--COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
The Partnership does not provide retired employees any health or life
insurance benefits.
NOTE 12--LEASES:
The Partnership leases certain buildings and office equipment under
operating lease agreements. The buildings are leased from affiliates of the
Partnership. For the years ended December 31, 1993, 1994 and 1995, rent
expense under these leases amounted to $103,957, $407,857 and $1,554,677,
respectively. Minimum rental commitments under operating leases are as
follows:
<TABLE>
<CAPTION>
LEASE OBLIGATIONS LEASE OBLIGATIONS
YEAR ENDING DECEMBER 31, TO RELATED PARTIES TO THIRD PARTIES
- ------------------------ ------------------ -----------------
<S> <C> <C>
1996 .................. $ 1,202,649 $405,643
1997 .................. 1,202,649 191,550
1998 .................. 1,202,649 --
1999 .................. 1,202,649 --
2000 .................. 1,202,649 --
Thereafter ............ 15,234,534 --
----------- --------
$21,247,779 $597,193
=========== ========
</TABLE>
NOTE 13--DOMESTIC AND EXPORT SALES INFORMATION:
Information about the Partnership's domestic and export sales for the
three years ended December 31, 1995 follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
NET REVENUES BY
GEOGRAPHICAL AREAS:
United States .... $22,026 $25,864 $ 68,052
Export sales-- ...
Europe ........... 1,398 2,327 28,666
Far East ......... -- -- 7,525
Latin America ... 5 -- 9,560
------- ------- --------
$23,429 $28,191 $113,803
======= ======= ========
</TABLE>
NOTE 14--PRO FORMA DISCLOSURES (UNAUDITED):
PRO FORMA INCOME TAXES
As described in Note 1, the Partnership is not subject to income taxes.
Assuming completion of the Offering (see Note 15), the net assets of the
Partnership will be held by a C Corporation (New ASC) (see Note 15) and will
be subject to Federal and State income taxes. Upon transfer of the net assets
of the Partnership to New ASC, deferred income taxes reflecting the tax
effect of temporary differences between the Partnership's book and tax basis
of certain assets and liabilities will be charged to operations. A pro forma
adjustment to reflect income taxes has been reflected in the accompanying
1995 consolidated statement of operations. Income taxes have been provided at
the estimated effective rate of 39%.
F-18
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 14--PRO FORMA DISCLOSURES (UNAUDITED):--(CONTINUED)
PRO FORMA NET INCOME PER SHARE
Pro Forma net income per share has been computed by dividing pro forma net
income by the number of shares of New ASC the original partners of ASC will
receive upon the completion of the Offering (for a discussion of the pro forma
weighted average number of common shares outstanding, see Note 15).
PRO FORMA SUPPLEMENTARY EARNINGS PER SHARE
The pro forma supplementary earnings per share (before extraordinary items)
for the year ended December 31, 1995 and the three months ended March 31, 1996,
assuming the Offering was completed on January 1, 1995 and January 1, 1996,
respectively, and all proceeds of the Offering were used to pay the $8,743,000
liability to J/T Aviation Partners (see Note 15) and retire outstanding debt, is
$1.26 and $0.35 per share, respectively. The supplementary net income used to
compute the pro forma supplementary earnings per share gives effect to the
elimination of interest expense on the debt assumed retired, less the related
income tax effect. The number of shares used to compute the supplementary net
income per share is the total shares outstanding after the assumed Offering (See
Note 15).
NOTE 15--PROPOSED INITIAL PUBLIC OFFERING AND PRO FORMA FINANCIAL INFORMATION
(UNAUDITED):
Aviation Sales Company (the "Company"), a newly formed Delaware
corporation which does not yet have any operations and has not yet been
capitalized, will publicly offer 3,250,000 shares of its common stock. In
addition, the Company will grant the underwriters a 30-day option to purchase
up to 487,500 additional shares to cover over-allotments, if any.
Immediately prior to the effectiveness of the Company's Registration
Statement relating to the offering (the "Offering"), the partners, other than
J/T Aviation Partners, will contribute to the Company their interest in the
Partnership in exchange for 2,924,000 shares of the Company and J/T Aviation
Partners will contribute to the Company its interest in the Partnership in
exchange for (i) 1,501,000 shares of common stock of the Company, (ii) an amount
equal to the proceeds to be received by the Company from the underwriters for
500,000 of the shares of common stock being sold by it and (iii) an amount equal
to approximately 15.38% of the proceeds received by the Company from the
underwriters for any shares of common stock sold pursuant to the exercise of the
underwriters' over-allotment option and to the extent such option is not
exercised in full, approximately 15.38% of the 487,500 shares of common stock
subject to such option which are not purchased by the underwriters.
The net proceeds from the offering are estimated to be $56,827,500,
assuming an initial public offering price of $19.00 per share. Assuming an
intial public offering price of $19.00 per share, $8,743,000 of such net
proceeds will be paid to J/T Aviation Partners related to the sale of 500,000
shares of common stock as described above. The remaining net proceeds will be
used to repay the outstanding debt balances.
The pro forma balance sheet gives effect to the contribution by the partners
of their interests in the Partnership in exchange for 4,500,000 shares of common
stock (assuming that the underwriters' over-allotment option is not exercised).
The pro forma balance sheet also sets forth the $8,743,000 liability
F-19
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 15--PROPOSED INITIAL PUBLIC OFFERING AND PRO FORMA FINANCIAL INFORMATION
(UNAUDITED):--(CONTINUED)
that will be incurred by the Company related to the exchange of the J/T Aviation
Partners interest as described above, a $1,718,000 liability for the estimated
distribution to the partners of the Partnership of an amount equal to 4o% of the
Partnership's income before provision for income taxes for the three months
ended March 31, 1996 and additional amounts due to the partners related to the
Partnership's 1995 net income, and a $350,000 facility fee payable to the
partners of the Partnership. The pro forma weighted average number of common
shares outstanding of 5,000,000 assumes that the 4,500,000 shares to be issued
to the partners, as described above, and the 500,000 shares of common stock the
net proceeds in respect of which will be paid to J/T Aviation Partners were also
outstanding in all periods.
NOTE 16--SUBSEQUENT EVENTS:
AMENDED CREDIT FACILITY
In conjunction with the repayment of indebtedness from the proceeds of the
Offering, the Company has entered into a letter of intent (the "Letter of
Intent") to amend the credit facility (the "Amended Credit Facility"). The
Amended Credit Facility will be comprised of (i) a term loan facility (the
"Term Loan") in an original principal amount not to exceed $20.0 million and
to be determined based on the application of the proceeds of the Offering,
and (ii) a $50.0 million revolving loan, letter of credit and acquisition
loan facility, subject to an availability calculation based on the eligible
borrowing base (the "Revolving Credit Facility"). The letter of credit
portion of the Revolving Credit Facility will be subject to a $10.0 million
sublimit and the acquisition loan portion of the Revolving Credit Facility
will be subject to a $30.0 million sublimit with the imposition of certain
borrowing criteria based on the satisfaction of certain debt ratios. The
unused portion of the acquisition loan portion of the Revolving Credit
Facility will expire on the second anniversary of the closing date of the
Amended Credit Facility. The interest rate on the Amended Credit Facility will
be, at the option of the Company, (i) prime plus a margin, or (ii) LIBOR plus a
margin, where the margin determination is made based upon the Company's
financial performance over the prior 12 month period (ranging from 0.25% to
1.25% in the event prime is utilized, or 1.75% to 2.75% in the event LIBOR is
utilized). Upon consummation of the Offering, borrowings under the Amended
Credit Facility will initially accrue interest at either prime plus 0.25% or
LIBOR plus 1.75%.
The Term Loan will amortize in equal quarterly installments and will
terminate on December 1, 1999. Interim payments under the Revolving Credit
Facility will be made daily from collections of the Company's accounts
receivable and the Revolving Credit Facility will terminate on December 1, 1999.
The Amended Credit Facility will contain similar financial and other covenants
of the Company and similar mandatory prepayment events as set forth in the
existing credit facility and is expected to be secured by a lien on
substantially all of the assets of the Company. However, in contrast to the
Credit Facility, the Amended Credit Facility will not require the application of
excess cash flows. Events of default will also be similar to the credit
facility; provided however that an event of default based on a change of control
will pertain to a change in more than 50% of the members of the Company's Board
of Directors in place on the closing date of the Amended Credit Facility.
STOCK OPTION PLANS
In connection with the organization of the Company, the Company will adopt
two stock option plans (the "Plans"). Pursuant to the 1996 Director Stock Option
Plan (the "Director Plan"), options to acquire a maximum of the greater of
150,000 shares or 2% of the number of shares of Common Stock then outstanding
may be granted to directors of the Company. Pursuant to the 1996 Stock Option
Plan (the "1996 Plan"), options to
F-20
<PAGE>
ASC ACQUISITION PARTNERS, L.P. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION RELATED TO THE THREE MONTHS ENDING
MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 16--SUBSEQUENT EVENTS:--(CONTINUED)
acquire a maximum of the greater of 650,000 shares of Common Stock or 8% of the
number of shares of Common Stock then outstanding may be granted to executive
officers, employees (including employees who are directors), independent
contractors and consultants of the Company. Options to purchase 165,000 shares
at an exercise price equal to the initial public offering price will be granted
under the Plans, 94,999 of which will be immediately exercisable.
The price at which the Company's Common Stock may be purchased upon the
exercise of options granted under the Plans will be required to be at least
equal to the per share fair market value of the Common Stock on the date
particular options are granted. Options granted under the Plans may have
maximum terms of not more than 10 years.
Generally, options granted under the Plans may remain outstanding and may
be exercised at any time up to three months after the person to whom such
options were granted is no longer employed or retained by the Company or
serving on the Company's Board of Directors.
Pursuant to the Plans, unless otherwise determined by the compensation
committee, one-third of the options granted under the Plans are exercisable upon
grant, one-third are exercisable on the first anniversary of such grant and the
final one-third are exercisable on the second anniversary of such grant.
However, options granted under the Plans shall become immediately exercisable if
the holder of such options is terminated by the Company or is no longer a
director of the Company, as the case may be, subsequent to certain events which
are deemed to be a "change in control" of the Company.
F-21
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
ASC Acquisition Partners, L.P.:
We have audited the accompanying combined balance sheet of Aviation Sales
Company (a division of Aviall Services, Inc.) as of November 30, 1994 and the
related combined statements of operations, changes in Aviall investment and
cash flows for the year ended December 31, 1993 and the eleven-month period
ended November 30, 1994. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the financial position of Aviation
Sales Company as of November 30, 1994, and the results of their operations
and their cash flows for the year ended December 31, 1993 and the eleven-month
period ended November 30, 1994, in conformity with generally accepted
accounting principles.
As discussed in note 10 to the combined financial statements, Aviation
Sales Company changed its method of accounting for postretirement benefits
other than pensions in 1993.
KPMG PEAT MARWICK LLP
Fort Lauderdale, Florida
November 3, 1995
F-22
<PAGE>
AVIATION SALES COMPANY
COMBINED BALANCE SHEET
NOVEMBER 30, 1994
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 30,
1994
-------------
<S> <C>
ASSETS
Current assets:
Cash ....................................................... $ 748
Accounts receivable, net ................................... 13,936
Inventories, net ........................................... 23,260
-------
Total current assets ..................................... 37,944
-------
Property, plant and equipment, net .......................... 6,733
Spare parts on lease ........................................ 10,000
Intangible assets, net ...................................... --
Other assets ................................................ 661
-------
Total assets ............................................. $55,338
=======
LIABILITIES AND AVIALL INVESTMENT
Current liabilities:
Accounts payable ............................................. $12,069
Accrued expenses ............................................. 2,652
-------
Total current liabilities .................................. 14,721
-------
Other noncurrent liabilities .................................. 1,273
Commitments and contingencies
Aviall investment:
Investment by and advances from Aviall ....................... 39,344
-------
Total liabilities and Aviall investment .................... $55,338
=======
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE>
AVIATION SALES COMPANY
COMBINED STATEMENTS OF OPERATIONS
AND CHANGES IN AVIALL INVESTMENT
FOR THE YEAR ENDED DECEMBER 31, 1993 AND
THE ELEVEN MONTHS ENDED NOVEMBER 30, 1994
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994
--------- --------
<S> <C> <C>
Net sales .................................................... $ 79,156 $ 63,326
--------- --------
Costs and expenses:
Cost of sales ............................................... 55,368 49,109
Provision for excess and obsolete inventory ................. 52,367 1,062
Selling, general and administrative expenses ................ 20,984 17,676
Intercompany interest expense ............................... 3,157 2,572
Other income ................................................ (309) (508)
--------- --------
Loss before income taxes and cumulative effect
of change in accounting ................................. (52,411) (6,585)
Income taxes ................................................. -- --
--------- --------
Loss before cumulative effect of change in accounting ..... (52,411) (6,585)
Cumulative effect of change in accounting, net of taxes ...... (193) --
--------- --------
Net loss .................................................. $ (52,604) $ (6,585)
========= ========
Changes in Aviall investment:
Investment by and advances from Aviall at beginning of period 104,551 49,617
Net loss .................................................... (52,604) (6,585)
Net change in investment by and advances from Aviall ........ (2,330) (3,688)
--------- --------
Investment by and advances from Aviall at end of period ... $ 49,617 $ 39,344
========= ========
</TABLE>
See accompanying notes to combined financial statements.
F-24
<PAGE>
AVIATION SALES COMPANY
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1993 AND THE
ELEVEN MONTHS ENDED NOVEMBER 30, 1994
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994
--------- --------
<S> <C> <C>
Net loss .................................................................. $(52,604) $(6,585)
Adjustments to reconcile loss to net cash provided by operating
activities:
Depreciation and amortization .......................................... 2,474 2,406
Write-off of goodwill ................................................... 4,005 --
Write-off of leased inventory ........................................... -- 2,727
Cumulative effect of accounting change .................................. 193 --
Provision for doubtful accounts ......................................... 471 1,377
Provision for excess and obsolete inventory ............................. 52,367 1,062
Changes in operating assets and liabilities:
(Increase) decrease in receivables ....................................... 1,576 (10)
Decrease in inventories .................................................. 4,069 1,008
Decrease (increase) in prepaid and other assets .......................... (605) 109
Increase (decrease) in accounts payable .................................. (153) 3,309
(Decrease) increase in accrued expenses .................................. 246 (251)
Increase (decrease) in other noncurrent liabilities ...................... 1,033 240
-------- -------
Net cash provided by operating activities ............................ 13,072 5,392
-------- -------
Cash flows from investing activities:
Capital expenditures ..................................................... (14,214) (1,386)
Proceeds from disposal of property, plant and equipment .................. -- --
Other, net ............................................................... 1,843 (121)
-------- -------
Net cash used by investing activities ................................ (12,371) (1,507)
-------- -------
Cash flows from financing activities:
Net decrease in investment by and advances from Aviall ................... (2,330) (3,688)
-------- -------
Net cash used in financing activities ................................ (2,330) (3,688)
-------- -------
Net increase (decrease) in cash ........................................... (1,629) 197
Cash, beginning of period ................................................. 2,180 551
-------- -------
Cash, end of period ....................................................... $ 551 $ 748
======== =======
</TABLE>
See accompanying notes to combined financial statements.
F-25
<PAGE>
AVIATION SALES COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND NOVEMBER 30, 1994
NOTE 1--NATURE OF BUSINESS
Aviation Sales Company ("ASC" or the "Division"), is a division of Aviall
Services, Inc. ("Aviall" or the "Seller"), which is a wholly-owned subsidiary
of Aviall, Inc. The Division is engaged in the redistribution by sale, lease,
exchange and brokerage of surplus factory new, new surplus, and used aircraft
spare parts to commercial airlines, air cargo carriers, distributors,
maintenance facilities, corporate aircraft operators and other aerospace
companies in the United States and abroad.
NOTE 2--ASSET PURCHASE AGREEMENT
On December 2, 1994, and effective November 30, 1994 for accounting
purposes, pursuant to the Asset Purchase Agreement by and between the Seller
and AJT Capital Partners d/b/a Aerospace International Services, ASC
Acquisition Partners, L.P. and Aviation Properties (collectively the "Buyer")
dated as of August 4, 1994 and amended as of December 2, 1994 (the "Purchase
Agreement"), the Seller sold certain assets and transferred certain
liabilities of the Division to the Buyer. The assets sold include certain
aircraft spare parts inventory, certain aircraft spare parts leased to third
parties, accounts receivable, property and equipment and other tangible
assets. The Buyer also assumed certain obligations of Aviall Services, Inc.,
to their former employees for accrued vacation time and certain other
liabilities.
The accompanying combined financial statements are presented for periods
prior to the effective date of the sale utilizing the historical accounting
practices followed by the Seller.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF COMBINATION
The accompanying combined financial statements include the operations,
assets and liabilities of the Division. The financial statements do not
include Aviall's corporate assets or liabilities not specifically
identifiable to the Division, except for cash and accrued expenses which were
allocated based on reasonable allocation methods. Management believes that
the allocation methods used are reasonable. The combined financial statements
include certain U.S. wholly owned subsidiaries of the Seller, which are
combined to reflect the total redistribution business of the Division, not
necessarily the assets sold. All significant intercompany transactions and
accounts have been eliminated in combination. These financial statements are
presented on a combined rather than consolidated basis because the
controlling financial interest did not rest directly or indirectly in one of
the businesses included in the historical combined financial statements.
The financial information included herein may not necessarily reflect the
financial position and results of operations of Aviation Sales Company in the
future or what the financial position and results of operations of Aviation
Sales Company would have been had it been a separate, stand-alone entity
during the periods covered.
(A) CASH EQUIVALENTS
ASC considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. There were no cash equivalents
at November 30, 1994.
(C) INVENTORIES
Inventories, which consist primarily of aviation parts, are stated at the
lower of cost, including repair costs to improve the condition of a part, or
net realizable value. ASC makes provisions for
F-26
<PAGE>
AVIATION SALES COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND NOVEMBER 30, 1994--(CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
estimated excess and obsolete inventories. In 1993, Aviall announced its
intention to explore the sale of ASC, at which time inventory that was slow
moving and intangible assets were determined to be permanently impaired. As a
result, ASC wrote-off intangible assets (note 3f) and slow-moving aircraft
parts inventory to reflect net realizable value, as presented on the
statement of operations for fiscal 1993. Additionally, in 1994, the Company
recorded an additional provision of approximately $1.1 million to reflect the
net realizable value received by the Seller based on the final selling price
of the assets (note 2).
(D) SPARE PARTS ON LEASE
Aviation Sales Leasing Company, a leasing subsidiary of ASC, leases spare
part inventories to the airline industry on a worldwide basis through
operating leases. Operating lease income is recognized on a straight-line
basis over the term of the underlying leases. The cost of the parts on lease
are amortized, principally on a straight-line basis, down to the estimated
remaining net realizable value over the shorter of the lease term or the
economic life of the spare parts inventory. In 1994, the Company recorded a
loss of approximately $2,727,000 to write down the leased inventories to net
realizable value received by the Seller based on the final selling price of
the assets (note 2).
(E) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost and depreciated over the
estimated useful lives of the related assets using the straight-line method.
Leasehold improvements are amortized over the shorter of the lease term or
estimated useful life of the asset using the straight-line method. Lives
assigned to asset categories are 10 to 30 years for buildings and
improvements and 3 to 10 years for machinery and equipment.
(F) INTANGIBLE ASSETS
Intangible assets consist principally of goodwill totaling $4,074,000 in
1992, net of accumulated amortization of $968,000. Goodwill is amortized on a
straight-line basis over 40 years. As discussed in note 3c, the Company
wrote-off the unamortized goodwill balance of $4,005,000 to selling, general
and administrative expenses in fiscal 1993.
(G) REVENUE RECOGNITION
Revenue from parts sales is recognized upon shipment of the product to
customers. ASC records reserves for estimated sales returns in the period
sales are made.
(H) INCOME TAXES
For the periods presented, ASC was included in the consolidated Federal
income tax return of Aviall. The income tax provision presented has been
determined, as if ASC was a stand-alone business filing separate tax returns
for the year ended December 31, 1993 and for the eleven months ended November
30, 1994.
ASC has adopted Financial Accounting Standards Board Statement No. 109
("Statement No. 109"), Accounting for Income Taxes. Statement No. 109
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the
F-27
<PAGE>
AVIATION SALES COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND NOVEMBER 30, 1994--(CONTINUED)
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to
reverse.
(I) DEFERRED LEASE REVENUE
Advance payments and deposits received on operating leases are initially
deferred and subsequently recognized as ASC's obligations under the lease
agreement are fulfilled.
NOTE 4--TRANSACTIONS WITH AVIALL
(A) GENERAL AND ADMINISTRATIVE SERVICES
Aviall provided certain corporate general and administrative services to
ASC, including legal, treasury, human resources, and finance, among others.
Costs related to these services were allocated to ASC on a basis that
approximated Aviall's incremental cost of the actual services provided which
management believes is a reasonable basis of allocation. Total allocated
expenses included in "Selling general and administrative expenses" in the
accompanying combined statements of operations approximated $3,832,000 in
1993 and $3,659,000 in 1994.
These historical amounts allocated by Aviall are not necessarily
representative of the costs that Aviation Sales Company would have incurred
as a stand-alone company.
(B) INTERCOMPANY FINANCING AND INTEREST EXPENSE
Aviall manages the cash and financial requirements of all of its business
divisions. The accompanying combined balance sheets and statements of
operations include allocated corporate debt included in Aviall investment,
which was used to finance the operations of ASC, and allocated corporate
interest expense based upon a target debt to equity ratio, respectively. The
composition of the "Investment by and advances from Aviall" in the combined
balance sheets has been periodically adjusted to effect this target debt to
equity ratio. Information relating to interest bearing advances from Aviall
and related interest allocations is presented below as of and for the year
ended December 31, 1993 and as of and for the eleven months ended November
30, 1994 (in thousands, except percentages):
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Interest-bearing advance at period end ...... $49,617 $39,344
Average annual interest-bearing advance ..... 77,084 44,480
Net intercompany interest allocation ........ 3,157 2,572
</TABLE>
"Intercompany interest expense" reflected in the combined statements of
operations is based upon an allocation of interest cost incurred by Aviall
for certain of its indebtedness based upon a target debt to equity ratio.
Therefore, it does not reflect the interest expense that ASC would have
incurred as an independent company. Management believes that the method of
allocating intercompany interest expense is reasonable.
Under Aviall's debt agreements entered into pursuant to Aviall's spin-off
from Ryder (note 10), all assets of Aviation Sales Company are pledged as
collateral to Aviall's outstanding debt.
(C) CORPORATE INSURANCE AND EMPLOYEE BENEFITS PROGRAM
ASC participated in Aviall's combined risk management programs for
property and casualty insurance and certain employee health benefit programs,
including medical and dental benefits. ASC
F-28
<PAGE>
AVIATION SALES COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND NOVEMBER 30, 1994--(CONTINUED)
NOTE 4--TRANSACTIONS WITH AVIALL--(CONTINUED)
was charged amounts which represented an allocation of third party premiums,
Aviall's administrative costs, and losses for Aviall's self-insured layers
including claims incurred but not reported. Costs allocated under these
programs were $558,538 and $420,381 during 1993 and 1994, respectively, and
are reflected in selling, general and administrative expenses. Management
believes the method of allocating costs related to risk management programs
for property and casualty insurance and certain employee health benefit
programs to be reasonable.
NOTE 5--ACCOUNTS RECEIVABLE ALLOWANCE
ASC provides services to a wide variety of aviation-related businesses,
including commercial airlines. Economic conditions within the commercial
airline industry have been weak over the past several years due to a number
of factors. Management believes that sufficient allowances for doubtful
accounts have been provided as of November 30, 1994 in relation to its total
accounts receivable balance. The following is a summary of the accounts
receivable allowances for the eleven months ended November 30, 1994 (in
thousands):
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Balance at beginning of period ....................... $ 1,539 $ 1,884
Provision for doubtful accounts ...................... 471 1,377
Write-off of doubtful accounts, net of recoveries .... (126) (1,344)
------- -------
Balance at end of period ........................... $ 1,884 $ 1,917
======= =======
</TABLE>
NOTE 6--INVENTORY ALLOWANCE
The following is a summary of the reserve for excess and obsolete
inventories for the year ended December 31, 1993 and for the eleven months
ended November 30, 1994 (in thousands):
<TABLE>
<CAPTION>
1993 1994
--------- --------
<S> <C> <C>
Balance at beginning of period ..................... $ 11,741 $ 63,033
Provision for excess and obsolete inventory ........ 52,367 1,062
Write-off of excess and obsolete inventory ......... (1,075) (342)
-------- --------
Balance at end of period ......................... $ 63,033 $ 63,753
======== ========
</TABLE>
NOTE 7--PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of the following at November
30, 1994 (in thousands):
<TABLE>
<CAPTION>
1994
---------
<S> <C>
Land ....................................................... $ 1,460
Buildings and improvements ................................. 6,761
Machinery and equipment .................................... 9,520
--------
Total .................................................... 17,741
Less accumulated depreciation .............................. (11,008)
--------
Property, plant and equipment, net ....................... $ 6,733
========
</TABLE>
F-29
<PAGE>
AVIATION SALES COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND NOVEMBER 30, 1994--(CONTINUED)
NOTE 8--ACCRUED EXPENSES--(CONTINUED)
The following is a summary of accrued expenses at November 30, 1994 (in
thousands):
<TABLE>
<CAPTION>
1994
------
<S> <C>
Salaries, wages and benefits ................................ $1,322
Operating taxes ............................................. 219
Self-insurance reserve ...................................... 420
Repair order reserve ........................................ 350
Deferred credit ............................................. --
Other ....................................................... 341
------
Total accrued expenses .................................... $2,652
======
</TABLE>
Salaries, wages and benefits, operating taxes and the self-insurance
reserve were allocated to the Division based on methods of allocation which
management believes are reasonable (note 4a).
NOTE 9--INCOME TAXES
As disclosed under "Nature of Business" and "Asset Purchase Agreement,"
Aviation Sales was a division of Aviall Services, Inc. prior to the November
30, 1994. The deferred tax inventory shown below reflects deferred tax assets
and liabilities as though ASC was a separate company and not part of a
consolidated filing for U.S. federal income tax purposes. Certain amounts,
such as the net operating loss, included as a deferred tax asset may have
been utilized in prior years as part of Aviall's consolidated filing for U.S.
income tax purposes and may not be available to offset future taxable income
of ASC. On the date of acquisition the deferred tax assets and liabilities
will be redetermined by the buyer at purchase date under APB16. No tax
benefits carryover to the buyer.
There is no provision for income taxes because the division incurred
operating losses for both book and tax purposes during the eleven months
ended November 30, 1994 and the year ended December 31, 1993.
Income tax expense from continuing operations differed from the amount
computed by applying the statutory federal income tax rate of 34 percent to
income before income taxes as a result of the following for the year ended
December 31, 1993 and for the eleven months ended November 30, 1994:
<TABLE>
<CAPTION>
1993 1994
------ -------
<S> <C> <C>
Computed benefit ..................................... (34.0)% (34.0)%
Increase/decrease resulting from:
Change in valuation allowance ....................... 37.6 % 37.6 %
State income tax (net of federal benefit) ........... (3.6)% (3.6)%
----- -----
Income tax benefit ................................. -- % -- %
===== =====
</TABLE>
F-30
<PAGE>
AVIATION SALES COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND NOVEMBER 30, 1994--(CONTINUED)
NOTE 9--INCOME TAXES--(CONTINUED)
The tax effects of the temporary differences that give rise to the
significant portions of the deferred tax assets and deferred tax liabilities
as of November 30, 1994 are presented below (in thousands):
<TABLE>
<CAPTION>
1994
--------
<S> <C>
Deferred tax assets:
Net operating loss carryforward .............................................. $ 832
Accounts receivable, principally due to allowance for doubtful accounts ..... 2,147
Inventory, principally due to reserve for obsolete inventory ................. 24,186
Uniform capitalization under Tax Reform Act of 1986 .......................... 1,330
Intangible assets, principally due to differences in amortization ........... 56
Accrued employee expenses .................................................... 129
Deferred lease revenue ....................................................... 291
Property, plant and equipment, principally due to differences in depreciation 163
Insurance, principally due to accrual for statement reporting purposes ...... 187
Inventory adjustments ........................................................ 132
Other ........................................................................ 62
--------
Total gross deferred assets ................................................. 29,515
Less valuation allowance ...................................................... (29,515)
--------
$
Net deferred tax assets ..................................................... --
========
</TABLE>
The net increase in the total valuation allowance for the periods ended
December 31, 1993 and November 30, 1994 was $19,926 and $2,672, respectively
(in thousands).
NOTE 10--PENSION PLANS
PENSION PLANS
Substantially all employees are covered by defined benefit plans
maintained by Aviall or Ryder System, Inc. ("Ryder") for the periods prior to
December 7, 1993, the effective date that Ryder distributed one share of
common stock for every four shares of Ryder common stock in a distribution
("Distribution") for the benefit of its employees.
Ryder retained the pension fund assets and accumulated benefit obligation
related to participants in the Ryder System, Inc. Retirement Plan (the "Ryder
Plan") for services rendered through the Distribution date. Aviall's pension
plan funding policy is to contribute such amounts as are necessary on an
actuarial basis to provide the plan with sufficient assets to meet the
benefits payable to plan participants. The plan's assets are primarily
invested in equities and interest bearing accounts.
Separate calculations of the components of net pension cost for Aviation
Sales Company and Aviation Sales Company's funded status with the Aviall Plan
and the Ryder Plan are not available. Pension expense included in the
combined statements of operations includes amounts allocated by and charged
to ASC by both Aviall and Ryder based on head count of approximately $124,000
and $325,000 in 1993 and 1994, respectively. Management believes the method
of allocating pension expense to be reasonable.
Aviall also maintains a qualified defined contribution plan of which ASC
was a component. Contribution expense included in the combined statements of
operations includes amounts allocated
F-31
<PAGE>
AVIATION SALES COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1993 AND NOVEMBER 30, 1994--(CONTINUED)
NOTE 10--PENSION PLANS--(CONTINUED)
based on head count of approximately $33,940 and $38,570 for 1993 and 1994,
respectively. Management believes the method of allocating contribution
expense is reasonable.
POSTRETIREMENT BENEFITS
Aviall, of which Aviation Sales Company was a component, maintains plans
which provide retired employees with certain health care and life insurance
benefits. Substantially all domestic employees are eligible for these
benefits. Generally, these plans require employee contributions, limit
Company contributions to $95 per month for nonunion employees, and provide
for a $10,000 lifetime maximum benefit for union employees. Effective January
1, 1993, ASC adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." As a
result, approximately $193,000, net of taxes, was recorded as the cumulative
effect of a change in accounting principle to establish a liability for the
present value of expected future benefits attributed to employees' service
rendered prior to January 1, 1993. Periodic postretirement benefit expense
included in the combined statements of operations includes amounts allocated
to ASC by Aviall based on head count of approximately $193,000 and $36,000,
respectively, for the year ended December 31, 1993 and for the eleven months
ended November 30, 1994. Separate calculations of the components of net
periodic postretirement benefit expense and the unfunded status for Aviation
Sales Company is not available. Management believes the method of allocating
postretirement benefits to be reasonable.
NOTE 11--BUSINESS AND CREDIT CONCENTRATIONS
The Company grants credit primarily on an unsecured basis to a wide
variety of aviation-related businesses that are located primarily in North
and South America, Europe and Indonesia. The Company's policy for granting
credit is dependent upon the customers' financial stability. Management
believes that sufficient allowances for doubtful accounts have been provided
at November 30, 1994.
NOTE 12--COMMITMENTS AND CONTINGENCIES
Aviation Sales Company leases facilities at its three primary locations.
The future minimum lease payments owed by the Company under noncancelable
operating leases are $273,998 in 1995 and $114,194 in 1996.
ASC is subject to claims and legal actions that arise in the ordinary
course of their business. Management believes that the ultimate liability, if
any, with respect to these claims and legal actions will not have a material
effect on the financial position or results of operations of ASC.
F-32
<PAGE>
- -----------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT
RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO
WHICH IT RELATES IN ANY STATE OR TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO
MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS DOES NOT IMPLY
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary ................. 3
Risk Factors ....................... 7
Use of Proceeds .................... 10
Dividend Policy .................... 10
Dilution ........................... 11
Capitalization ..................... 12
History of the Company ............. 13
Selected Financial Data ............ 14
Management's Discussion and
Analysis of Financial Condition
and Results of Operations .......... 16
Business ........................... 23
Management ......................... 30
Certain Transactions ............... 35
Principal Stockholders ............. 37
Description of Capital Stock ...... 38
Shares Eligible for Future Sale ... 41
Underwriting ....................... 42
Legal Matters ...................... 43
Experts ............................ 43
Additional Information ............. 43
Index to Financial Statements ..... F-1
</TABLE>
Until July 21, 1996, all dealers effecting transactions in the Common Stock,
whether or not participating in this distribution, may be required to deliver
a Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
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3,250,000 Shares
[LOGO]
COMMON STOCK
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P R O S P E C T U S
JUNE 26, 1996
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SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
SANDERS MORRIS MUNDY
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