UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File No. 1-11775
AVIATION SALES COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 65-0665658
------------------------------ -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6905 NW 25TH STREET
MIAMI, FLORIDA 33122
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 592-4055
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 9,204,231 shares of
common stock, $.001 par value per share, were outstanding as of November 12,
1997.
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<TABLE>
<CAPTION>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,262,149 $ 1,802,253
Accounts receivable, net of allowances
for doubtful accounts of $3,779,580
and $4,622,300 and allowances for sales
returns of $1,227,598 and $1,274,098 in
1996 and 1997, respectively 37,086,899 57,258,782
Inventories 72,974,397 114,822,960
Prepaid expenses 4,067,332 2,620,601
Deferred income taxes 1,972,410 2,639,029
------------- -------------
Total current assets 117,363,187 179,143,625
------------- -------------
SPARE PARTS ON LEASE, net of accumulated
amortization of $2,601,069 in 1996 and
$3,488,330 in 1997 17,950,783 21,851,953
------------- -------------
FIXED ASSETS
Property and equipment 4,333,070 8,709,344
Less - Accumulated depreciation (2,027,197) (3,230,174)
------------- -------------
Total fixed assets 2,305,873 5,479,170
------------- -------------
AMOUNTS DUE FROM RELATED PARTIES 2,914,615 2,928,056
------------- -------------
OTHER ASSETS
Deposits and other 804,246 1,148,890
Deferred income taxes 3,406,331 3,314,774
Deferred financing costs, net 872,568 2,035,614
------------- -------------
Total other assets 5,083,145 6,499,278
------------- -------------
Total assets $ 145,617,603 $ 215,902,082
============= =============
</TABLE>
2
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<TABLE>
<CAPTION>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 15,736,288 $ 20,407,734
Accrued expenses 7,746,156 12,459,937
Income taxes payable 755,216 2,652,243
Notes payable, current maturities
Senior 7,428,571 4,243,788
Revolver 16,697,985 60,383,112
------------ ------------
Total current liabilities 48,364,216 100,146,814
------------ ------------
LONG-TERM LIABILITIES
Deferred income 890,065 1,074,465
Notes payable - Senior 14,857,143 21,485,150
------------ ------------
Total long-term liabilities 15,747,208 22,559,615
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding -- --
Common stock, $.001 par value, 30,000,000 shares
authorized, 9,183,470 and 9,202,499 shares
outstanding at December 31, 1996 and September 30,
1997, respectively 9,183 9,202
Additional paid-in capital 71,364,684 71,772,487
Retained earnings 10,132,312 21,413,964
------------ ------------
Total stockholders' equity 81,506,179 93,195,653
------------ ------------
Total liabilities and stockholders' equity $145,617,603 $215,902,082
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
---------------------------- -------------------------------
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- -------------------------------
1996 1997 1996 1997
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales of aircraft parts, net $ 38,233,172 $ 62,852,941 $ 104,815,265 $165,883,534
Rentals from leases and other 2,947,952 2,373,706 8,078,329 7,841,090
Gain on sale of spare parts on lease -- -- -- 752,922
------------ ------------ ------------- ------------
41,181,124 65,226,647 112,893,594 174,477,546
COST OF SALES 28,039,907 45,588,947 75,834,953 122,712,277
------------ ------------ ------------- ------------
13,141,217 19,637,700 37,058,641 51,765,269
------------ ------------ ------------- ------------
OPERATING EXPENSES
Operating 2,293,686 3,916,965 6,864,461 11,026,918
Selling 1,703,906 2,546,726 5,110,779 6,858,966
General and administrative 2,647,682 3,471,988 7,157,258 8,895,737
Depreciation and amortization 584,477 776,227 1,562,014 2,157,876
------------ ------------ ------------- ------------
7,229,751 10,711,906 20,694,512 28,939,497
------------ ------------ ------------- ------------
INCOME FROM OPERATIONS 5,911,466 8,925,794 16,364,129 22,825,772
OTHER EXPENSES
Interest expenses and amortization
of deferred financing costs 746,489 1,825,981 4,614,774 4,331,261
------------ ------------ ------------- ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 5,164,977 7,099,813 11,749,355 18,494,511
INCOME TAX (BENEFIT) EXPENSE (1,776,311) 2,768,927 (2,490,770) 7,212,859
------------ ------------ ------------- ------------
INCOME BEFORE EXTRAORDINARY ITEM 6,941,288 4,330,886 14,240,125 11,281,652
EXTRAORDINARY ITEM, NET OF INCOME
TAXES (Note 3) 1,862,140 -- 1,862,140 --
------------ ------------ ------------- ------------
NET INCOME $ 5,079,148 $ 4,330,886 $ 12,377,985 $ 11,281,652
============ ============ ============= ============
EARNINGS PER SHARE:
Net income per share $ 0.47 $ 1.22
============ ============
PRO FORMA EARNINGS PER SHARE (Note 3):
Pro forma net income per share $ 0.14 $ 0.75
============ =============
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 9,019,127 9,242,352 7,027,650 9,231,661
============ ============ ============= ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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<TABLE>
<CAPTION>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1996 1997
---------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,377,985 $ 11,281,652
Adjustments to reconcile net income to
net cash used in operating activities
Depreciation and amortization 2,093,405 2,414,425
Gain on sale of spare parts on lease -- (752,922)
Provision for doubtful accounts 620,000 1,331,063
Increase in deferred income taxes (4,860,741) (575,062)
Extraordinary item, net of income taxes 1,862,140 --
(Increase) decrease in accounts receivable, net (7,654,317) (21,502,946)
(Increase) decrease in inventory (9,278,096) (41,848,563)
(Increase) decrease in prepaid expenses (709,414) 1,446,731
(Increase) decrease in deposits and other 498,259 (344,644)
Increase (decrease) in accounts payable 1,870,045 4,671,446
Increase (decrease) in accrued expenses 2,456,224 4,713,781
Increase (decrease) in income taxes payable 1,590,810 1,897,027
Increase (decrease) in deferred income 12,750 184,400
------------ ------------
Net cash provided by (used in) operating
activities 879,050 (37,083,612)
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES
Purchases of equipment, net (942,617) (3,850,941)
Purchase of spare parts on lease (6,819,324) (7,958,480)
Proceeds from sales of spare parts on lease -- 3,330,000
Purchase of certain assets of the business of
Dixie Bearings, Incorporated (9,090,481) --
Payments (to) from related parties 53,686 (13,441)
------------ ------------
Net cash used in investing activities (16,798,736) (8,492,862)
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings under original credit facility 15,763,592 --
Payments under original credit facility (5,000,000) --
Payment of initial public offering proceeds
to original credit facility (52,806,400) --
Payment to J/T Aviation Partners (10,160,250) --
Borrowings under new credit facility 5,121,812 43,685,127
Payment under new credit facility (1,857,143) (3,714,286)
Issuance of senior debt under acquisition subfacility 6,000,000 --
Borrowings under term loan -- 7,157,510
Distributions to partners (3,041,936) --
Proceeds from common stock offering 64,769,097 --
Stock options exercised -- 407,822
Payment of deferred financing costs (1,511,404) (1,419,595)
------------ ------------
Net cash provided by financing activities 17,277,368 46,116,578
------------ ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,357,682 540,104
------------ ------------
CASH AND CASH EQUIVALENTS, beginning of period 253,307 1,262,149
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 1,610,989 $ 1,802,253
============ ============
Interest paid $ 4,114,302 $ 3,256,744
============ ============
Income taxes paid $ 516,000 $ 5,948,018
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
September 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION:
Interim Condensed Financial Statements
The accompanying unaudited interim condensed consolidated 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 disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying unaudited interim
condensed financial statements should be read in conjunction with the Company's
December 31, 1996 financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 (File
No. 1-11775).
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements of Aviation Sales Company (the "Company")
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of
September 30,1997 and the results of its operations and cash flows for the three
and nine month periods ended September 30, 1997 and 1996. The results of
operations and cash flows for the nine month period ended September 30, 1997 are
not necessarily indicative of the results of operations or cash flows which may
be reported for the year ending December 31, 1997.
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.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"), is effective for fiscal years ending after December 15, 1997. This
statement specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. Basic and diluted earnings per share computed in accordance with
SFAS No. 128 for the three and nine months ended September 30, 1996 and 1997 do
not differ materially from primary and fully diluted earnings per share as
presented.
6
<PAGE>
2. ACQUISITIONS:
On September 30, 1997, the Company acquired Aerocell Structures, Inc.
("Aerocell") for consideration of 620,970 shares of the Company's common stock.
Although the acquisition is accounted for using the pooling of interests method
of accounting, the accompanying consolidated statements of income, stockholders'
equity and cash flows prior to December 31, 1996 have not been restated to give
retroactive effect for the acquisition due to the immateriality of the restated
amounts. As a result of the Aerocell acquisition, the Company's operating
revenues for the nine months ended September 30, 1997 increased by approximately
$14.3 million.
On December 10, 1996, the Company acquired AvEng Trading Partners, Inc.
("AvEng") for consideration of 400,000 shares of the Company's common stock.
Although the acquisition was accounted for using the pooling of interests method
of accounting, the accompanying consolidated statements of income, partners'
capital and stockholders' equity and cash flows prior to December 31, 1995 have
not been restated to give retroactive effect for the acquisition due to the
immateriality of the restated amounts.
On August 9, 1996, the Company completed the acquisition of certain assets of
the business of Dixie Bearings, Incorporated ("Dixie") relating primarily to the
sale of new bearings for use in aircraft for a purchase price of approximately
$9 million. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the operations of Dixie since the acquisition have been
included in the accompanying consolidated financial statements from the date of
acquisition. The historical operations of Dixie, when compared to the historical
operations of the Company, are not significant. For the nine months ended
September 30, 1996 and 1997, revenues from Dixie's operations were $2.5 million
and $16.2 million, respectively.
3. PRO FORMA DISCLOSURES:
Pro Forma Income Taxes
Prior to June 26, 1996 the business of the Company was conducted by a
partnership and was not subject to income taxes. As a result of the transfer of
the net assets of the partnership to the Company and the initial public offering
of its common stock in June 1996, the Company became subject to federal and
state income taxes.
7
<PAGE>
The following pro forma adjustments to record income taxes at the Company's
estimated effective tax rate have been reflected in the pro forma earnings per
share data presented in the accompanying condensed consolidated statements of
income of all periods presented:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------- -------------------------
SEPTEMBER 30, 1996 SEPTEMBER 30, 1996
-------------------------- -------------------------
<S> <C> <C>
Historical income before income taxes
and extraordinary item $5,164,977 $11,749,355
Pro forma provision for income taxes 2,014,341 4,582,248
---------- -----------
Pro forma income before extraordinary item 3,150,636 7,167,107
Extraordinary item, net of income taxes 1,862,140 1,862,140
---------- -----------
Pro forma net income $1,288,496 $ 5,304,967
========== ===========
</TABLE>
Pro Forma Net Income Per Share
Pro forma net income per share has been computed by dividing pro forma net
income by the weighted average number of common and common equivalent shares
outstanding during the period. Outstanding stock options are considered common
stock equivalents and are included in the calculation using the treasury stock
method.
4. NOTES PAYABLE:
On August 22, 1997, the Company amended its bank lending agreement pursuant to
the terms of a Second Amended and Restated Credit Agreement ( the "Second
Amended Credit Agreement"). Pursuant to the Second Amended Credit Agreement, the
Company has obtained a credit facility consisting of (a) a term loan facility
(the "Second Amended Term Loan"), in a principal amount of $18.6 million, and
(b) a $106.4 million revolving loan, letter of credit and acquisition loan
facility, subject to an availability calculation based on the eligible borrowing
base (the "Second Amended Revolving Credit Facility"). The eligible borrowing
base includes certain receivables and inventories of the Company. At September
30, 1997, the Company had availability under the Second Amended Revolving Credit
Facility of approximately $45.7 million. The letter of credit portion of the
Second Amended Revolving Credit Facility is subject to a $15 million sublimit
and the acquisition loan portion of the Second Amended Revolving Credit Facility
is subject to a $30 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 Second Amended Revolving Credit Facility
expires on August 21, 1999. The interest rate on the Second Amended Credit
Agreement is, at the option of the Company, (a) prime plus a margin, or (b)
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 1.50% to 2.75% in the event
LIBOR is utilized). At September 30, 1997, the margin was 0.25% for the prime
rate loans and 1.75% for the LIBOR loans.
The Second Amended Term Loan amortizes in equal quarterly installments and
terminates on July 31, 2002. Interim payments under the Second Amended Revolving
Credit Facility will be made from daily collections of the Company's accounts
receivable. The Second Amended Revolving Credit Facility will terminate on July
31, 2002. The Second Amended Credit Agreement contains
8
<PAGE>
financial and other covenants and mandatory prepayment events, as defined. At
September 30, 1997, the Company was in compliance with all covenants of the
Second Amended Credit Agreement. The Second Amended Credit Agreement is secured
by a lien on substantially all of the assets of the Company. At September 30,
1997, the outstanding balances under the Second Amended Term Loan and Second
Amended Revolving Credit Facility were $18.6 million and $60.4 million,
respectively.
On August 5, 1997, the Company entered into a term loan agreement in a principal
amount of $7.2 million to finance certain equipment and rotable parts on long
term lease which secure the loan. This loan is payable in 59 consecutive equal
monthly payments of $91,750 commencing September 14, 1997, with a final balloon
payment due on August 14, 2002. Interest on this term loan is fixed at 8.21%.
The Company has leased the underlying equipment and rotable parts to unrelated
third parties. Interim payments under the term loan will be made from the
proceeds of these parts leases. This term loan contains financial and other
covenants and mandatory prepayment events, as defined. At September 30, 1997,
the Company was in compliance with all covenants of this term loan.
5. SUBSEQUENT EVENTS:
On October 17, 1997 the Company completed the acquisition of substantially all
of the assets of the business of Kratz-Wilde Machine Company, a Kentucky
corporation ("Kratz-Wilde") for a purchase price of approximately $42.5 million
in cash and notes and the assumption of certain liabilities of Kratz-Wilde in
the approximate amount of $2.5 million. Kratz-Wilde specializes in the
manufacture of machined components primarily for jet engines, and also produces
some automotive and faucet components. The acquisition was accounted for using
the purchase method of accounting.
On October 17, 1997, the Company amended its bank lending agreement pursuant to
the terms of a Third Amended and Restated Credit Agreement (the "Third Amended
Credit Agreement"), which supersedes the agreement referred to in Note 4 above.
Pursuant to the Third Amended Credit Agreement, the Company has obtained a
credit facility consisting of (a) a term loan facility (the "Third Amended Term
Loan") in a principal amount of $18.6 million, and (b) a $131.4 million
revolving loan, letter of credit and acquisition loan facility, subject to an
availability calculation based on the eligible borrowing base (the "Third
Amended Revolving Credit Facility"). The eligible borrowing base includes
certain receivables and inventories of the Company. The letter of credit portion
of the Third Amended Revolving Credit Facility is subject to a $15 million
sublimit and the acquisition loan portion of the Third Amended Revolving Credit
Facility is subject to a $40 million sublimit, with the imposition of certain
borrowing criteria based on the satisfaction of certain debt ratios. The
interest rate on the Third Amended Credit Agreement is, at the option of the
Company, (a) prime plus a margin, or (b) LIBOR plus a margin, where the margin
determination is made based upon the Company's financial performance over the 12
month period (ranging from 0.0% to 1.25% in the event prime is utilized, or
1.50% to 2.75% in the event LIBOR is utilized). At October 17, 1997, the margin
was .25% for prime rate loans and 1.75% for LIBOR rate loans.
The Third Amended Term Loan, as well as any portion of the revolving credit
facility utilized to make acquisitions, amortizes in equal quarterly
installments and terminates on July 31, 2002. Interim payments under the Third
Amended Revolving Credit Facility will be made from daily collections of the
Company's accounts receivable. The Third Amended Revolving Credit Facility will
terminate on July 31, 2002. The Third Amended Credit Agreement contains
financial and
9
<PAGE>
other covenants and mandatory prepayment events, as defined. At October 17,
1997, the Company was in compliance with all covenants of the Third Amended
Credit Agreement. The Third Amended Credit Agreement is secured by a lien on
substantially all of the assets of the Company. Following the acquisition of
Kratz-Wilde on October 17, 1997, the outstanding balances under the Third
Amended Term Loan and Third Amended Revolving Credit Facility were $58.6 million
(including $40 million borrowed under the acquisition subfacility) and $70.6
million, respectively.
10
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with the
information set forth under Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 15 through 22 of Aviation Sales
Company's Annual Report on Form 10-K for the year ended December 31, 1996. This
discussion contains forward looking information which involves risks and
uncertainties and is based upon information currently available to the Company.
Actual results could differ from those described herein and future results may
be subject to numerous factors, many of which are beyond the control of the
Company.
RESULTS OF OPERATIONS
Third quarter operating revenues rose 58.4% to $65.2 million, compared with
$41.2 million for the same period last year. Operating revenues for the nine
months ended September 30, 1997 increased 54.6% to $174.5 million, compared with
$112.9 million, for the same period last year. On September 30, 1997, the
Company acquired Aerocell Structures, Inc. for consideration of 620,970 shares
of the Company's common stock. The acquisition was accounted for using the
pooling of interests method of accounting, and therefore, the Company's
consolidated statement of income and cash flows for the nine months ended
September 30, 1997 reflect the results of operations for Aerocell. The
consolidated statement of income and cash flows for the nine months ended
September 30, 1996 has not been restated to give retroactive effect for the
acquisition due to the immateriality of the prior year amounts. Operating
revenues from Aerocell were $5.4 million and $14.3 million respectively for the
three and nine month periods ending September 30, 1997. Operating revenues also
increased due the inclusion of a full quarter of sales in the Company's bearings
distribution business which was acquired during the third quarter of 1996,
increased revenues from leasing activities, increased customer penetration,
increased sales due to the Company's investment in and availability of increased
amounts of inventory and the continued expansion of inventory management
services being offered to and utilized by the Company's customers.
Gross profit increased 49.4% to $19.6 million for the third quarter ended
September 30, 1997, compared with $13.1 million for the same period last year.
Gross profit margin declined to 30.1% for the 1997 third quarter from 31.9% for
the 1996 third quarter. Gross profit for the nine months ended September 30,
1997 increased 39.7% to $51.8 million compared with $37.1 million for the same
period in 1996. Gross margin declined to 29.7% for the first nine months of 1997
from 32.8% for the same period in 1996. The decline in gross profit margin
compared to 1996 was expected as the mix of inventories sold during the 1997
period continued to reflect a declining contribution from bulk inventories
acquired prior to 1995 and an increase in revenues from the Company's bearings
distribution business acquired in August 1996. Gross profit margin from the
Company's bearings distribution business was 19.8% for the first nine months of
1997. As the Company's mix of products and services offered to customers
matures, the Company expects that its gross profit margin from period to period
will fluctuate between approximately 27% and 31%.
The Company's operating expenses increased $3.5 million in the third quarter of
1997 compared with the third quarter of 1996, due to costs of $0.9 million
associated with Aerocell's operations and due to higher sales levels resulting
in higher selling and operating expenses. Operating expenses as a percentage of
sales declined, however, to 16.4% in the 1997 third quarter from
11
<PAGE>
17.6% in the corresponding period of 1996, reflecting the continuing benefits of
economies of scale and operating efficiencies.
Interest expense and amortization of deferred financing costs increased from
period to period due to net borrowings of $47.1 million during the first nine
months of 1997 to finance inventory acquisitions and spare parts and engines
held for lease.
As a result of the above factors, income before income taxes and extraordinary
item increased $1.9 million, or 37.5%, from $5.2 million to $7.1 million,
respectively, from the three month period ended September 30, 1996 compared to
the same period ending in 1997. Income before income taxes and extraordinary
item for the first nine months of 1997 increased 57.4% to $18.5 million,
compared with $11.7 million, for the same period last year.
After accounting for pro forma income taxes (as if the Company had been taxed as
a C Corporation) and extraordinary item, pro forma net income for the three and
nine months ended September 30, 1996 were $1.3 million ($0.14 per share) and
$5.3 million ($0.75 per share), respectively, as compared to net income of $4.3
million ($0.47 per share) and $11.3 million ($1.22 per share), respectively for
the three and nine months ended September 30, 1997. Weighted average shares
outstanding were 9.24 million and 9.23 million, respectively, during the three
and nine months ended September 30, 1997, compared with 9.02 million and 7.03
million, respectively, for the three and nine months ended September 30, 1996.
LIQUIDITY AND FINANCIAL RESOURCES
Cash provided by operations was $0.9 million for the nine months ended September
30, 1996 and cash used in operations was $37.1 million for the nine months ended
September 30, 1997. Cash used in investing activities for the nine month periods
ended September 30, 1996 and 1997 was $16.8 million and $ 8.5 million,
respectively. During the nine month periods ended September 30, 1996 and 1997,
the Company financed its operating and investing activities primarily with its
cash flow from financing activities, amounting to $17.3 million and $46.1
million, respectively.
On October 17, 1997, the Company amended its bank lending agreement pursuant to
the terms of a Third Amended and Restated Credit Agreement (the "Third Amended
Credit Agreement"). Pursuant to the Third Amended Credit Agreement, the Company
has obtained a credit facility consisting of (a) a term loan facility (the
"Third Amended Term Loan") in a principal amount of $18.57 million, and (b) a
$131.43 million revolving loan, letter of credit and acquisition loan facility,
subject to an availability calculation based on the eligible borrowing base (the
"Third Amended Revolving Credit Facility"). The eligible borrowing base includes
certain receivables and inventories of the Company. The letter of credit portion
of the Third Amended Revolving Credit Facility is subject to a $15 million
sublimit and the acquisition loan portion of the Third Amended Revolving Credit
Facility is subject to a $40 million sublimit, with the imposition of certain
borrowing criteria based on the satisfaction of certain debt ratios. The
interest rate on the Third Amended Credit Agreement is, at the option of the
Company, (a) prime plus a margin, or (b) LIBOR plus a margin, where the margin
determination is made based upon the Company's financial performance over the 12
month period (ranging from 0.0% to 1.25% in the event prime is utilized, or
1.50% to 2.75% in the event LIBOR is utilized). At October 17, 1997, the margin
was .25% for prime rate loans and 1.75% for LIBOR rate loans.
The Third Amended Term Loan, as well as any portion of the revolving credit
facility utilized to make acquisitions, amortizes in equal quarterly
installments and terminates on July 31, 2002.
12
<PAGE>
Interim payments under the Third Amended Revolving Credit Facility will be made
from daily collections of the Company's accounts receivable. The Third Amended
Revolving Credit Facility will terminate on July 31, 2002. The Third Amended
Credit Agreement contains financial and other covenants and mandatory prepayment
events, as defined. At October 17, 1997, the Company was in compliance with all
covenants of the Third Amended Credit Agreement. The Third Amended Credit
Agreement is secured by a lien on substantially all of the assets of the
Company. At October 17, 1997, the outstanding balances under the Third Amended
Term Loan and Third Amended Revolving Credit Facility were $58.6 million
(including $40 million borrowed under the acquisition subfacility to complete
the acquisition of the assets of Kratz-Wilde) and $70.6 million, respectively.
On August 5, 1997, the Company entered into a term loan agreement in a principal
amount of $7.2 million to finance certain equipment and rotable parts on
long-term lease, which secure the loan. This loan is payable in 59 consecutive
equal monthly payments of $91,750 commencing September 14, 1997, with a final
balloon payment due on August 14, 2002. Interest on this term loan is fixed at
8.21%. The Company has leased the underlying equipment and rotable parts to
unrelated third parties. Interim payments under the term loan will be made from
the proceeds of these parts leases. This term loan contains financial and other
covenants and mandatory prepayment events, as defined. At September 30, 1997,
the Company was in compliance with all covenants of this term loan.
During the three and nine month periods ended September 30, 1997, the Company
incurred capital expenditures of approximately $2.6 million and $3.9 million,
respectively, primarily to make enhancements to the Company's management
information systems, telecommunication systems and other capital equipment and
improvements.
The repayment of indebtedness with the net proceeds of the Company's June 1996
initial public offering improved 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 Third Amended Credit Agreement will be
sufficient to satisfy the Company's anticipated working capital requirements
over the next 12 months.
As part of its growth strategy, the Company intends to continue to pursue
acquisitions of bulk inventories of aircraft spare parts and complementary
businesses. Additionally, the Company is currently evaluating the prospect of
purchasing and implementing a new management information system and exploring
the possibility of consolidating its various facilities into a single warehouse
facility. Financing for such activities would be provided from operations and
from the proceeds of the Third Amended Credit Agreement. The Company may also
issue additional debt and/or equity securities or seek to borrow additional
funds under its Third Amended Credit Agreement in connection with its business
activities.
ITEM 2: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. LITIGATION
Not applicable
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's 1997 Annual Meeting of Stockholders on
September 19, 1997, the stockholders of the Company voted upon and
elected the following directors and approved and adopted the
following proposals:
(A) DIRECTOR NOMINEE VOTES CAST FOR VOTES WITHHELD
---------------- -------------- --------------
Kazutami Okui 5,685,408 1,360
--------------- --------------
Sam Humphreys 5,685,408 1,360
--------------- --------------
(B) To ratify the selection of Arthur Andersen LLP as
Company's independent auditors for the 1997 fiscal year (5,683,808
votes were cast in favor of this proposal, 2,000 votes were cast
against this proposal and there were 960 abstentions and broker
non-votes).
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
10.1 Second Amended and Restated Credit Agreement dated as of
August 22, 1997 among Aviation Sales Operating Company, the
Company, the Lenders and Citicorp USA, Inc., as agent
(Incorporated by reference from the Company's Current Report on
Form 8-K filed October 14, 1997)
10.2 Merger Agreement by and among Aviation Sales Company, AVS/ASI
Merger Corp., Aerocell Structures, Inc. ("Aerocell") and the
shareholders of Aerocell, dated as of September 30, 1997
(Incorporated by reference from the Company's Current Report on
Form 8-K filed October 15, 1997).
14
<PAGE>
10.3 Asset Purchase Agreement by and between Aviation Sales Company
and Kratz-Wilde Machine Company (Incorporated by reference from
the Company's Current Report on Form 8-K filed November 3,
1997).
10.4 Third Amended and Restated Credit Agreement dated as of October
17, 1997 among Aviation Sales Operating Company, Aerocell
Structures, Inc., AVS/Kratz-Wilde Machine Company, the Company,
the Lenders, and Citicorp USA, Inc., as agent (Incorporated by
reference from the Company's Current Report on Form 8-K filed
November 3, 1997).
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the third quarter.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AVIATION SALES COMPANY
By: /s/ DALE S. BAKER
----------------------------
Dale S. Baker, President and November 14, 1997
Chief Executive Officer
By: /s/ JOSEPH E. CIVILETTO
-----------------------------
Joseph E. Civiletto,
Vice President and November 14, 1997
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-31-1996
<PERIOD-END> SEP-30-1997
<CASH> 1,802,253
<SECURITIES> 0
<RECEIVABLES> 57,258,782<F1>
<ALLOWANCES> 4,622,300
<INVENTORY> 114,822,960
<CURRENT-ASSETS> 179,143,625
<PP&E> 8,709,344
<DEPRECIATION> 3,230,174
<TOTAL-ASSETS> 215,902,082
<CURRENT-LIABILITIES> 100,146,814
<BONDS> 21,485,150<F2>
0
0
<COMMON> 9,202
<OTHER-SE> 93,186,451
<TOTAL-LIABILITY-AND-EQUITY> 215,902,082
<SALES> 165,883,534
<TOTAL-REVENUES> 174,477,546
<CGS> 122,712,277
<TOTAL-COSTS> 122,712,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,331,261
<INCOME-PRETAX> 18,494,511
<INCOME-TAX> 7,212,859
<INCOME-CONTINUING> 11,281,652
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,281,652
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
<FN>
<F1>Net of allowances for doubtful accounts and sales returns of $5,896,398
<F2>Comprised of long-term debt
</FN>
</TABLE>
