AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 1998
REGISTRATION NO. 333-48669
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE
AMENDMENT NO. 3
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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AVIATION SALES COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5088 65-0665658
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
<TABLE>
<S> <C>
DALE S. BAKER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
6905 N.W. 25TH STREET 6905 N.W. 25TH STREET
MIAMI, FLORIDA 33122 MIAMI, FLORIDA 33122
(305) 592-4055 (305) 592-4055
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) INCLUDING AREA CODE, OF AGENT FOR SERVICE)
</TABLE>
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COPIES TO:
PHILIP B. SCHWARTZ, ESQ.
AKERMAN, SENTERFITT & EIDSON, P.A.
ONE S.E. THIRD AVENUE, 28TH FLOOR
MIAMI, FL 33131
(305) 374-5600
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<TABLE>
<CAPTION>
STATE OF PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER
NAME OF ADDITIONAL REGISTRANT(S)* INCORPORATION CLASSIFICATION CODE INDENTIFICATION CODE
- ----------------------------------------------- --------------- ----------------------------- ---------------------
<S> <C> <C> <C>
Aviation Sales Operating Company Delaware 5088 65-0673002
Aviation Sales Finance Company Delaware 6159 51-0375317
Aviation Sales Leasing Company Delaware 7359 65-0674397
Aviation Sales Manufacturing & Repair Company Delaware 6719 65-0791491
AVS/Kratz-Wilde Machine Company Delaware 3460 31-1575338
Aerocell Structures, Inc. Arkansas 4581 71-0704240
Apex Manufacturing, Inc. Arizona 3725 65-0801884
Caribe Aviation, Inc. Florida 4581 59-1710967
Aircraft Interior Design, Inc. Florida 4581 59-2449132
Aviation Sales Bearings Company Delaware 5088 65-0684071
Aviation Sales SPSI, Inc. Delaware 7359 65-0774065
</TABLE>
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* Address and telephone number of principal executive offices are the same as
Aviation Sales Company.
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
in connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
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================================================================================
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 23, 1998
OFFER TO EXCHANGE
8 1/8% SENIOR SUBORDINATED NOTES DUE 2008, WHICH HAVE BEEN
REGISTERED UNDER THE ACT, FOR ANY AND ALL
OUTSTANDING 8 1/8% SENIOR SUBORDINATED NOTES DUE 2008
WHICH HAVE NOT BEEN SO REGISTERED
OF
AVIATION SALES COMPANY
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
----------------
Aviation Sales Company (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer"), to
exchange $1,000 principal amount of 8 1/8% Senior Subordinated Notes due 2008 of
the Company (the "New Notes") which have been registered under the Securities
Act of 1933, as amended (the "Securities Act") for each $1,000 principal amount
of the issued and outstanding 8 1/8% Senior Subordinated Notes due 2008 which
have not been registered under the Securities Act (the "Old Notes," and
collectively with the New Notes, the "Notes"). Interest on the Notes is payable
semi-annually commencing August 15, 1998 with a final maturity date of February
15, 2008. As of the date of this Prospectus, $165.0 million aggregate principal
amount of the Old Notes is outstanding. The terms of the New Notes and the Old
Notes are substantially identical in all material respects, except for certain
transfer restrictions and registration rights; and except that holders of Old
Notes are entitled to receive Liquidated Damages (as defined) if (a) the
Company fails to file any of the registration statements required by the
Registration Rights Agreement (as defined) on or before the date specified for
such filing, (b) any of such registration statements is not declared effective
by the Securities and Exchange Commission (the "Commission") on or prior to the
date specified for such effectiveness (the "Effectiveness Target Date"), (c)
the Company fails to consummate the Exchange Offer within 30 business days of
the Effectiveness Target Date with respect to the registration statement of
which this Prospectus forms a part (the "Exchange Offer Registration
Statement"), or (d) a shelf registration statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted
Securities (as defined) during the periods specified in the Registration Rights
Agreement without being succeeded immediately by a post-effective amendment to
such registration statement that cures such failure and that is itself declared
immediately effective (each such event referred to in clauses (a) through (d)
above is a "Registration Default"). In the event of a Registration Default, the
Company is required to pay Liquidated Damages to each holder of Transfer
Restricted Securities with respect to the first 90-day period immediately
following the occurrence of such Registration Default, in an amount equal to
$.05 per week per $1,000 principal amount of Old Notes held by such holder. The
amount of the Liquidated Damages will increase by an additional $.05 per week
per $1,000 principal amount of Old Notes with respect to each subsequent 90-day
period until all Registration Defaults have been cured, up to a maximum amount
of Liquidated Damages of $.50 per week per $1,000 principal amount of Old
Notes. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease. See "Description of Notes--Registration Rights;
Liquidated Damages."
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN THE EXCHANGE OFFER.
----------------
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.
----------------
The date of this Prospectus is June , 1998
<PAGE>
The Exchange Offer is being made to satisfy certain obligations of the
Company under the Registration Rights Agreement, dated as of February 17, 1998,
among the Company and the Initial Purchasers (as defined) of the Old Notes (the
"Registration Rights Agreement"). Upon consummation of the Exchange Offer,
holders of Old Notes that were not prohibited from participating in the
Exchange Offer and did not tender their Old Notes will not have any further
exchange rights under the Registration Rights Agreement with respect to such
nontendered Old Notes and, accordingly, such Old Notes will continue to be
subject to the restrictions on transfer contained in the legend thereon.
Based on interpretations by the staff of the Commission with respect to
similar transactions, including no-action letters, the Company believes that
the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold and otherwise transferred by any holder of
such New Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act of 1933, as
amended (the "Securities Act")) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes and neither the holder nor any other person
is engaging in or intends to engage in a distribution of the New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes must acknowledge that it will deliver a prospectus in connection with any
resale of its New Notes. A broker-dealer which acquired Old Notes directly from
the Company cannot exchange such Old Notes in the Exchange Offer. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the New Notes received in exchange for the Old Notes acquired
by the broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that they will make this Prospectus
available to any broker-dealer for use in connection with any such resale for a
period of one year after the Exchange Date (as defined) or, if earlier, until
all participating broker-dealers have so resold. See "Plan of Distribution."
The New Notes will evidence the same debt as the Old Notes and will be
entitled to the benefits of the Indenture (as defined). For a more complete
description of the terms of the New Notes, see "Description of Notes." There
will be no cash proceeds to the Company from the Exchange Offer. The New Notes
will be subordinated in right of payment to all current and future Senior Debt
(as defined) of the Company. The New Notes will also be effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including under the Company's existing revolving credit
facility. As of June 15, 1998, the New Notes were subordinated to approximately
$47.9 million of Senior Debt of the Company. As of June 15, 1998 the Company
had availability of approximately $50.1 million under the Credit Facility (as
defined). The Indenture permits the Company and its subsidiaries to incur
additional indebtedness, including additional Senior Debt, in the future.
The Old Notes were originally issued and sold on February 11, 1998 in an
offering of $165.0 million aggregate principal amount (the "Offering," as
defined). The Offering was exempt from registration under the Securities Act in
reliance upon the exemptions provided by Rule 144A and Section 4(2) of the
Securities Act. Accordingly, the Old Notes may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an exemption from the registration requirements of the
Securities Act and applicable state securities laws is available.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and to
the best of the Company's information and belief, each person participating in
the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to participate
in the distribution of the New Notes to be received in the Exchange Offer. Any
person participating in the Exchange Offer who does not acquire the Exchange
Notes in the ordinary course of business: (i) cannot rely on the above
referenced no-action letters; (ii) cannot tender its Old Notes in the Exchange
Offer; and (iii) must comply with the registration and prospectus delivery
requirements of the Securities Act.
2
<PAGE>
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange. However, the Exchange Offer is
subject to certain customary conditions which may be waived by the Company. The
Exchange Offer will expire at 5:00 p.m., New York City time, on , 1998,
unless extended (as it may be so extended, the "Expiration Date"), provided
that the Exchange Offer shall not be extended beyond 30 business days from the
date of this Prospectus. The date of acceptance for exchange of the Old Note
for the New Notes (the "Exchange Date") will be the first business day
following the Expiration Date or as soon as practicable thereafter. Old Notes
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date; otherwise such tenders are irrevocable.
There has not previously been any public market for the Notes. If a market
for the New Notes should develop, the New Notes could trade at a discount from
their initial offering price. The Company does not intend to apply for listing
of the New Notes on any securities exchange or in any automated quotation
system. There can be no assurance that an active trading market for the New
Notes will develop.
AVAILABLE INFORMATION
The Company has filed with the Commission in Washington, D.C. a
Registration Statement on Form S-4 under the Securities Act with respect to the
Exchange Offer. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and the Exchange Offer, reference is made to such Registration
Statement and the exhibits and schedules filed as part thereof.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Commission. The
Registration Statement and the exhibits and schedules thereto filed with the
Commission may be inspected and copied without charge at the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and will also be available for inspection and
copying at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048, and the Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
portion of the Registration Statement may be obtained from the Public Reference
Section of the Commission upon payment of certain prescribed fees. Electronic
registration statements made through the Electronic Data Gathering, Analysis,
and Retrieval system are publicly available through the Commission's web site
(http://www.sec.gov.), which is maintained by the Commission and which contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The Company's common
stock is traded on the New York Stock Exchange ("NYSE"). Information filed by
the Company with the NYSE may be inspected at the offices of the NYSE at 20
Broad Street, New York, New York 10005.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by AVS (File
No. 001-11775) or Whitehall (File No. 001-05483) pursuant to the Exchange Act
are incorporated by reference in this Prospectus: (i) AVS's Annual Report on
Form 10-K for the year ended December 31, 1997, as amended by Form 10-K/A; (ii)
AVS's Current Report on Form 8-K/A dated December 31, 1997; (iii) AVS's Current
Report on Form 8-K dated February 12, 1998; (iv) AVS's Current Report on Form
8-K dated March 6, 1998; (v) AVS's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1998; (vi) the description of AVS's Common
Stock contained in AVS's Registration Statement on Form 8-A/12B, dated May 28,
1996; (vii) Whitehall's Annual Report on Form 10-K for the year ended December
31, 1997, as amended by Form 10-K/A; and (viii) Whitehall's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
In addition, all documents filed by AVS or Whitehall with the Commission
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date and prior to the termination of the Exchange Offer contemplated hereby
shall be deemed to be incorporated by reference herein and shall be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated by reference herein or contained in this Prospectus shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein (or in any other subsequently filed
document which also is incorporated by reference herein) modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus, except as so modified or superseded.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. COPIES OF SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, ON WRITTEN OR ORAL
REQUEST, FROM AVIATION SALES COMPANY, 6905 N.W. 25TH STREET, MIAMI, FLORIDA,
TELEPHONE NUMBER (305) 592-4055; ATTENTION: JOSEPH E. CIVILETTO, VICE
PRESIDENT, CORPORATE SECRETARY AND CHIEF FINANCIAL OFFICER.
4
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY, AND
SHOULD BE READ IN CONJUNCTION WITH, THE FINANCIAL STATEMENTS AND THE MORE
DETAILED INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT
REQUIRES OTHERWISE, REFERENCES TO THE "COMPANY" MEAN AVIATION SALES COMPANY AND
ITS SUBSIDIARIES.
THE COMPANY
GENERAL
Aviation Sales Company is a leading provider of fully integrated aviation
inventory services and a recognized worldwide leader in the redistribution of
aircraft spare parts. The Company sells aircraft spare parts and provides
inventory and repair services 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. 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 and engines. The Company also manufactures certain aircraft parts for
sale to original equipment manufacturers ("OEMs"), including precision engine
parts, and provides certain aircraft parts repair services at its Federal
Aviation Administration ("FAA") licensed repair facilities.
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
market for spare parts and the redistribution market in particular are growing
due to (i) the increasing size and the age of the worldwide airline fleet (the
worldwide fleet of commercial airplanes is expected to double from 1996 to
2016). and (ii) increased outsourcing by airlines of inventory management
functions in response to cost control pressures. These pressures have also
contributed to a reduction in the number of approved vendors utilized by the
airlines and maintenance and repair facilities, which in turn has led to
consolidation in the redistribution market. The aircraft spare parts
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
its diverse product and service offerings, superior management information
systems, financial strength and access to capital markets allow it to
capitalize on the current industry environment.
The Company's strategy is to increase revenues and operating income
through internal growth combined with new product and service offerings. Growth
is expected to be achieved through continued customer penetration in existing
markets, expansion into new product areas, continued investment in the size and
breadth of its inventory and by continuing to offer customers a broad array of
inventory management services. These services allow 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
parts inventory. The Company further intends to increase the types of aircraft
parts which it manufactures for its OEM customers and the repair services which
it offers to its customers. The Company will seek to develop new products and
services internally, as well as through acquisitions of other companies, assets
or product lines. The Company believes that a diversified platform of services
will better allow it to serve the needs of its larger customers, and to benefit
from the continuing consolidation of vendor by the airlines.
Since completion of its initial public offering in July 1996, the Company
has acquired six businesses which leveraged the Company's product and service
base beyond the redistribution of aircraft spare
5
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parts into new parts distribution, manufacturing and maintenance, and repair
and overhaul. During 1996, the Company acquired the aircraft bearings division
of Dixie Bearings, Inc. ("Dixie"), a leading provider of aircraft bearings and
related products to commercial airlines, cargo carriers and overhaul service
facilities, and AvEng Trading Partners, Inc. ("AvEng"), a redistributor of
aircraft engine parts. During 1997, the Company acquired Aerocell Structures,
Inc. ("Aerocell"), an FAA-certified maintenance, overhaul and repair facility,
Kratz-Wilde Machine Company ("Kratz"), a manufacturer of specialty machined
metal parts for jet engines, and Apex Manufacturing, Inc. ("Apex"), a precision
manufacturer of specialty machined metal parts including shafts, fuel shrouds,
housings and couplings for aerospace actuating systems. In March 1998, the
Company acquired Caribe Aviation, Inc. ("Caribe") and its subsidiary, Aircraft
Interiors, Inc. ("Aircraft"). Caribe is an FAA-certified repair station
specializing in the maintenance, repair and overhaul of hydraulic, pneumatic,
electrical and electromagnetic aircraft components, and Aircraft manufacturers
plastic cabin interior replacement parts under FAA-PMA approval and refurbishes
aircraft interior components.
On March 26, 1998, the Company entered into an agreement (the "Merger
Agreement"), to merge with Whitehall Corporation ("Whitehall"). Under the terms
of the merger agreement, at the effective date of the merger, the shareholders
of Whitehall will receive 0.5143 shares of the Company's common stock for each
share of Whitehall common stock outstanding on such date (the "Merger"). Based
upon the approximately 6.0 million Whitehall shares currently outstanding
(including shares underlying presently outstanding stock options), the Company
will issue approximately 3.1 million shares in the Merger. The transaction,
which is expected to close during the third quarter of 1998, will be accounted
for as a pooling of interest.
Whitehall is an independent provider of maintenance and modification for
commercial, military and freighter aircraft. Whitehall focuses primarily on two
categories of commercial customers: established traditional commercial carriers
that view outsourcing as a way to reduce operating expenses and increase their
competitiveness and new entrant, low-cost air carriers that rely on outsourcing
for scheduled heavy maintenance. Whitehall operates two FAA and Joint Aviation
Authority of the European Economic Community ("JAA") certified repair stations
that specialize in heavy maintenance and modification of Boeing 707, 727, 737,
McDonnell Douglas DC-8, DC-9, DC-10 and Lockheed L-100, L-188 and C-130
aircraft. Aviation services offered by Whitehall include schedule "A," "B," "C"
and "D" level inspections, block overhauls and repairs, corrosion prevention
and control programs and exterior stripping and painting. Modification services
provided by Whitehall include interior reconfiguration, cargo conversions and
avionics installations. Through a joint venture, Whitehall also designs and
markets hushkits designed to reduce the noise created by Boeing 737-100 and
737-200 series aircraft to levels which comply with FAA-mandated Stage 3 noise
reduction standards.
COMPANY ORGANIZATION
The operations of the business are conducted by the Company and its
wholly-owned subsidiaries, Aviation Sales Operating Company ("ASOC") (and its
wholly-owned subsidiary, Aviation Sales Bearings Company ("ASBC")), Aviation
Sales Leasing Company ("ASLC") (and its wholly-owned subsidiary Aviation Sales
SPS I, Inc. ("SPS I"), Aviation Sales Finance Company ("ASFC"), Aviation Sales
FSC, Ltd. and Aviation Sales Manufacturing & Repair Company ("ASMRC") (and its
wholly-owned subsidiaries, Kratz, Apex, Aerocell, Caribe (and Caribe's
wholly-owned subsidiary, Aircraft). Substantially all of the operating assets
of the Company are owned by ASOC, ASLC and ASMRC and a substantial portion of
the operating revenues and net income derived during by the Company during 1996
and 1997, and for the first quarter of 1998, were derived from the operations
of ASOC.
In addition to ASOC and ASMRC, the businesses of the Company's
subsidiaries are as follows: (i) ASBC provides aircraft bearings and related
products to commercial airlines, cargo carriers and overhaul service
facilities, (ii) ASLC provides long-term leasing of inventories of aircraft
spare parts to airline customers, (iii) ASFC is utilized by the Company in
connection with certain financing
6
<PAGE>
transactions with its senior lenders, (iv) Kratz primarily manufactures
specialty machined metal parts for jet engines, (v) Apex manufactures precision
specialty machined metal parts including shafts, fuel shrouds, housings and
couplings for aerospace actuating systems, (v) Caribe is an FAA-certified
repair station specializing in the maintenance, repair and overhaul of
hydraulic, pneumatic, electrical and electromagnetic aircraft components, (vi)
Aircraft manufactures plastic cabin interior replacement parts under FAA-PMA
approval and refurbishes aircraft interior components, (vii) SPS I leases an
aircraft engine and certain rotables and (viii) Aviation Sales FSC, Ltd. is
qualified as a foreign sales company. With the exception of Aviation Sales FSC,
Ltd., all of the foregoing subsidiaries of the Company (the "Subsidiary
Guarantors") jointly and severally and fully and unconditionally guarantee, on
a senior subordinated basis, the Notes.
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.
THE INITIAL OFFERING
Pursuant to a Purchase Agreement dated as of February 11, 1998 (the
"Purchase Agreement"), the Company sold Old Notes in an aggregate principal
amount of $165.0 million to the Initial Purchasers on February 17, 1998. The
Initial Purchasers subsequently resold the Old Notes purchased from the Company
to qualified institutional buyers pursuant to Rule 144A under the Securities
Act. A portion of the net proceeds from the Offering, of approximately $158.9
million after deducting discounts to the Initial Purchasers and estimated
Offering expenses, were used to repay approximately $138.8 million of
outstanding indebtedness under the Credit Facility. The funds repaid under the
Credit Facility included amounts borrowed during 1997 to repay assumed
indebtedness of Aerocell and Apex in connection with those acquisitions and
borrowings incurred to fund the purchase price in connection with the
acquisition of Kratz. The remaining net proceeds from the Offering were used to
pay the cash requirements in connection with the Company's acquisition of
Caribe.
THE EXCHANGE OFFER
Securities Offered.......... Up to $165.0 million aggregate principal amount
of 8 1/8% Senior Notes due 2008 of the Company
(the "New Notes," and collectively with the Old
Notes, the "Notes"). The terms of the New Notes
and the Old Notes are substantially identical in
all material respects, except for certain
transfer restrictions, registration rights and
liquidated damages ("Liquidated Damages") for
Registration Defaults relating to the Old Notes
which will not apply to the New Notes. See
"Description of Notes."
The Exchange Offer.......... The Company is offering to exchange $1,000
principal amount of New Notes for each $1,000
principal amount of Old Notes. See "The Exchange
Offer" for a description of the procedures for
tendering Old Notes. The Exchange Offer is being
made pursuant to the registration obligations of
the Company under the Registration Rights
Agreement. Upon consummation of the Exchange
Offer, holders of Old Notes that were not
prohibited from participating in the Exchange
Offer and did not tender their Old Notes will not
have any further exchange rights under the
Registration Rights Agreement with respect
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<PAGE>
to such nontendered Old Notes and, accordingly,
such Old Notes will continue to be subject to
the restrictions on transfer contained in the
legend thereon.
Tenders, Expiration Date;
Withdrawal; Exchange Date... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1998, or such later
date and time to which it is extended (as it may
be so extended, the "Expiration Date"), provided
that the Exchange Offer shall not be extended
beyond 30 business days from the date of this
Prospectus. Tender of Old Notes pursuant to the
Exchange Offer may be withdrawn and retendered at
any time prior to the Expiration Date. Any Old
Notes not accepted for exchange for any reason
will be returned without expense to the tendering
holder as promptly as practicable after the
expiration or termination of the Exchange Offer.
The date of acceptance for exchange of all Old
Notes properly tendered and not withdrawn for New
Notes (the "Exchange Date") will be the first
business day following the Expiration Date or as
soon as practicable thereafter.
Shelf Registration
Statement................... If any holder of the Old Notes (other than any
such holder which is an affiliate of the Company
within the meaning of Rule 405 under the
Securities Act) is not eligible under applicable
securities laws to participate in the Exchange
Offer, and such holder has provided information
regarding such holder and the distribution of
such holder's Old Notes to the Company for use
therein, the Company and the Subsidiary
Guarantors have agreed to register the Old Notes
with a shelf registration statement ("Shelf
Registration Statement") and use its best efforts
to cause to be declared effective by the
Commission within certain time periods after the
consummation of the Exchange Offer. The Company
and the Subsidiary Guarantors have agreed to
maintain the effectiveness of the Shelf
Registration Statement for, under certain
circumstances, a maximum of two years to cover
resales of the Old Notes held by such holders.
See "Description of Notes--Registration Rights;
Liquidated Damages."
Accrued Interest on the
New Notes................... Each New Note will bear interest from the most
recent date to which interest has been paid on
the Old Note or, if no such payment has been
made, from February 17, 1998.
Federal Income Tax
Considerations............. The Exchange Offer will not result in any
income, gain or loss to the holders of Notes or
the Company for federal income tax purposes. See
"Federal Income Tax Considerations."
Use of Proceeds............. There will be no proceeds to the Company from
the exchange of New Notes for the Old Notes
pursuant to the Exchange Offer.
8
<PAGE>
Exchange Agent.............. SunTrust Bank, Central Florida, National
Association, the Trustee under the Indenture, is
serving as exchange agent (the "Exchange Agent")
in connection with the Exchange Offer.
CONSEQUENCES OF EXCHANGING OR FAILURE TO
EXCHANGE OLD NOTES PURSUANT TO THE EXCHANGE OFFER
Generally, holders of Old Notes (other than any holder who is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) who exchange their Old Notes for New Notes pursuant to the Exchange Offer
may offer their New Notes for resale, resell their New Notes, and otherwise
transfer their New Notes without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided such New Notes
are acquired in the ordinary course of the holder's business, such holders have
no arrangement with any person to participate in a distribution of such New
Notes and neither the holder nor any other person is engaging in or intends to
engage in a distribution of the New Notes. A broker-dealer who acquired Old
Notes directly from the Company cannot exchange such Old Notes in the Exchange
Offer. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes must acknowledge that it will deliver a prospectus in
connection with any resale of its New Notes. See "Plan of Distribution." To
comply with the securities laws of certain jurisdictions, it may be necessary
to qualify for sale or register the New Notes prior to offering or selling such
New Notes. The Company is required, under the Registration Rights Agreement, to
register the New Notes in any jurisdiction requested by the holders, subject to
certain limitations. Upon consummation of the Exchange Offer, holders that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Notes, and accordingly,
such old Notes will continue to be subject to the restrictions on transfer
contained in the legend thereon. See "The Exchange Offer--Consequences of
Failure to Exchange."
9
<PAGE>
SUMMARY DESCRIPTION OF THE NOTES
Issuer...................... Aviation Sales Company
Securities Offered.......... $165.0 million aggregate principal amount of
8 1/8% Senior Subordinated Notes due 2008 (the
"New Notes," and collectively with the Old Notes,
the "Notes"). The terms of the New Notes and the
Old Notes are substantially identical in all
material respects, except for certain transfer
restrictions, registration rights and Liquidated
Damages for Registration Defaults relating to the
Old Notes which will not apply to the New Notes.
See "Description of Notes."
Maturity Date............... February 15, 2008.
Interest Rate and
Payment Dates............... The Notes bear interest at a rate of 8 1/8% per
annum, payable semi-annually in arrears on
February 15 and August 15 of each year,
commencing August 15, 1998.
Subordination............... The Notes are general unsecured obligations of
the Company, subordinated in right of payment to
all existing and future Senior Debt of the
Company, including indebtedness outstanding under
the Company's existing revolving credit facility
(the "Credit Facility"). For a description of the
Credit Facility, see "Description of Other
Indebtedness." In addition, the Notes are
effectively subordinated to all secured
obligations to the extent of the assets securing
such obligations, including the Credit Facility.
At June 15, 1998, the Company and the Subsidiary
Guarantors had approximately $47.9 million of
Senior Debt outstanding, all of which is secured.
The indenture pursuant to which the Notes have
been issued (the "Indenture") permits the Company
and its subsidiaries to incur additional
indebtedness, including Senior Debt, subject to
certain limitations. See "Description of
Notes--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
Subsidiary Guarantees....... The Notes are unconditionally guaranteed, on a
senior subordinated basis, by substantially all
of the Company's existing subsidiaries and each
subsidiary that is organized in the future by the
Company, unless such subsidiary is designated as
an Unrestricted Subsidiary (as defined). The
present Subsidiary Guarantors are ASOC, ASBC,
ASLC, ASFC, ASMRC, Kratz, Apex Caribe, Aircraft
and SPS I. Aviation Sales FSC, Ltd., a
wholly-owned subsidiary of the Company, is not a
Subsidiary Guarantor. The Subsidiary Guarantees
are joint and several, full and unconditional and
general unsecured obligations of the Subsidiary
Guarantors. The Subsidiary Guarantees are
subordinated in right of payment to all existing
and future Senior Debt of the Subsidiary
Guarantors, including the Credit Facility, and
are also effectively subordinated to all secured
obligations of the
10
<PAGE>
Subsidiary Guarantors to the extent of the
assets securing such obligations, including the
Credit Facility. Furthermore, the Indenture
permits the Subsidiary Guarantors to incur
additional indebtedness, including Senior Debt
subject to certain limitations.
Optional Redemption......... The Notes will be redeemable, at the option of
the Company, in whole or in part, at any time
after February 15, 2003, at the redemption prices
set forth herein, plus accrued and unpaid
interest and Liquidated Damages, if any, to the
redemption date. In addition, on or prior to
February 15, 2001, the Company may redeem up to
35% of the aggregate principal amount of the
Notes at a redemption price of 108 1/8 of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon
to the redemption date with the net proceeds of a
public offering of common stock of the Company;
provided, that at least 65% of the aggregate
principal amount of the Notes originally issued
remains outstanding immediately after the
occurrence of such redemption. See "Description
of Notes--Optional Redemption."
Change of Control........... Upon the occurrence of a Change of Control, the
Company will be required to make an offer to
repurchase all or any part of holder's Notes to
repurchase such holder's Notes at a repurchase
price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the
repurchase date. There can be no assurance that
the Company will have the financial resources
necessary to purchase the Notes upon a Change of
Control or that such repurchase will be permitted
under the Credit Facility. See "Description of
Notes--Repurchase at the Option of
Holders--Change of Control."
Certain Covenants........... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries to incur additional
indebtedness and issue preferred stock, pay
dividends or make other distributions, make
investments, dispose of assets, issue capital
stock of subsidiaries, create certain liens
securing indebtedness, enter into certain
transactions with affiliates, sell assets or
enter into certain mergers and consolidations or
sell all or substantially all of their assets.
See "Description of Notes--Certain Covenants."
Registration Rights,
Liquidated Damages......... Pursuant to a Registration Rights Agreement
(the "Registration Rights Agreement") among the
Company, the Subsidiary Guarantors and the
Initial Purchasers, the Company and the
Subsidiary Guarantors agreed (a) to file a
registration statement (the "Exchange Offer
Registration Statement") on or prior to 45 days
after the closing of the Offering (the "Closing")
with respect to an offer to exchange
11
<PAGE>
the Old Notes for a new issue of debt securities
of the Company (the "New Notes") registered
under the Securities Act, with terms
substantially identical to those of the Old
Notes (the "Exchange Offer") and (b) use their
best efforts to cause the Exchange Offer
Registration Statement to be declared effective
by the Securities and Exchange Commission (the
"SEC" or the "Commission") on or prior to 120
days after the Closing. If (i) the Exchange
Offer is not permitted by applicable law or (ii)
any holder of Transfer Restricted Securities (as
defined) notifies the Company that (A) it is
prohibited by law or policy from participating
in the Exchange Offer, (B) that it may not
resell the New Notes acquired by it in the
Exchange Offer to the public without delivering
a prospectus and the prospectus contained in the
Exchange Offer Registration Statement is not
appropriate or available for such resales or (C)
that it is a broker-dealer and holds Notes
acquired directly from the Company or an
affiliate of the Company, the Company will be
required to provide a shelf registration
statement to cover resales of the Notes by the
holders thereof. If the Company fails to satisfy
these registration obligations, it will be
required to pay liquidated damages ("Liquidated
Damages") to holders of Notes under certain
circumstances.
RISK FACTORS
Prospective participants in the Exchange Offer should take into account
the specific considerations set forth under "Risk Factors" as well as the other
information set forth in this Prospectus. See "Risk Factors."
12
<PAGE>
SUMMARY HISTORICAL AND UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following summary historical financial data for the three years ended
December 31, 1997, has been derived from the Company's Consolidated Financial
Statements as of December 31, 1997 and 1996 and for the three years ended
December 31, 1997, which have been audited by Arthur Andersen LLP, independent
certified public accountants, and are included elsewhere herein. The following
summary historical unaudited financial data of the Company as of March 31, 1998
and for the three months ended March 31, 1997 and 1998, has been derived from
the unaudited historical financial statements of the Company included elsewhere
herein which, in the opinion of management, include all adjustments (consisting
of only normal recurring adjustments) necessary for a fair and consistent
presentation of such data. See footnote (1) on the following page.
The following unaudited condensed combined pro forma financial data
present: (i) the pro forma, as adjusted, financial position of the Company at
March 31, 1998 as if the Merger had been consummated on that date, and (ii) the
pro forma results of operations of the Company for the three months ended March
31, 1998 and the year ended December 31, 1997, as if the Offering had been
consummated as of January 1, 1998 and as if the acquisition of Kratz and the
Offering had been consummated as of January 1, 1997, respectively. The pro
forma, as adjusted results of operations for the three months ended March 31,
1998 and the year ended December 31, 1997 are further adjusted as if the Merger
had occurred on January 1, 1998 and January 1, 1997, respectively. The
following summary pro forma data presents such information as if the Merger had
been accounted for as a pooling of interests. The following summary historical
condensed financial data has not been restated to reflect the Merger under the
pooling of interests method of accounting. Neither the summary historical
consolidated financial data nor the summary pro forma condensed combined
financial data are necessarily indicative of either the future results of
operations or the results of operations that would have occurred if the events
described had been consummated on the indicated dates. The following summary
historical and pro forma condensed combined financial data should be read in
conjunction with "Selected Historical and Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Condensed Combined Financial Statements," and
the audited and unaudited historical financial statements of the Company,
Whitehall and Kratz which are included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 1996 1997 1997 1997
------------- ------------- ------------- -------------- ----------------
PRO FORMA,
PRO FORMA(2) AS ADJUSTED(3)
(UNAUDITED) (UNAUDITED)
-------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Operating revenues. ...................... $113,803 $161,944 $256,899 $285,610 $ 351,250
Gross profit ............................. 42,489 51,585 76,186 85,644 87,167
Operating expenses ....................... 23,916 29,301 41,192 44,200 55,790
Income from operations ................... 18,573 22,284 34,994 41,444 31,377
Interest and other expenses, net ......... 8,287 5,350 7,432 14,531 20,082
Income before taxes and
extraordinary item ...................... 10,286 16,934 27,562 26,913 11,295
Income (loss) before
extraordinary items ..................... 6,274 10,330 16,781 16,385 4,404
Extraordinary item, net of taxes ......... -- 1,862 -- -- --
Net income(4) ............................ 6,274 8,468 16,781 16,385 4,404
Historical diluted income before
extraordinary items
per share(5)(6) ......................... $ 2.22 $ 1.77
======== ========
Pro forma diluted income
before extraordinary items
per share(4)(5)(6) ...................... $ 1.00 $ 1.32 $ 1.73 $ 0.36
======== ======== ======== =========
OTHER DATA(1):
Ratio of earnings to fixed
charges(7) .............................. 2.2 x 3.8 x 4.4 x 2.8 x 1.7 x
BALANCE SHEET DATA
(END OF PERIOD)(1):
Working capital .......................... $46,641 $68,999 $82,789
Total assets ............................. 93,478 145,183 284,987
Total debt ............................... 62,043 38,984 151,285
Stockholders' equity ..................... 14,199 81,071 98,241
<CAPTION>
THREE MONTHS ENDED
MARCH 31, (UNAUDITED)
--------------------------------------------------------
1997 1998 1998 1998
------------ ------------ -------------- ---------------
PRO FORMA,
PRO FORMA(2) AS ADJUSTED(3)
-------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Operating revenues. ...................... $54,853 $ 82,456 $ 82,456 $102,156
Gross profit ............................. 15,104 24,595 24,596 25,241
Operating expenses ....................... 9,017 13,903 13,904 14,838
Income from operations ................... 6,087 10,692 10,692 10,403
Interest and other expenses, net ......... 1,072 3,630 3,788 3,539
Income before taxes and
extraordinary item ...................... 5,015 7,062 6,904 6,864
Income (loss) before
extraordinary items ..................... 3,048 4,350 4,253 4,229
Extraordinary item, net of taxes ......... -- 599 -- --
Net income(4) ............................ 3,048 3,751 4,253 4,229
Historical diluted income before
extraordinary items
per share(5)(6) ......................... $ 0.32 $ 0.45
======= ========
Pro forma diluted income
before extraordinary items
per share(4)(5)(6) ...................... $ 0.44 $ 0.34
======== ========
OTHER DATA(1):
Ratio of earnings to fixed
charges(7) .............................. 2.8 x 2.7 x 2.8 x
BALANCE SHEET DATA
(END OF PERIOD)(1):
Working capital .......................... $200,729 $207,882
Total assets ............................. 349,539 399,565
Total debt ............................... 203,349 219,682
Stockholders' equity ..................... 107,966 131,001
</TABLE>
- --------------
(FOOTNOTES ON NEXT PAGE)
13
<PAGE>
(1) Dixie, which was acquired on August 9, 1996, Kratz, which was acquired on
October 17, 1997 and Caribe, which was acquired on March 6, 1998, were
accounted for under the purchase method of accounting and accordingly, all
of their results of operations have been included in the Company's
historical results of operations from the date of acquisition.
AvEng, which was acquired on December 10, 1996, Aerocell, which was acquired
on September 30, 1997 and Apex, which was acquired on December 31, 1997,
were accounted for under the pooling of interests method of accounting. As
such, AvEng is included in the Company's historical financial results for
all periods presented subsequent to 1995, and Aerocell and Apex are included
for all periods presented subsequent to 1996. Historical operating results
and financial position for the periods presented prior to 1996 have not been
restated to give retroactive effect to the acquisition of AvEng and
historical operating results for periods presented prior to 1997 have not
been restated to give retroactive effect to the acquisition of Aerocell and
Apex, due to the immateriality of the restated amounts.
(2) Adjusted to reflect: the pro forma results of operations of the Company for
the three months ended March 31, 1998 and the year ended December 31,
1997, as if the Offering had been consummated on January 1, 1998 and as if
the acquisition of Kratz and the Offering had been consummated as of
January 1, 1997, respectively, for Statement of Income Data and Other
Data.
(3) Further adjusted to reflect: (i) the pro forma, as adjusted, financial
position of the Company at March 31, 1998 as if the proposed merger with
Whitehall had been consummated on that date for Balance Sheet Data, and
(ii) the pro forma, as adjusted results of operations for the three months
ended March 31, 1998 and the year ended December 31, 1997 as if the Merger
with Whitehall had occurred on January 1, 1998 and January 1, 1997,
respectively.
(4) Periods presented prior to 1997 include pro forma adjustments to record
income taxes, as the Company conducted its business as a partnership prior
to June 26, 1996.
(5) Weighted average common and common equivalent shares used in calculating
diluted earnings per share are 5,859,542 for 1993; 5,923,103 for 1994;
6,259,542 for 1995; 7,819,837 for 1996; 9,484,097 for 1997; 9,463,967 for
the three months ended March 31, 1997 and 9,592,820 for the three months
ended March 31, 1998.
(6) The 1995 and 1996 Company per share data assumes that the 4,425,000 common
shares issued to the partners and the 575,000 shares of common stock, the
net proceeds in respect of which were paid to J/T Aviation Partners, were
outstanding for periods prior to the closing of the Company's initial
public offering in July 1996.
(7) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes, extraordinary item and
fixed charges. Fixed charges consist of interest expense, amortization of
deferred debt issuance costs and the interest portion of the Company's
rent expense.
14
<PAGE>
RISK FACTORS
THIS PROSPECTUS AND OTHER REPORTS AND STATEMENTS FILED BY THE COMPANY FROM
TIME TO TIME WITH THE COMMISSION (COLLECTIVELY, "COMMISSION FILINGS") CONTAIN
OR MAY CONTAIN FORWARD-LOOKING STATEMENTS, SUCH AS STATEMENTS REGARDING THE
COMPANY'S GROWTH STRATEGY AND ANTICIPATED TRENDS IN THE INDUSTRIES AND
ECONOMIES IN WHICH THE COMPANY OPERATES. THESE FORWARD-LOOKING STATEMENTS ARE
BASED ON THE COMPANY'S CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF
RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATING TO THE COMPANY'S OPERATIONS AND
RESULTS OF OPERATIONS, COMPETITIVE FACTORS, SHIFTS IN MARKET DEMAND, AND OTHER
RISKS AND UNCERTAINTIES, INCLUDING IN ADDITION TO THOSE DESCRIBED BELOW AND
ELSEWHERE IN THIS PROSPECTUS OR ANY COMMISSION FILING, UNCERTAINTIES WITH
RESPECT TO CHANGES OR DEVELOPMENTS IN SOCIAL, BUSINESS, ECONOMIC, INDUSTRY,
MARKET, LEGAL AND REGULATORY CIRCUMSTANCES AND CONDITIONS AND ACTIONS TAKEN OR
OMITTED TO BE TAKEN BY THIRD PARTIES, INCLUDING THE COMPANY'S CONTRACTORS,
CUSTOMERS, SUPPLIERS, COMPETITORS, STOCKHOLDERS, LEGISLATIVE, REGULATORY AND
JUDICIAL AND OTHER GOVERNMENTAL AUTHORITIES. SHOULD ONE OR MORE OF THESE RISKS
OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM RESULTS EXPRESSED OR
IMPLIED IN ANY FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY IN THIS
PROSPECTUS OR ANY COMMISSION FILING. THE COMPANY DOES NOT UNDERTAKE ANY
OBLIGATION TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS
OR CIRCUMSTANCES. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS IN EVALUATING THE COMPANY AND ITS BUSINESS BEFORE PARTICIPATING IN THE
EXCHANGE OFFER.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any exchange rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such Old
Notes will continue to be subject to the restrictions on transfer contained in
the legend thereon. In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act and applicable state securities
laws, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. Pursuant to the
Registration Rights Agreement, the Company and the Subsidiary Guarantors have
agreed to register for resale Old Notes under the Shelf Registration Statement
for certain holders of the Old Notes not eligible under applicable securities
laws to participate in the Exchange Offer. See "Description of the
Notes--Registration Rights; Liquidated Damages".
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Company believes that the New Notes issued pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by any holder of such New Notes (other than any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's business, such holder has no
arrangement or understanding with any person to participate in the distribution
of such New Notes and neither the holder nor any other person is engaging in or
intends to engage in a distribution of the New Notes. A broker-dealer who
acquired Old Notes directly from the Company cannot exchange such Old Notes in
the Exchange Offer. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes must acknowledge that it will deliver a
prospectus in connection with any resale of its New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of the New Notes received in exchange for the Old Notes acquired
by the broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that it will make this Prospectus available
to any broker-dealer for use in connection with any such resale for a certain
period of time after the Exchange Date or, if earlier, until all participating
broker-dealers have so resold. See "Plan of Distribution." The New Notes may
not be offered or sold unless they have been registered or qualified for sale
under applicable state securities
15
<PAGE>
laws or an exemption from registration or qualification is available and is
complied with. The Company is required, under the Registration Rights
Agreement, to register the New Notes in any jurisdiction requested by the
holders, subject to certain limitations.
SUBORDINATION AND LEVERAGE
The Notes and the Subsidiary Guarantees are subordinated in right of
payment to all existing and future Senior Debt. The Company currently has
significant outstanding indebtedness, and subsequent to the Offering, the
Company will be significantly leveraged. As of June 15, 1998, Whitehall had
outstanding indebtedness of $16.9 million. As of June 15, 1998 the Company had
outstanding indebtedness of $219.1 million, of which $41.1 million is Senior
Debt and $164.0 million is the Notes (aggregate principal amount issued of
$165.0 million). See "Capitalization." In addition, subject to the limitations
set forth in the Indenture, the Company and its Subsidiaries (as defined) may
incur substantial amounts of additional indebtedness, much of which is expected
to constitute Senior Debt. By reason of the subordination of the Notes and the
Subsidiary Guarantees, in the event of insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up of the business of the Company or any
Subsidiary Guarantor, or upon default in payment with respect to or
acceleration of any Senior Debt of the Company or any Subsidiary Guarantor or
an event of default with respect to certain Senior Debt, the assets of the
Company or the Subsidiary Guarantor would be available to pay the amounts due
on the Notes and the Subsidiary Guarantees only after such Senior Debt had been
paid in full. As of June 15, 1998, the Company had availability under the
Credit Facility of $50.1 million. The Credit Facility is secured by
substantially all of the assets of the Company. Subject to certain limitations
in the documents governing its indebtedness, the Company will likely be able to
incur significant additional amounts of secured and unsecured indebtedness in
the future. For a description of the debt which the Company may be able to
incur in the future under the Credit Facility and the Indenture, see
"Description of Other Indebtedness." The Notes and the Subsidiary Guarantees
are effectively subordinated to all such secured obligations to the extent of
the collateral, irrespective of whether payments on the Notes and the
Subsidiary Guarantees are otherwise permitted to be made under the
subordination provisions in the Indenture prior to payment of such other
indebtedness in full. Upon certain events of default under such facilities, the
lenders could elect to declare all amounts outstanding, together with accrued
and unpaid interest thereon, to be immediately due and payable. If the Company
were unable to repay those amounts, the lenders could proceed against the
collateral granted them to secure that indebtedness. If any of such
indebtedness were to be accelerated, there can be no assurance that the assets
of the Company would be sufficient to repay in full that indebtedness and the
other indebtedness of the Company, including the Notes. In addition, the
Indenture permits the subsidiaries of the Company to incur debt under certain
circumstances. Any such debt incurred by a subsidiary of the Company that is
not a Subsidiary Guarantor could be structurally senior to the Notes. To the
extent the Subsidiary Guarantees are not enforceable, the Notes and the
Subsidiary Guarantees would be effectively subordinated to all liabilities of
the Subsidiary Guarantors, including trade payables of such Subsidiary
Guarantors, whether or not such liabilities otherwise constitute Senior Debt of
the Subsidiary Guarantor under the Indenture.
The Company's ability to make payments of principal and interest on, or to
refinance its current or future indebtedness (including the Notes), depends on
its future operating performance, which to a certain extent is subject to
economic, financial, competitive and other factors beyond its control. The
degree to which the Company is leveraged could have important consequences to
the holders of the Notes, including (i) the Company's vulnerability to adverse
general economic and industry conditions, (ii) the Company's ability to obtain
additional financing for future working capital expenditures, general corporate
purposes or other purposes and (iii) the dedication of a substantial portion of
the Company's cash flow from operations to the payment of principal and
interest on indebtedness, thereby reducing the funds available for operations
and future business opportunities. The Company's debt service requirements for
the year ended December 31, 1998 are approximately $28.6 million.
16
<PAGE>
RESTRICTIONS IMPOSED BY LENDERS
The instruments governing the indebtedness of the Company impose
significant operating and financial restrictions on the Company. Such
restrictions will affect, and in many respects, significantly limit or
prohibit, among other things, the ability of the Company to incur additional
indebtedness, pay dividends, repay indebtedness prior to its stated maturity,
sell assets or engage in mergers or acquisitions. These restrictions could also
limit the ability of the Company to effect future financings, make needed
capital expenditures, withstand a future downturn in the business or the
economy, or otherwise conduct necessary corporate activities.
FUNDING REQUIREMENTS
During the fiscal years ended December 31, 1996 and 1997 and during the
first quarter of 1998, AVS has largely relied upon significant borrowings under
its Credit Facility and the sale of its securities, including the Notes, to
satisfy its funding needs relating to the growth of its business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
CONSEQUENCES OF CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the holders of the Notes would
be entitled to require the Company to repurchase up to all outstanding Notes of
the holders requiring such repurchase at a purchase price equal to 101% of the
principal amount of such Notes, plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of repurchase. Failure by the Company to
make such a repurchase would result in a default under the Indenture. In
addition, the Credit Facility contains and the future indebtedness of the
Company and the Subsidiaries may contain prohibitions on the occurrence of
certain events that would constitute a Change of Control or require such
indebtedness to be repurchased upon a Change of Control. Moreover, the exercise
by the holders of the Notes of their right to require the Company to repurchase
the Notes could cause a default under such indebtedness due to the financial
effect of such repurchase on the Company or otherwise, even if the Change of
Control itself does not cause a default. In the event of a Change of Control,
there can be no assurance that the Company would have sufficient funds to
repurchase the Notes and to satisfy its other obligations under the Notes and
any such other indebtedness or would be permitted to make such repurchase in
compliance with the subordination provisions in the Indenture. See "Description
of Notes--Repurchase at Option of Holders--Change of Control."
EFFECTS OF THE ECONOMY ON THE COMPANY'S SPARE PARTS BUSINESS
Since the Company's customers consist of airlines, maintenance and repair
facilities that service airlines and other aircraft spare parts redistributors,
as well as original equipment manufacturers, 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 may affect the airline industry will not have
an adverse impact on the Company's business, financial condition or results of
operations.
RISKS REGARDING THE COMPANY'S SPARE PARTS 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 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
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to sources deemed acceptable by such agencies. 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 country by similar agencies. While the Company's spare parts
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. Additionally, the Company must
be certified by the FAA and, in some cases, by original equipment manufacturers
in order to manufacture or repair aircraft and aircraft components. Although
the Company believes that its newly acquired manufacturing and repair
operations are in material compliance with applicable regulations, there can be
no assurance of this fact. Further, 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 a material adverse effect on
the Company's business, financial condition or results of operations.
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 or results of operations.
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 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.
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 employment agreements between the Company and its
executive officers are individually terminable by each executive officer upon a
change of control of the Company. 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 Company does not
maintain "key person" life insurance on the lives of its executive officers.
See "Management."
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COMPETITION
The markets for the Company's product and services are extremely
competitive, and the Company faces competition from a number of sources. These
include aircraft and aircraft part 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,
manufactured or repaired 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 Company's business, financial condition or results of operations. See
"Business--Product Liability."
POTENTIAL INFLUENCE BY CERTAIN STOCKHOLDERS
As of the date of this Prospectus, one of the Company's stockholders
beneficially owns 24.6% of the outstanding Common Stock and the Company's
directors and executive officers, as a group, beneficially own an aggregate of
32.8% (including the 24.6% referred to above) 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 exercise substantial
influence on the election of all of the members of the Company's Board and,
therefore, to exercise substantial influence over the business, policies and
affairs of the Company. See "Principal Stockholders."
FRAUDULENT CONVEYANCES AND PREFERENTIAL TRANSFERS
The ability of the holders of the Notes or the Trustee (as defined herein)
to enforce the Notes and the Subsidiary Guarantees may be limited by certain
fraudulent conveyance and similar laws. Various fraudulent conveyance and
similar laws have been enacted for the protection of creditors and may be
utilized by a court of competent jurisdiction to avoid the Notes and the
Subsidiary Guarantees or to further subordinate the obligations of the Company
under the Notes or the obligations of any Subsidiary Guarantor under its
Subsidiary Guarantee to obligations (including trade payables) that do not
otherwise constitute Senior Debt. The requirements for establishing a
fraudulent conveyance vary depending on the law of the jurisdiction which is
being applied. Generally, if in a bankruptcy, reorganization, rehabilitation or
similar proceeding in respect of the Company or a Subsidiary Guarantor, or in a
lawsuit by or on behalf of creditors against the Company or a Subsidiary
Guarantor, a court were to find that (i) the Company or a Subsidiary Guarantor,
as the case may be, incurred indebtedness in connection with the Notes or the
Subsidiary Guarantees with the intent of hindering, delaying or defrauding
current or future creditors of the Company or the Subsidiary Guarantor, as the
case may be, or (ii) the Company or a Subsidiary Guarantor, as the case may be,
received less than reasonable equivalent value or fair consideration for
incurring such indebtedness, and (a) was insolvent at the time of the
incurrence of such indebtedness, (b) was rendered insolvent by reason of
incurring such indebtedness, (c) was at such time engaged or about to engage in
a business or transaction for which its assets constituted unreasonably small
capital or (d) intended to incur, or believed that it would incur, debts beyond
its ability to pay such debts as they matured, such court could, with respect
to the Company or the Subsidiary Guarantor, as the case may be, declare void in
whole or in part the obligations of the Company or such Subsidiary Guarantor in
connection with the Notes or the Subsidiary Guarantees and/or further
subordinate claims with respect to the Notes and the Subsidiary Guarantees to
all other debts of the Company or the Subsidiary Guarantors, as applicable. If
the
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obligations of the Company or the Subsidiary Guarantors were further
subordinated, there can be no assurance that after payment of the other debts
of the Company or the Subsidiary Guarantors, there would be sufficient funds to
pay the subordinated claims with respect to the Notes and the Subsidiary
Guarantees.
Generally, for purposes of the foregoing, an entity will be considered
insolvent if the sum of its respective debts is greater than the fair saleable
value of all of its property at a fair valuation or if the present fair
saleable value of its assets is less than the amount that will be required to
pay its probable liability on its existing debts, as they become mature and
absolute.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against
the Company or any Subsidiary Guarantor within 90 days after any payment by the
Company or such Subsidiary Guarantor with respect to the Notes or a Subsidiary
Guarantee, respectively, or the incurrence. of a Subsidiary Guarantee or if the
Company or such Subsidiary Guarantor anticipated becoming insolvent at the time
of such payment or incurrence, all or a portion of such payment or guarantee
could be avoided as a preferential transfer and the recipient of such payment
could be required to return such payment.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The New Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to apply for listing of
the New Notes on any securities exchange. The Initial Purchasers have informed
the Company that they currently intend to make a market in the New Notes.
However, they are not obligated to do so, and any such market making may be
discontinued at any time without notice. In addition, any such market-making
activity will be subject to the limits imposed by the Securities Act and the
Exchange Act and may be limited during the Exchange Offer or the pendency of
the Shelf Registration Statement. Accordingly, no assurance can be given that
an active public or other market will develop for the New Notes or as to the
liquidity of or the trading market for the New Notes. If a trading market does
not develop or is not maintained, holders of the New Notes may experience
difficulty in reselling the New Notes or may be unable to sell them at all. If
a market for the New Notes develops, any such market may be discontinued at any
time.
If a public trading market develops for the New Notes, future trading
prices of such securities will depend on many factors including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities. Depending on prevailing interest rates, the
market for similar securities and other factors, including the financial
condition of the Company, the New Notes may trade at a discount from their
principal amount.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On February 17, 1998, the Company issued $165.0 million aggregate
principal amount of Old Notes to Salomon Brothers Inc, BT Alex Brown
Incorporated and Citicorp Securities, Inc. (collectively, the "Initial
Purchasers"). The issuance was not registered under the Securities Act in
reliance upon the exemption under Rule 144A and Section 4(2) of the Securities
Act. In connection with the issuance and sale of the Old Notes, the Company
entered into a Registration Rights Agreement with the Initial Purchasers dated
as of February 17, 1998 (the "Registration Rights Agreement"), which requires
the Company to file with the Commission a registration statement under the
Securities Act with respect to an issue of new notes of the Company identical
in all material respects to the Old Notes, and use its best efforts to cause
such registration statement to become effective under the Securities Act and,
upon the effectiveness of that registration statement, to offer to the holders
of the Old Notes the opportunity to exchange their Old Notes for a like
principal amount of New Notes, which will be issued without a restrictive
legend and may be reoffered and resold by the holder without restrictions or
limitations under the Securities Act. A copy of the Registration Rights
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. The Exchange Offer is being made pursuant to the
Registration Rights Agreement to satisfy the Company's exchange obligations
thereunder.
Based on no-action letters issued by the staff of the Commission to third
parties, the Company believes that the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by any holder of such New Notes (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such
holder has no arrangement or understanding with any person to participate in
the distribution of such New Notes and neither the holder nor any other person
is engaging in or intends to engage in a distribution of the New Notes. A
broker-dealer who acquired Old Notes directly from the Company can not exchange
such Old Notes in the Exchange Offer. Any holder who tenders in the Exchange
Offer for the purpose of participating in a distribution of the New Notes
cannot rely on such interpretations by the staff of the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept any and all Old Notes validly tendered
and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration
Date (as defined herein). The Company will issue a principal amount of New
Notes in exchange for an equal principal amount of outstanding Old Notes
tendered and accepted in the Exchange Offer. Holders may tender some or all of
their Old Notes pursuant to the Exchange Offer. The date of acceptance for
exchange of the Old Notes for the New Notes (the "Exchange Date") will be the
first business day following the Expiration Date or as soon as practicable
thereafter.
The terms of the New Notes and the Old Notes are substantially identical
in all material respects, except for certain transfer restrictions,
registration rights and Liquidated Damages for Registration Defaults relating
to the Old Notes which will not apply to the New Notes. See "Description of
Notes." The New Notes will evidence the same debt as the Old Notes. The New
Notes will be issued under and entitled to the benefits of the Indenture
pursuant to which the Old Notes were issued.
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As of the date of this Prospectus, $165.0 million aggregate principal
amount of the Old Notes are outstanding. This Prospectus, together with the
Letter of Transmittal, is being sent to all registered holders of Old Notes.
Holders of Old Notes do not have any appraisal or dissenters' rights under
state law or the Indenture in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with the provisions of the
Registration Rights Agreement and the applicable requirements of the Exchange
Act, and the rules and regulations of the Commission thereunder. Old Notes
which are not tendered and were not prohibited from being tendered for exchange
in the Exchange Offer will remain outstanding and continue to accrue interest
and to be subject to transfer restrictions, but will not be entitled to any
rights or benefits under the Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
on the Exchange Date the Company will accept all Old Notes properly tendered
and not withdrawn and will issue New Notes in exchange therefor. For purposes
of the Exchange Offer, the Company shall be deemed to have accepted properly
tendered Old Notes for exchange when, as and if the Company had given oral or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders for the purposes of receiving the New Notes
from the Company.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents; provided, however, that
the Company reserves the absolute right to waive any defects or irregularities
in the tender or conditions of the Exchange Offer. If any tendered Old Notes
are not accepted for any reason set forth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount
than the holder desires to exchange, such unaccepted or nonexchanged Old Notes
or substitute Old Notes evidencing the unaccepted portion, as appropriate, will
be returned without expense to the tendering holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See "Fees and Expenses" below.
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended; provided that the Exchange Offer
shall not be extended beyond 30 business days after the date of this
Prospectus.
In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, prior to 9:00 a.m., New York City
time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of
the Exchange Offer. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holder of Old Notes
of such amendment.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no
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obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to an appropriate news
agency.
INTEREST ON THE NEW NOTES
New Notes will bear interest at the rate of 8 1/8% per annum, payable
semi-annually, in cash, on February 15 and August 15 of each year, from the
most recent date to which interest has been paid on the Old Notes or, if no
such payment has been made, from February 17, 1998.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to exchange any new Notes for any Old Notes, and may terminate or
amend the Exchange Offer before the acceptance of any Old Notes for exchange,
if the Exchange Offer or the consummation thereof would otherwise violate or be
prohibited by applicable federal law.
If the Company determines in its sole discretion that such condition is
not satisfied, the Company may refuse to accept any Old Notes and return all
tendered Old Notes to the tendering holders.
PROCEDURES FOR TENDERING
The tender of Old Notes by a holder as set forth below (including the
tender of Old Notes by book-entry delivery pursuant to the procedures of the
Depository Trust Company ("DTC")) and the acceptance thereof by the Company
will constitute an agreement between such holder and the Company in accordance
with the terms and subject to the conditions set forth in this Prospectus and
in the Letter of Transmittal.
Only a holder of Old Notes may tender such Old Notes in the Exchange
Offer. To tender in the Exchange Offer, a holder must (i) complete, sign and
date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes (unless such tender is being effected pursuant to the procedure
for book-entry transfer described below) and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date, or (ii) comply with the guaranteed delivery procedures described below.
Delivery of all documents must be made to the Exchange Agent at its address set
forth herein.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owners' own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering of
such owner's Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer of registered ownership may
take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by any Eligible Institution (as defined) unless
the Old Notes tendered pursuant thereto are
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tendered (i) by a registered holder who has not completed the box entitled
"Special Payment Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be by a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes,
with the signature thereon guaranteed by an Eligible Institution. If the Letter
of Transmittal or any Old Notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
Any financial institution that is a participant in the book-entry transfer
facility for the Old Notes, DTC, may make book-entry delivery of Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with DTC's procedures for such transfer,
including if applicable the procedures under the Automated Tender Offer Program
("ATOP"). Although delivery of Old Notes may be effected through book-entry
transfer into the Exchange Agent's account at DTC, an appropriate Letter of
Transmittal with any required signature guarantee and all other required
documents must in each case be, or be deemed to be, transmitted to and received
and confirmed by the Exchange Agent at its address set forth below on or prior
to the Expiration Date, or, if the guaranteed delivery procedures described
below are complied with, within the time period provided under such procedures.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject
any and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel of the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered and
as to which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date.
By tendering, each holder will also represent to the Company (i) that the
New Notes acquired pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the person receiving such New Notes, whether or
not such person is the holder, (ii) that neither the holder nor any such person
has an arrangement or understanding with any person to participate in the
distribution of such New Notes and (iii) that neither the holder nor any such
other person is an "affiliate," as defined in Rule 405 under the Securities
Act, of the Company, or that if it is an "affiliate," it will comply with the
registration and prospective delivery requirements of the Securities Act to the
extent applicable.
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GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or (iii) who cannot complete the procedures for book-entry
transfer of Old Notes to the Exchange Agent's account with DTC prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting
forth the name and address of the holder, the certificate number(s) of such Old
Notes (if possible) and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
business trading days after the Expiration Date, (i) the Letter of Transmittal
(or facsimile thereof) together with the certificate(s) representing the Old
Notes and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, or (ii) that
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC
will be effected and confirmation of such book-entry transfer will be delivered
to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by the
Letter of Transmittal, or confirmation of book-entry transfer of the Old Notes
into the Exchange Agent's account at DTC, are received by the Exchange Agent
within five business trading days after the Expiration Date. Upon request to
the Exchange Agent, a Notice of Guaranteed Delivery will be sent to holders who
wish to tender their Old Notes according to the guaranteed delivery procedures
set forth above.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, the following
terms and conditions, which are part of the Exchange Offer:
The holder tendering Old Notes exchanges, assigns and transfers the Old
Notes to the Company and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
assigned, transferred and exchanged. The holder represents and warrants to the
Company and the Exchange Agent that (i) its has full power and authority to
tender, exchange, assign and transfer the Old Notes and to acquire the New
Notes in exchange for the Old Notes, (ii) when the Old Notes are accepted for
exchange, the Company will acquire good and unencumbered title to the Old
Notes, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim, (iii) it will, upon request, execute and
deliver any additional documents deemed by the Company to be necessary or
desirable to complete the exchange, assignment and transfer of tendered Old
Notes and (iv) acceptance of any tendered Old Notes by the Company and the
issuance of New Notes in exchange therefor will constitute performance in full
by the Company of its obligations under the Registration Rights Agreement and
the Company will have no further obligations or liabilities thereunder to such
holders (except with respect to accrued and unpaid Liquidated Damages, if any).
All authority conferred by the holder will survive the death or incapacity of
the holder and every obligation of the holder will be binding upon the heirs,
legal representatives, successors, assigns, executors and administrators of the
holder.
Each holder will also certify that it (i) is not an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act or that, if it
is an "affiliate," it will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable, (ii) is acquiring
the New Notes in the ordinary course of its business and (iii) has no
arrangement with any person or intent to participate in, and is not
participating in, the distribution of the New Notes.
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WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram telex,
facsimile transmission or letter indicating notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having tendered the Old Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers and principal amount of such Old
Notes), (iii) be signed by the holder in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Old Notes register
the transfer of such Old Notes into the name of the person withdrawing the
tender and (iv) specify the name in which any such Old Notes are to be
registered, if different from that of the Depositor. If Old Notes have been
tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at DTC to be
credited with the withdrawn Old Notes or otherwise comply with DTC's
procedures. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for payment will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Old Notes may be retendered by following one of the procedures described above
under "Procedures for Tendering" at any time prior to the Expiration Date.
UNTENDERED OLD NOTES
Holders of Old Notes whose Old Notes are not tendered or are tendered but
not accepted in the Exchange Offer will continue to hold such Old Notes and
will be entitled to all the rights and preferences and subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Old Notes will continue to be subject to the
existing restrictions upon transfer thereof and the Company will have no
further obligations to such holders, to provide for the exchange of the Old
Notes held by them. To the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes could be adversely affected.
EXCHANGE AGENT
SunTrust Bank, Central Florida, National Association, the Trustee under
the Indenture, has been appointed as Exchange Agent of the Exchange Offer.
Questions and requests for assistance, requests for additional copies of this
Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail, by hand or by Overnight Courier:
SunTrust Bank, Central Florida, National Association
225 E. Robinson Street, Suite 250
Orlando, FL 32802-0044
Attention: Corporate Trust Division
26
<PAGE>
By Facsimile:
SunTrust Bank, Central Florida, National Association
Attention: Corporate Trust Division
(407) 237-5299
Confirm by Telephone:
(407) 237-4791
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A
VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers, regular employees
or agents of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith
and will pay the reasonable fees and expenses of holders in delivering their
Old Notes to the Exchange Agent.
The cash expenses of the Company to be incurred in connection with the
Company's performance and completion of the Exchange Offer will be paid by the
Company. Such expenses include fees and expenses of the Exchange Agent and
Trustee, accounting and legal fees and printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any further exchange rights under the
Registration Rights Agreement with respect to such nontendered Old Notes and,
accordingly, such Old Notes will continue to be subject to the restrictions on
transfer contained in the legend thereon. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act and applicable
state securities laws, except pursuant to an exemption from, or in a
transaction not subject to, the Securities Act and applicable state securities
laws. Pursuant to the Registration Rights Agreement, the Company and the
Subsidiary Guarantors have agreed to register for resale Old Notes under the
Shelf Registration Statement for certain holders of the Old Notes not eligible
under applicable securities laws to particpate in the Exchange Offer. See
"Description of the Notes--Registration Rights; Liquidated Damages."
Based on interpretations by the staff of the Commission with respect to
similar transactions, the Company believes that the New Notes issued pursuant
to the Exchange Offer in exchange for Old
27
<PAGE>
Notes may be offered for resale, resold and otherwise transferred by any holder
of such New Notes (other than any such holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Notes and neither the holder nor any other person is engaging in or intends to
engage in a distribution of the New Notes. If any holder has any arrangement or
understanding with respect to the distribution of the New Notes to be acquired
pursuant to the Exchange Offer, the holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes must acknowledge that it
will deliver a prospectus in connection with any resale of its New Notes. See
"Plan of Distribution." The New Notes may not be offered or sold unless they
have been registered or qualified for sale under applicable state securities
laws or an exemption from registration or qualification is available and is
complied with. The Company is required, under the Registration Rights
Agreement, to register the New Notes in any jurisdiction requested by the
holders, subject to certain limitations.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of the Old Notes that
were not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any exchange rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such Old
Notes will continue to be subject to the restrictions on transfer contained in
the legend thereon. However, in the event the Company fails to consummate the
Exchange Offer or a holder of Old Notes notifies the Company in accordance with
the Registration Rights Agreement that it will be unable to participate in the
Exchange Offer due to circumstances delineated in the Registration Rights
Agreement, then the holder of the Old Notes will have certain rights to have
such Old Notes registered under the Securities Act pursuant to the Registration
Rights Agreement and subject to conditions contained therein. See "Description
of the Notes--Registration Rights; Liquidated Damages."
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and to
the best of the Company's information and belief, each person participating in
the Exchange Offer is acquiring the New Notes in it ordinary course of business
and has no arrangement or understanding with any person to participate in the
distribution of the New Notes to be received in the Exchange Offer. In this
regard, the Company will make each person participating in the Exchange Offer
aware (through this Prospectus or otherwise) that if the Exchange Offer is
being registered for the purpose of secondary resale, any holder using the
Exchange Offer to participate in a distribution of New Notes to be acquired in
the registered Exchange Offer (i) may not rely on the staff position enunciated
in Morgan Stanley and Co. Incorporated (available June 5, 1991) and Exxon
Capital Holdings Corporation (available May 13, 1988) or similar letters and
(ii) must comply with registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes
as reflected in the Company's accounting records on the Exchange Date.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company. The expenses of the Exchange Offer will be expensed over the term of
the New Notes.
28
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Old Notes in the Offering were
approximately $158.9 million (after deducting discounts to the Initial
Purchasers and estimated Offering expenses). The Company will not receive any
proceeds from the Exchange Offer. The net proceeds from the sale of the Old
Notes in the Offering was used to repay outstanding indebtedness under the
Credit Facility and to pay the cash requirements in connection with the
Company's acquisition of Caribe. See "Description of Other Indebtedness."
CAPITALIZATION
The following table sets forth, at March 31, 1998, the capitalization of
the Company and the pro forma capitalization of the Company assuming the
completion of the Merger. This table should be read in conjunction with the
historical and pro forma financial statements of the Company and notes thereto
included elsewhere in this Prospectus:
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
ACTUAL PRO FORMA
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Notes payable, current maturities and other short-term debt ......... 29,294 41,261
Notes payable ....................................................... 10,041 14,407
Bonds payable, net .................................................. 164,014 164,014
------- -------
Total debt ........................................................ 203,349 219,682
------- -------
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
no shares issued and outstanding ................................. -- --
Common stock, $.001 par value, 30,000,000 shares authorized,
9,593,560 issued actual, and 12,437,639 issued pro forma ......... 10 12
Additional paid-in capital ......................................... 76,635 63,172
Retained earnings .................................................. 31,321 67,817
------- -------
Total stockholders' equity ........................................ 107,966 131,001
------- -------
Total capitalization ............................................. $311,315 $350,683
======== ========
</TABLE>
29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
OF THE COMPANY
The following table represents selected consolidated financial information
of the Company. The following selected historical financial data has been
derived from the Company's consolidated financial statements. The financial
statements of the Company as of December 31, 1996 and 1997 and for the three
years ended December 31, 1997 have been audited by Arthur Andersen LLP,
independent certified public accountants, as indicated in their report included
elsewhere herein. The following unaudited historical financial data as of March
31, 1998 and for the three months ended March 31, 1998 and 1997 has been
derived from the unaudited historical financial statements of the Company
included elsewhere herein which, in the opinion of management, include all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair and consistent presentation of the information set forth therein. The
selected historical consolidated financial data is not necessarily indicative
of either the future results of operations or the results of operations that
would have occurred if the events described had been consummated on the
indicated dates. The selected financial data set forth below should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Prospectus and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," which contains
a description of the factors which materially affect the comparability from
period to period of the information presented herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
---------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues .......................... $ 23,429 $ 28,191 $ 113,803 $161,944 $256,899
Cost of sales ............................... 11,162 12,017 71,314 110,359 180,713
-------- -------- --------- -------- --------
Gross profit ................................ 12,267 16,174 42,489 51,585 76,186
-------- -------- --------- -------- --------
Operating expenses
Operating .................................. 3,121 2,900 8,989 9,320 14,286
Selling .................................... 1,845 2,043 4,820 6,977 9,665
General and administrative ................. 4,199 5,167 8,641 10,681 16,772
Depreciation and amortization .............. 217 415 1,466 2,323 3,094
Gain on litigation settlement .............. -- -- -- -- (2,625)
-------- -------- --------- -------- --------
9,382 10,525 23,916 29,301 41,192
-------- -------- --------- -------- --------
Income from operations ...................... 2,885 5,649 18,573 22,284 34,994
Interest expense ............................ 6,041 4,458 8,287 5,350 7,432
-------- -------- --------- -------- --------
Income (loss) before taxes and
extraordinary item ......................... (3,156) 1,191 10,286 16,934 27,562
Income tax (benefit) expense ................ -- -- -- (426) 10,781
-------- -------- --------- -------- --------
Income (loss) before extraordinary item ..... (3,156) 1,191 10,286 17,360 16,781
Extraordinary item, net of income taxes ..... -- -- -- 1,862 --
-------- -------- --------- -------- --------
Net income (loss) ........................... $ (3,156) $ 1,191 $ 10,286 $ 15,498 $ 16,781
======== ======== ========= ======== ========
Historical diluted net income (loss) per
share(3)(4) ................................ $ 1.98 $ 1.77
======== ========
Pro forma diluted net income (loss) per
share(2)(3)(4) ............................. $ (0.33) $ 0.12 $ 1.00 $ 1.08
======== ======== ========= ========
OTHER DATA:
Ratio of earnings to fixed charges(5) ....... .05 x 1.3 x 2.2 x 3.8 x 4.4 x
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------
1997 1998
------------ ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
STATEMENT OF INCOME DATA:
Operating revenues .......................... $ 54,853 $ 82,456
Cost of sales ............................... 39,749 57,861
-------- --------
Gross profit ................................ 15,104 24,595
-------- --------
Operating expenses
Operating .................................. 3,406 3,305
Selling .................................... 1,941 2,734
General and administrative ................. 2,996 6,753
Depreciation and amortization .............. 674 1,111
Gain on litigation settlement .............. -- --
-------- --------
9,017 13,903
-------- --------
Income from operations ...................... 6,087 10,692
Interest expense ............................ 1,072 3,630
-------- --------
Income (loss) before taxes and
extraordinary item ......................... 5,015 7,062
Income tax (benefit) expense ................ 1,967 2,712
-------- --------
Income (loss) before extraordinary item ..... 3,048 4,350
Extraordinary item, net of income taxes ..... -- 599
-------- --------
Net income (loss) ........................... $ 3,048 $ 3,751
======== ========
Historical diluted net income (loss) per
share(3)(4) ................................ $ 0.32 $ 0.39
======== ========
Pro forma diluted net income (loss) per
share(2)(3)(4) .............................
OTHER DATA:
Ratio of earnings to fixed charges(5) ....... 2.8 x
</TABLE>
- ---------------
(FOOTNOTES ON NEXT PAGE)
30
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,(1) AS OF
----------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
--------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Accounts receivable .......... $ 4,166 $16,980 $23,776 $ 37,087 $ 66,545 $ 76,209
Inventories .................. 34,025 52,765 48,957 72,974 139,314 179,850
Working capital .............. 24,519 51,871 46,641 68,999 82,789 200,729
Total assets ................. 42,401 89,264 93,478 145,183 284,987 349,539
Total debt ................... 31,992 69,152 62,043 38,984 151,285 203,349
Stockholders' equity ......... 2,888 7,079 14,199 81,071 98,241 107,966
</TABLE>
- ---------------
(1) Dixie, which was acquired on August 9, 1996, Kratz, which was acquired on
October 17, 1997 and Caribe, which was acquired on March 6, 1998, were
accounted for under the purchase method of accounting and accordingly,
Caribe's, Dixie's and Kratz's results of operations have been included in
the Company's historical results of operations from the dates of their
acquisition.
AvEng, which was acquired on December 10, 1996, Aerocell, which was acquired
on September 30, 1997, and Apex, which was acquired on December 31, 1997,
were accounted for under the pooling of interest method of accounting. As
such AvEng is included in the Company's historical financial results for all
periods presented subsequent to 1995, and Aerocell and Apex are included for
all periods presented subsequent to 1996. Historical operating results and
financial position for periods presented prior to 1996 have not been
restated to give retroactive effect to the acquisition of AvEng and
historical operating results and financial positions for periods presented
prior to 1997 have not been restated to give retroactive effect to the
acquisition of Aerocell and Apex, due to the immateriality of the restated
amounts.
(2) Periods presented prior to 1997 include pro forma adjustments to record
income taxes, as the Company conducted its business as a partnership prior
to June 26, 1996.
(3) Weighted average common and common equivalent shares used in calculating
diluted earnings per share are 5,859,542 for 1993; 5,923,103 for 1994;
6,259,542 for 1995; 7,819,837 for 1996; 9,484,097 for 1997; 9,463,967 for
the three months ended March 31, 1997 and 9,592,820 for the three months
ended March 31, 1998.
(4) The Company's per share data, for periods presented prior to 1997, assumes
that the 4,425,000 common shares issued to the partners and the 575,000
shares of common stock, the net proceeds in respect of which were paid to
J/T Aviation Partners, were outstanding for periods prior to the closing
of the Company's initial public offering in July 1996.
(5) For the purpose of determining the ratio of earnings to fixed charges,
earnings consist of income before income taxes, extraordinary item and
fixed charges. Fixed charges consist of interest expense, amortization of
deferred debt issuance costs and the interest portion of the Company's
rent expense.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's predecessor, Aerospace International Services ("AIS"),
commenced operations in February 1992 through the acquisition of certain
aircraft spare parts owned by Eastern Air Lines, Inc. (the "Eastern
Inventory"), for an aggregate purchase price of $55.2 million. During the
period between February 1992 and December 1994, the primary business of AIS was
the marketing and sale of the Eastern Inventory. During December 1994, AIS
organized ASC Acquisition Partners L.P. (the "Partnership"), and completed the
acquisition of certain assets and assumed certain liabilities of the Aviation
Sales Company business unit ("ASC") from Aviall Services, Inc. for an aggregate
purchase price of $46.8 million.
On July 2, 1996, the Company closed its initial public offering ("IPO") of
3,250,000 shares of its common stock at an offering price of $19 per share. On
July 25, 1996, the Company sold an additional 487,500 shares of its common
stock at the same price upon the exercise of an underwriters' over-allotment
option.
Immediately prior to the IPO, all but one of the parties holding interests
in the Partnership contributed their interest 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
575,000 shares of common stock sold in the offering.
The Company received aggregate net proceeds in the IPO of $64.6 million.
Of this amount, $10.2 million was used to repay the indebtedness incurred to
one of the stockholders of the Company in connection with the formation of the
Company and the balance was used to repay senior and subordinated indebtedness.
As a result of the repayment of indebtedness with the proceeds of the IPO, the
Company wrote-off approximately $3.1 million in deferred financing costs
relating to that debt.
Subsequent to the completion of the IPO, on August 9, 1996, the Company
completed the acquisition of certain assets of the business of Dixie relating
primarily to the sale of new bearings for use in aircraft for the purchase
price of approximately $9.0 million. The acquisition was accounted for using
the purchase method of accounting. As a result of the Dixie acquisition, the
Company's operating revenues increased approximately $7.0 million from the date
of the acquisition through December 31, 1996.
On December 10, 1996 (effective November 30, 1996), the Company completed
the acquisition of AvEng for a purchase price of approximately $8.0 million,
payable by the issuance of an aggregate of 400,000 shares of the Company's
common stock. The acquisition was accounted for using the pooling of interests
method of accounting. As a result of the acquisition, the Company's operating
revenues include AvEng's total revenues for 1996, amounting to approximately
$9.3 million.
During 1997, the Company completed three acquisitions. The first
acquisition, which was completed in September 1997, was a merger accounted for
as a pooling of interests with Aerocell. Aerocell operates an FAA-licensed
overhaul and repair facility. The purchase price paid for Aerocell was
approximately $18.8 million, payable by issuance of an aggregate of 620,970
shares of the Company's common stock. As a result of the acquisition of
Aerocell, the Company's operating revenues for the year ended December 31, 1997
increased by approximately $19.3 million. The second acquisition, which was
completed in October 1997, was of the assets of Kratz, a company which
specializes in the manufacture of machined components primarily for jet engines
(and also produces certain automotive and faucet components). The Company paid
approximately $39.6 million, including acquisition costs and net of cash
acquired, to acquire the assets of Kratz and accounted for the
32
<PAGE>
acquisition under the purchase method of accounting. As a result of the
acquisition of Kratz, the Company's operating revenues increased by
approximately $6.5 million from the date of acquisition through December 31,
1997. The third acquisition, which was completed in December 1997 and was
accounted for in a transaction accounted for as a pooling of interests, was the
acquisition of Apex, a precision aerospace manufacturer specializing in the
machining of metal parts, including precision shafts, fuel shrouds, housings
and couplings for aerospace actuating systems, fuel controls and engines. The
purchase price paid to acquire Apex was $8.4 million, payable by the issuance
of an aggregate of 238,572 shares of the Company's common stock. As a result of
the acquisition of Apex, the Company's operating results for the year ended
December 31, 1997 increased by approximately $7.3 million.
To date during 1998, the Company has completed one acquisition. On March
6, 1998, the Company acquired Caribe and its wholly-owned subsidiary Aircraft.
The acquisition was a merger accounted for as a purchase. Caribe is an
FAA-licensed repair station. Aircraft manufactures plastic cabin interior
replacement parts and refurbishes aircraft interior components. The purchase
price paid to acquire Caribe and Aircraft was approximately $23.3 million
consisting of the following: (i) $5.0 million in cash; (ii) $5.0 million in the
form of promissory notes payable over two years; and (iii) $5.7 million in
shares of the Company's authorized but unissued common stock (182,143 shares),
and (iv) the repayment of approximately $7.6 million of Caribe's and Aircraft's
indebtedness due to a financial institution. The operations of Caribe and
Aircraft will be included in the Company's consolidated financial statements
from the date of acquisition. Caribe and Aircraft had consolidated fiscal 1997
revenues of approximately $27.0 million. The pre-acquisition operations of
Caribe are not material to the operations of the Company.
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 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.
RECENT DEVELOPMENT
On March 26, 1998, the Company entered into an aircraft purchase agreement
with Philippines Airlines, Inc. ("PAI") to purchase five-Airbus A-300 aircraft.
At the time the purchase agreement was entered into, the Company made a deposit
of $900,000 per aircraft to PAI. The Company intended to refurbish these
aircraft as cargo aircraft for future lease or sale. In April 1998, PAI
delivered one aircraft under the purchase agreement, at which time the Company
held back pursuant to the terms of the purchase agreement $1.0 million of the
purchase price on that aircraft due to certain record keeping issues regarding
that aircraft. PAI has advised the Company that due to its current financial
condition, it does not intend to perform its remaining obligations under the
purchase agreement. The Company is ready, willing and able to perform its
obligations under the Purchase Agreement and in furtherance thereof, on June 17,
1998, the Company brought a lawsuit in the Southern District of New York to
compel PAI to specifically perform its obligations under the purchase agreement.
While there can be no assurance, the Company does not believe that the ultimate
resolution of this matter will have a material adverse effect on the Company's
financial condition or results of operations.
RESULTS OF OPERATIONS
Operating revenues consist primarily of gross sales, net of allowances for
returns. 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.
33
<PAGE>
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.
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.
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998
The following table sets forth certain information for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------------------------------
1997 1998
------------------------ ------------------------
$ % $ %
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating Rvenues ......................................... $54,853 100.0% $82,456 100.0%
Costs of Sales ............................................ 39,749 72.5% 57,861 70.2%
------- ----- ------- -----
15,104 27.5% 24,595 29.8%
------- ----- ------- -----
Operating Expenses
Operating ................................................ 3,406 6.2% 3,305 4.0%
Selling .................................................. 1,941 3.5% 2,734 3.3%
General and administrative ............................... 2,996 5.5% 6,753 8.2%
Depreciation and amortization ............................ 674 1.2% 1,111 1.3%
------- ----- ------- -----
9,017 16.4% 13,903 16.9%
------- ----- ------- -----
Income from operations .................................... 6,087 11.1% 10,692 13.0%
Interest expense, net ..................................... 1,072 2.0% 3,630 4.4%
------- ----- ------- -----
Income before income taxes and extraordinary item ......... 5,015 9.2% 7,062 8.5%
Income tax expense ........................................ 1,967 3.6% 2,712 3.3%
------- ----- ------- -----
Income before extraordinary item .......................... 3,048 5.6% 4,350 5.3%
Extraordinary item, net of income taxes ................... -- --% 599 0.7%
------- ------ ------- -----
Net income ................................................ $ 3,048 5.6% $ 3,751 4.5%
======= ===== ======= =====
</TABLE>
First quarter operating revenues rose 50.3% to $82.5 million, compared
with $54.9 million for the same period last year. On March 6, 1998 the Company
acquired Caribe and its wholly-owned subsidiary, Aircraft. The post-acquisition
operations of Caribe and Aircraft have been included in the accompanying
condensed consolidated financial statements from the date of acquisition. As a
result of the Caribe and Aircraft acquisition, the Company's operating revenues
increased approximately $2.2 million from the date of the acquisition through
March 31, 1998. Kratz-Wilde, which was acquired during the fourth quarter of
1997 and accounted for using the purchase method of accounting, generated
approximately $10.5 million in revenue during the first quarter of 1998.
Operating revenues also increased due to 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.
34
<PAGE>
Gross profit increased 62.8% to $24.6 million for the quarter ended March
31, 1998, compared with $15.1 million for the same period last year. Gross
profit margin increased to 29.8% for the first quarter of 1998, from 27.5% for
the first quarter of 1997. The increase in gross profit margin compared to 1997
was due primarily to a slightly different mix of products and services
delivered in each of the respective periods and remains in line with the 29.8%
gross profit margin reported for the fourth quarter of 1997.
The Company's total operating expenses increased 54.2% to $13.9 million in
the first quarter of 1998, compared with $9.0 million in the first quarter of
1997, due to higher sales levels resulting in higher selling and operating
expenses. Total operating expenses as a percentage of operating revenues
increased to 16.9% in the first quarter of 1998 from 16.4% in the corresponding
period of 1997 due, in large measure, to the approximately $.53 million in
legal and professional fees incurred during the period in connection with the
Company's contemplated acquisition of Whitehall. Without these expenses, total
operating expenses as a percentage of operating revenues for the first quarter
of 1998 would have been 16.2%.
Interest expense, net increased by $2.6 million from period to period due
to net borrowings of $142.3 million during the last nine months of 1997 and the
first three months of 1998 to finance the acquisitions of Kratz-Wilde and
Caribe, inventory acquisitions and acquisitions of spare parts and engines held
for lease.
As a result of the above factors, income before income taxes and
extraordinary item increased $2.1 million, or 40.8%, from $5.0 million in the
first quarter of 1997 to $7.1 million in the first quarter of 1998.
In connection with the repayment of the term and acquisition portions of
the Credit Facility utilizing the proceeds of the Company's Senior Subordinated
Notes due 2008, the Company wrote off, during the first quarter of 1998, $1.0
million of deferred financing costs resulting in an extraordinary item, net of
income taxes, of $.6 million.
After accounting for income taxes and the extraordinary item, net income
for the three months ended March 31, 1998 was $3.8 million ($0.39 per diluted
share) compared to net income of $3.0 million ($0.32 per diluted share) for the
three months ended March 31, 1997. Weighted average common and common
equivalent shares outstanding (diluted) were 9.59 million during the three
months ended March 31, 1998, compared with 9.46 million for the three months
ended March 31, 1997.
35
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following table sets forth certain information relating to the
Company's operations for the periods indicated:
<TABLE>
<CAPTION>
1996 1997
------------------------- -------------------------
$ % $ %
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues ........................................ $161,944 100.0% $256,899 100.0%
Cost of sales ............................................. 110,359 68.1% 180,713 70.3%
-------- ----- -------- -----
51,585 31.9% 76,186 29.7%
-------- ----- -------- -----
Operating Expenses
Operating ................................................ 9,320 5.8% 14,286 5.6%
Selling .................................................. 6,977 4.3% 9,665 3.8%
General and administrative ............................... 10,681 6.6% 16,772 6.5%
Depreciation and amortization ............................ 2,323 1.4% 3,094 1.2%
Gain on litigation settlement ............................ -- -- (2,625) ( 1.0)%
-------- ----- -------- -----
29,301 18.1% 41,192 16.1%
-------- ----- -------- -----
Income from operations .................................... 22,284 13.8% 34,994 13.6%
Interest expense, net ..................................... 5,350 3.3% 7,432 2.9%
-------- ----- -------- -----
Income before income taxes and extraordinary item ......... 16,934 10.5% 27,562 10.7%
Income tax expense (benefit) .............................. (426) ( 0.2%) 10,781 4.2%
-------- ----- -------- -----
Income before extraordinary item .......................... 17,360 10.7% 16,781 6.5%
Extraordinary item, net of income taxes ................... 1,862 1.1% -- --
-------- ----- -------- -----
Net income ................................................ $ 15,498 9.6% $ 16,781 6.5%
======== ===== ======== =====
</TABLE>
The Company's operating revenues increased by approximately $95.0 million,
or 58.6%, from 1996 to 1997. Of this amount, approximately $33.1 million was
derived from the operations associated with Aerocell, Kratz and Apex, all of
which were acquired during 1997. Operating revenues also increased due to the
inclusion during 1997 of a full year of Dixie's sales (Dixie was acquired on
August 9, 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. During this period, domestic sales increased 90.2% from $94.6
million to $179.9 million and international sales increased 14.4%, from $67.3
million to $77.0 million.
The Company's gross profit increased 47.7%, from $51.6 million in 1996 to
$76.2 million in 1997. Gross margin declined from 31.9% in 1996 to 29.7% in
1997. The decline in gross profit margin was expected as the mix of inventories
sold during 1997 continued to reflect a declining contribution from bulk
inventories acquired prior to 1995 and an increase in revenues from the
Company's lower margin bearings distribution business acquired in August 1996.
The Company's total operating expenses for 1997, in absolute dollars,
increased $11.9 million, or 40.6%, compared to 1996. Approximately $4.4 million
of the increase is attributable to the operating expenses of Aerocell, Kratz
and Apex, with the balance attributable to higher sales levels resulting in
higher selling and operating expenses and increased reserves, offset in part by
a $2.6 million gain on a legal settlement with a former employee and
stockholder. Primarily due to economies of scale and improved operating
efficiencies, total operating expenses as a percentage of revenue decreased
from 18.1% in 1996 to 16.1% in 1997. See Note 7 to Notes to the Company's
Consolidated Financial Statements.
Interest expense, net increased $2.1 million, or 38.9% from 1996 to 1997
primarily due to the increase in borrowings necessary to fund the Company's
growth.
36
<PAGE>
As a result of the above factors, income before income taxes and
extraordinary item increased $10.6 million, or 62.8%, from 1996 to 1997.
Income taxes for 1996 were offset by one-time deferred tax benefits of
approximately $4.9 million associated with the organization of the Company. See
Notes 1 and 11 to Notes to the Company's Consolidated Financial Statements. No
such tax benefit was realized in 1997.
In connection with the IPO, the Company repaid certain debt. As a result,
during 1996 the Company wrote-off approximately $3.1 million in deferred
financing costs relating to that debt, which resulted in an extraordinary item,
net of taxes, of approximately $1.9 million. See Note 5 to Notes to the
Company's Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The following table sets forth certain information relating to the
Company's operations for the periods indicated:
<TABLE>
<CAPTION>
1995 1996
------------------------- -------------------------
$ % $ %
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating revenues ........................................ $113,803 100.0% $161,944 100.0%
Cost of sales ............................................. 71,314 62.7% 110,359 68.1%
-------- ----- -------- -----
Gross profit .............................................. 42,489 37.3% 51,585 31.9%
-------- ----- -------- -----
Operating Expenses
Operating ................................................ 8,989 7.9% 9,320 5.8%
Selling .................................................. 4,820 4.2% 6,977 4.3%
General and administrative ............................... 8,641 7.6% 10,681 6.6%
Depreciation and amortization ............................ 1,466 1.3% 2,323 1.4%
-------- ----- -------- -----
Total .................................................... 23,916 21.0% 29,301 18.1%
-------- ----- -------- -----
Income from operations .................................... 18,573 16.3% 22,284 13.8%
Interest expense, net ..................................... 8,287 7.3% 5,350 3.3%
-------- ----- -------- -----
Income before income taxes and extraordinary item ......... 10,286 9.0% 16,934 10.5%
Income tax expense (benefit) .............................. -- -- (426) ( 0.2%)
-------- ----- -------- -----
Income before extraordinary item .......................... 10,286 9.0% 17,360 10.7%
Extraordinary item, net of income taxes ................... -- -- 1,862 1.1%
-------- ----- -------- -----
Net income ................................................ $ 10,286 9.0% $ 15,498 9.6%
======== ===== ======== =====
</TABLE>
The Company's operating revenues increased by approximately $48.1 million,
or 42.3%, from 1995 to 1996. Of this amount, approximately $16.3 million was
derived from the operations associated with AvEng and Dixie, both of which were
acquired during 1996. The balance represents increased sales due to the
expansion of the Company's customer base and increased sales to existing
customers. During this period, domestic sales increased 39.1% from $68.0
million to $94.6 million and international sales increased 47.3%, from $45.7
million to $67.3 million.
The Company's gross profit increased 21.4%, from $42.5 million in 1995 to
$51.6 million in 1996. The increase in gross profit is primarily attributable
to the increase in sales. Gross margins decreased from 37.3% in 1995 to 31.9%
in 1996 due to a change in the mix of inventories sold. Due to the acquisition
of ASC in December 1994, the Company's gross profit was benefited by the impact
of this bulk inventory acquisition throughout 1995. No such acquisition of
inventory favorably benefited gross margins during 1996.
The Company's total operating expenses for 1996, in absolute dollars,
increased $5.4 million, or 22.5%, compared to 1995 (of which approximately $1.5
million of the increase is attributable to the
37
<PAGE>
operating expenses of AvEng and Dixie during 1996 and the balance is
attributable to the Company's existing operations). Primarily due to economies
of scale and improved operating efficiencies, total operating expenses as a
percentage of revenue decreased from 21.0% in 1995 to 18.1% in 1996.
Interest expense, net decreased $2.9 million, or 35.4% from 1995 to 1996
as a result of the repayment and restructuring of the Company's credit facility
during 1996.
As a result of the above factors, income from operations (before income
tax (benefit) expense and extraordinary item) increased $6.6 million, or 64.6%,
from 1995 to 1996.
Income taxes for 1996 were offset by one-time deferred tax benefits of
approximately $4.9 million associated with the organization of the Company. See
Notes 1 and 11 to Notes to the Company's Consolidated Financial Statements.
Based on all of the above factors, the Company's 1996 net income was $17.4
million, or $2.22 per share, an increase of $7.1 million, or 68.8 %, compared
to 1995 income before extraordinary item of $10.3 million.
In connection with the IPO, the Company repaid certain debt. As a result,
during 1996 the Company wrote-off approximately $3.1 million in deferred
financing costs relating to that debt, which resulted in an extraordinary item,
net of taxes, of approximately $1.9 million. See Note 5 to the Company's
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations during the three months ended March 31, 1997 and
1998 was $9.6 million and $31.9 million, respectively. Cash used in investing
activities during the three month periods ended March 31, 1997 and 1998 was
$2.1 million and $10.6 million, respectively. During the three month periods
ended March 31, 1997 and 1998, the Company financed its operating and investing
activities primarily with its cash flow from financing activities, amounting to
$11.4 million and $42.6 million, respectively.
Cash provided by operations was $14.0 million for the year ended December
31, 1995. Cash used in operations was $8.0 million and $48.8 million for the
years ended December 31, 1996 and 1997, respectively. Cash used in investing
activities for the years ended December 31, 1995, 1996 and 1997 was $4.7
million, $17.8 million and $54.8 million, respectively. Cash provided by
financing activities was $26.8 million and $107.4 million for the years ended
December 31, 1996 and 1997, respectively. Cash used in financing activities for
the year ended December 31, 1995 was $10.5 million.
During the three month period ended March 31, 1998 and the years ended
December 31, 1995, 1996 and 1997, the Company incurred capital expenditures of
approximately $4.1 million, $0.9 million, $1.1 million and $4.4 million,
respectively, primarily to make enhancements to the Company's management
information systems, telecommunications systems and other capital equipment and
improvements. The Company's current management information system is not Year
2000 compliant. The Company is currently implementing a new management
information system, which among other things, management believes will allow
the Company to continue to maintain its competitive advantage resulting from
the availability of information regarding its market and will mitigate the Year
2000 issues currently inherent in the Company's existing system. The cost of
the new MIS system is expected to be approximately $8.0 million, which will be
incurred over approximately a two year period. Financing for the new system
will be provided from operations and from borrowings under the Credit Facility.
Additionally, the Company is actively considering the prospect of
consolidating several of its facilities into a single warehouse facility. The
anticipated cost of such facility is expected to be approximately $30 million,
which will be funded either through an operating lease with the developer of
the facility or from future borrowings obtained for the purpose of developing
the facility. No definitive arrangements to finance the development of the new
facility have been entered into to date.
38
<PAGE>
As part of its growth strategy, the Company intends to continue to pursue
acquisitions of bulk inventories of aircraft spare parts and complementary
businesses. Financing for such activities would be provided from operations and
from borrowings under the Credit Facility. The Company may also in the future
issue additional debt and/or equity securities in connection with financing one
or more of its activities, although the Company does not have any current plans
to issue additional securities. The Company believes that cash flow from
operations and borrowing availability under the Credit Facility will be
sufficient to satisfy the Company's anticipated working capital requirements,
including working capital required to operate the Company and Whitehall on a
combined basis once the Merger is completed, over the next twelve months.
As a result of the proposed Merger with Whitehall, the Company will incur
certain charges relating primarily to the costs associated with the completion
of the Merger. These costs will be taken as incurred in quarters prior to the
completion of the Merger, with the balance incurred in the fiscal quarter in
which the Merger closes. The Company also believes that the combination of the
Company and Whitehall will allow the combined entity to receive the benefit of
certain synergies. These synergies in the first year of combined operations are
expected to relate primarily to sales of aircraft spare parts and to the supply
by the Company's other repair stations of repaired and overhauled seats, flight
surfaces and components to Whitehall for use in providing repair services to
its customers, and to savings available to the Company from the elimination of
Whitehall's corporate staff, which synergies are expected to allow the Company
to reduce the combined company's costs by approximately $4.1 million during
1999.
The Company and each of the Subsidiary Guarantors are co-registrants of
the Company's Registration Statement on Form S-4 (file no. 333-48669), of which
this Prospectus forms a part. As a result, the Company and each of the
Subsidiary Guarantors will become subject to the informational requirements of
the Securities Exchange Act of 1934 (the "Exchange Act") upon the effectiveness
of the Registration Statement. The Company is a holding company with no assets
or operations other than its investments in its subsidiaries. The Notes are
unconditionally guaranteed, on a senior subordinated basis, by substantially
all of the Company's existing subsidiaries. Each subsidiary that will be
organized in the future by the Company, unless such subsidiary is designated as
an unrestricted subsidiary, will jointly, severally, fully and unconditionally
guarantee the Notes on a senior subordinated basis. Subsidiary Guarantees are
joint and several, full and unconditional and general unsecured obligations of
the Subsidiary Guarantors. The Subsidiary Guarantors are all wholly-owned
subsidiaries of the Company. At present, the Subsidiary Guarantors comprise all
of the direct and indirect subsidiaries of the Company, other than one
inconsequential subsidiary. Subsidiary Guarantees are subordinated in right of
payment to all existing and future Senior Debt of Subsidiary Guarantors,
including the Credit Facility, and are also effectively subordinated to all
secured obligations of Subsidiary Guarantors to the extent of the assets
securing such obligations, including the Credit Facility. Furthermore, the
Indenture permits Subsidiary Guarantors to incur additional indebtedness,
including Senior Debt, subject to certain limitations. The Company has not
presented separate financial statements and other disclosures concerning each
of the Subsidiary Guarantors because management has determined that such
information is not material to investors.
So long as the factors set forth in the paragraph immediately above remain
true and correct, under applicable SEC rules and regulations, the Company
believes that the Subsidiary Guarantors will not need to individually comply
with the reporting requirements of the Exchange Act, nor will the Company have
to include separate financial statements and other disclosures concerning each
of the Subsidiary Guarantors in its Exchange Act reports. In that regard, the
Company has requested a no-action letter from the SEC concurring with the
Company's position on this issue. While there can be no assurance, the Company
expects to receive a favorable response to its no-action letter request.
39
<PAGE>
BUSINESS
GENERAL
The Company is a leading provider of fully integrated aviation inventory
services and a recognized worldwide leader in the redistribution of aircraft
spare parts. The Company sells aircraft spare parts and provides inventory and
repair services 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. 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 and engines. The Company also manufactures certain aircraft parts for
sale to original equipment manufacturers ("OEMs"), including precision engine
parts, and provides certain aircraft parts repair services at its FAA-licensed
repair facilities.
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
market for spare parts and the redistribution market in particular are growing
due to (i) the increasing size and the age of the worldwide airline fleet (the
worldwide fleet of commercial airplanes is expected to double from 1996 to
2016), and (ii) increased outsourcing by airlines of inventory management
functions in response to cost control pressures. These pressures have also
contributed to a reduction in the number of approved vendors utilized by the
airlines and maintenance and repair facilities, which in turn has led to
consolidation in the redistribution market. The aircraft spare parts
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
its diverse product and service offerings, superior management information
systems, financial strength and access to capital markets allow it to
capitalize on the current industry environment.
The Company's strategy is to increase revenues and operating income
through internal growth combined with new product and service offerings. Growth
is expected to be achieved through continued customer penetration in existing
markets, expansion into new product areas, continued investment in the size and
breadth of its inventory and by continuing to offer customers a broad array of
inventory management services. These services allow 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 further intends to increase the types of
aircraft parts which it manufactures for its OEM customers and the repair
services which it offers to its customers. The Company will seek to develop new
products and services internally, as well as through acquisitions of other
companies, assets or product lines that would expand the products and services
which the Company offers to its customers. The Company believes that a
diversified platform of services will better allow it to serve the needs of its
larger customers, and to benefit from the continuing consolidation of vendors
by the airlines.
Since completion of its initial public offering in July 1996, the Company
has acquired six businesses which leverage the Company's product and service
base beyond the redistribution of aircraft spare parts into new parts
distribution, manufacturing and maintenance, and repair and overhaul. During
1996, the Company acquired the aircraft bearings division of Dixie Bearings,
Inc., a leading provider of aircraft bearings, and related products to
commercial airlines, cargo carriers and overhaul service facilities, and AvEng
Trading Partners, Inc., a redistributor of aircraft engine parts. During 1997,
the Company acquired Aerocell Structures, Inc., an FAA-certified maintenance,
overhaul and repair facility, Kratz-Wilde Machine Company, a manufacturer of
specialty machined metal parts for jet engines, and Apex Manufacturing, Inc., a
precision manufacturer of specialty machined metal parts including shafts, fuel
shrouds, housings and couplings for aerospace actuating systems. In March 1998,
the Company acquired Caribe Aviation, Inc. and its subsidiary, Aircraft
Interior Design, Inc. Caribe is an FAA-licensed repair
40
<PAGE>
station specializing in the maintenance, repair and overhaul of hydraulic,
pneumatic, electrical and electromagnetic aircraft components and Aircraft
manufactures plastic cabin interior replacement parts under FAA-PMA approval
and refurbishes aircraft interior components. See "the Company's Management
Discussion--Overview" and"--Results of Operations."
On March 26, 1998, the Company entered into an agreement to merge with
Whitehall. See "Proposed Merger with Whitehall."
Whitehall is an independent provider of maintenance and modification for
commercial, military and freighter aircraft. Whitehall focuses primarily on two
categories of commercial customers: established traditional commercial carriers
that view outsourcing as a way to reduce operating expenses and increase their
competitiveness and new entrant, low-cost air carriers that rely on outsourcing
for scheduled heavy maintenance. Whitehall operates two FAA and JAA certified
repair stations that specialize in heavy maintenance and modification of Boeing
707, 727, 737, McDonnell Douglas DC-8, DC-9, DC-10 and Lockheed L-100, L-188
and C-130 aircraft. Whitehall offers its customers a comprehensive range of
aviation services, including scheduled "A," "B," "C" and "D" level inspections,
block overhauls and repairs, corrosion prevention and control programs and
exterior stripping and painting. Modification services provided by Whitehall
include interior reconfiguration, cargo conversions and avionics installations.
Through a joint venture, Whitehall also designs, and markets hushkits designed
to reduce the noise created by Boeing 737-100 and 737-200 series aircraft to
levels which comply with FAA-mandated Stage 3 noise reduction standards.
INDUSTRY OVERVIEW
GROWTH IN MARKET FOR AIRCRAFT SPARE PARTS. According to Boeing's 1997
Current Market Outlook (the "Boeing Report"), the worldwide fleet of commercial
airplanes is expected to double from approximately 11,500 airplanes at the end
of 1996 to approximately 23,000 airplanes by 2016. Further, the Boeing Report
projects that cargo jet aircraft will increase from approximately 1,230
airplanes in 1996 to approximately 2,350 airplanes by 2016. The majority 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 causing many airlines and repair and
maintenance facilities which had historically purchased their parts 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.
Since the Company's customers consist of airlines, maintenance and repair
facilities that service airlines and other aircraft spare parts redistributors,
as well as original equipment manufacturers, 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 may affect the airline industry will not have
an adverse impact on the Company's business, financial condition or results of
operations.
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
airlines can reduce their operating costs. Outsourcing inventory
41
<PAGE>
management functions allows these functions to be handled less expensively and
more efficiently by a redistributor like the Company that can achieve economies
of scale unavailable to individual airlines. Several small and start-up
airlines and 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.
Other airlines, including several large airlines, have begun to outsource
portions of their purchasing services, repair management and warehouse
management.
CONSOLIDATION IN THE AIRCRAFT PARTS MARKET. 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. 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. Furthermore, 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.
CONSIGNMENT AND BULK PURCHASES. Certain of the Company's customers adjust
inventory levels on a periodic basis by disposing of excess aircraft 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 a significant parts
inventory at minimal capital cost to the Company. Consignment agreements are
generally entered into on a long-term basis for a large group of parts or
entire airplanes which are disassembled for sale of the individual parts. In
the Boeing Report it is noted that approximately 4,070 aircraft will be removed
from active commercial service between 1997 and 2016. Many of these aircraft
will be disassembled in order to sell their parts.
COMPETITIVE STRENGTHS
The Company believes that its competitive position in the markets which it
serves is based on its diverse product offerings, sophisticated inventory
management information systems and a consistent record of meeting rigorous
customer requirements.
DIVERSIFIED PLATFORM OF PRODUCTS AND SERVICES. The Company believes that
the breadth of inventory management services which it provides to its
customers, including a wide range of repair and overhaul services and
specialized manufacturing, allows the Company to be a vendor of choice to its
customers in a highly fragmented industry. The Company has over 1,000
customers, including commercial passenger airlines, air cargo carriers and
maintenance and repair facilities.
LARGE INVENTORY BASE. The Company believes that it has one of the largest
inventories of aircraft spare parts in the world, with over 552,000 line items
currently in stock. The Company's inventory supports the worldwide commercial
fleet of over 11,500 aircraft including Airbus A300, A31x, A32x and A340 series
aircraft, Boeing 707, 727, 737, 747, 757, 767 and 777 series aircraft,
McDonnell Douglas DC-8, DC-9, DC-10, MD-8x and MD-11 series aircraft, and the
Lockheed L-1011 aircraft. In addition, the Company has parts available for the
following engine types: General Electric CF6, SNECMA CFM-56, Pratt and Whitney
JT-3, JT-8, JT-9 and PW-2000 and the Rolls Royce RB-211.
PROPRIETARY MANAGEMENT INFORMATION SYSTEMS. The Company's proprietary
management information systems comprise an integral component of the Company's
position as a leader in its industry. As industry, regulatory and public
awareness have focused on safety, documentation and traceability of aircraft
parts have become key factors in competitiveness. The Company's MIS systems
42
<PAGE>
collect and report data regarding inventory turnover, documentation, pricing,
market availability and customer demographic information on more than 3.7
million line items. Access to such information enables the Company to be aware
of and to capitalize on the changing trends in the marketplace. The Company
utilizes electronic data scanning and document image storage technology for
rapid and accurate retrieval of inventory traceability documents. The Company
is continuing to invest in technology in order to allow the Company to maintain
its strength in this area. In that regard, the Company is currently in the
early stages of purchasing and implementing a new management information system
that management believes will allow the Company to mitigate the Year 2000
issues currently inherent in the Company's existing system. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
WORLDWIDE MARKETING PRESENCE. The Company conducts business in more than
100 countries and utilizes sales representatives in 23 countries. This
international presence allows the Company to meet the demands of its global
customer base and provides for a timely supply of parts and services. During
the years ended December 31, 1996 and 1997, 41.6% and 28.9%, respectively, of
the Company's revenues were derived from sales to international customers and
58.4% and 71.1%, respectively, were derived from sales to domestic customers.
SIGNIFICANT FINANCIAL AND OTHER RESOURCES. As a result of the Company's
strong capital position, the Company is able to take advantage of opportunities
which arise in the market from time to time to expand its products and
services, make selected acquisitions and evaluate bulk purchases of inventory.
The Company's market presence, industry experience, sophisticated MIS systems
and capital strength enable the Company to quickly analyze and complete
purchases, giving the Company a competitive advantage in the market.
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: (a)
rotable; (b) repairable; and (c) 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. The Company's inventory consists in large part of rotable and
repairable parts which are regularly required by its customers. The Company
also maintains an inventory of expendable parts.
Aircraft spare parts conditions are classified within the industry as (a)
factory new, (b) new surplus, (c) overhauled, (d) serviceable and (e) 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 part designation indicates that the part is eligible for
immediate use on an aircraft. A part in an as removed condition requires
functional testing, repair or overhaul by a licensed facility prior to being
returned to service in an aircraft.
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
43
<PAGE>
must meet certain standards of condition established by the 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. 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.
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, manufactures aircraft parts for its OEM customers and repairs
aircraft parts at its FAA-licensed repair facilities. The Company believes that
providing its customers with a diversified platform of services will allow the
Company to significantly expand its 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 is provided by the Company's proprietary
database.
The Company currently has over 552,000 line items in stock with market
availability, pricing and historical data available on more than 3.7 million
line items. The Company sells new, overhauled and serviceable replacement parts
from its inventory. Additionally, the Company will purchase parts on behalf of
its customers against specific orders. The Company also 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.
The Company's inventory consists principally of new, overhauled,
serviceable and repairable aircraft spare parts that are purchased from many
sources. Parts that are to be installed in an aircraft must meet certain
standards established by the 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 be traceable to sources deemed acceptable by such
agencies. See "Government Regulation and Traceability" below. 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.
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<PAGE>
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 spare parts repair requirements. The Company believes
that it is well positioned to offer these repair management services, since a
significant portion of the 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 part costs, 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 engines and 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 December 31, 1996 and 1997 and at March 31, 1998, the Company had $18.0
million, $22.8 million and $16.8 million, respectively, of inventories on
long-term lease.
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 maintaining inventory at the Company's
warehouse facility. The Company also will manage a customer's inventory at the
customer's own facility.
MANUFACTURING AND REPAIR SERVICES
The Boeing Report projects that global air travel will increase by close
to 75% in the aggregate by the year 2006. In addition, average passenger fleet
miles flown are also expected to increase significantly over the next few
years, requiring current operators to increase the size of their fleets.
Further, many new airlines are expected to commence operations in the United
States and abroad. These increases in passenger travel and the number of
aircraft in service increases the demand for manufacture and repair services.
Consequently the Company foresees the manufacture and repair of aircraft parts
as a profit center with significant growth opportunity, and as an integral
component of the Company's expansion strategy.
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During the last half of 1997 and the first quarter of 1998, the Company
completed four acquisitions furthering its objective of expanding the services
which it offers to its customers to include manufacturing of aircraft parts for
sale to OEMs and repair services. Descriptions of the companies acquired are as
follows:
Aerocell specializes in the maintenance, repair and overhaul of airframe
components, including bonded and structural assemblies for commercial
aircraft. Aerocell is an FAA-licensed repair facility with limited
airframe ratings for flight controls, doors, fairing panels, nacelle
systems and exhaust systems.
Kratz specializes in the manufacture of machined components primarily for
jet engines, and also produces automotive and faucet components. Kratz is
a leading supplier of CFM56 and CF6 engine components to General
Electric's Aircraft Engine business, with three manufacturing facilities
in the greater Cincinnati area. The acquisition of Kratz provides the
Company with precision manufacturing capabilities which the Company
believes will allow it to expand its relationship with its current and
future OEM customers.
Apex, located in Phoenix, Arizona, manufactures precision aerospace parts
and specializes in the machining of metal parts, including precision
shafts, fuel shrouds, housings and couplings for aerospace actuating
systems, fuel controls and engines.
Caribe, located in Miami, Florida, is an FAA-licensed repair station
specializing in the maintenance, repair and overhaul of hydraulic,
pneumatic, electrical and electromagnetic aircraft components, as well as
avionics and instruments on Airbus and Boeing aircraft. Caribe's
wholly-owned subsidiary, Aircraft, manufactures plastic cabin interior
replacement parts under FAA-PMA approval and refurbishes aircraft
interior components, including passenger and crew seats.
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 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. The Company's top ten customers
accounted for approximately 23%, 26% and 29% of operating revenues,
respectively, for the three years ended December 31, 1995, 1996 and 1997. No
single customer accounted for more than 10% of operating revenues for the year
ended December 31, 1997.
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 system collects and reports 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
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value of more than 3.7 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.
The Company believes that to maintain its competitive advantages,
accommodate growth and keep pace with the rapid changes in technology, it will
be prudent to continue to acquire state of the art management information
systems to ensure the capability to meet the Company's needs for the
foreseeable future. In that regard, the Company is currently in the early
stages of purchasing and implementing a new management information system that
management believes will allow the Company to mitigate the Year 2000 issues
currently inherent in the Company's existing system. See Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
COMPETITION
There are numerous suppliers of aircraft 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.
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. There can be no assurance that competitive pressures will not
materially and adversely affect the Company's business, financial condition or
results of operations.
GOVERNMENT REGULATION AND TRACEABILITY
The aviation industry is highly regulated. While the Company's spare parts
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. Additionally, the Company must
be certified by the FAA and, in some cases, by OEMs in order to manufacture or
repair aircraft components. Although the Company believes that its newly
acquired manufacturing and repair operations are in material compliance with
applicable regulations, there can be no assurance of this fact. Further, 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 a material adverse effect on the Company's business, financial
condition or results of operations.
The FAA regulates the manufacture, repair and operation of all aircraft
and aircraft parts operated in the United States. Its regulations are designed
to ensure that all aircraft and aircraft equipment are continuously maintained
in proper condition to ensure safe operation of the aircraft. Similar rules
apply 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 aircraft 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, the Company utilizes FAA
and/or Joint Aviation Authority certified repair stations (including the
Company's FAA-licensed repair facilities) to repair and certify parts to ensure
worldwide marketability.
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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.
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,
(a) a maintenance release from a certified airline or repair facility signed
and dated by a licensed airframe and/or power plant mechanic who repaired the
aircraft spare part and an inspector certifying that the proper methods,
materials and workmanship were used, (b) a "teardown" report detailing the
discrepancies and corrective actions taken during the last shop repair, and (c)
an invoice or purchase order from an approved source.
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,
manufactured or repaired by it. While the Company maintains what it believes to
be adequate liability insurance to protect it from such claims based on its
review of the insurance coverages maintained by similar companies in its
industry, 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.
The Company will have exposure to product liability claims in the event
that the use of its leased aircraft, aircraft engines or aircraft spare parts
inventory is alleged to have resulted in bodily injury or property damage.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 850 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 is actively considering the
possibility of consolidating its inventory into a single warehouse facility.
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The following table identifies, as of the date of this Prospectus, the
principal properties utilized by the Company. See Notes 6 and 8 to Notes to the
Company's Consolidated Financial Statements.
<TABLE>
<CAPTION>
FACILITY DESCRIPTION APPROXIMATE LOCATIONS SQUARE FOOTAGE OWNED OR LEASED
- --------------------------------------------------- ----------------------- ---------------- ----------------
<S> <C> <C> <C>
Corporate Headquarters and Miami, FL 166,000 Leased
Central Warehouse ...............................
Office and Repair Facility ........................ Hot Springs, AK 140,000 Owned
Aircraft Disassembly and Storage .................. Ardmore, OK 130,000 Leased
Warehouse ......................................... Pearland, TX 100,000 Owned
Office and Repair Facility ........................ Miami, FL 55,000 Leased
Office and Manufacturing Facility ................. Westchester, OH 47,400 Owned
Warehouse ......................................... Miami, FL 40,000 Leased
Office and Manufacturing Facility ................. Covington, KY 38,200 Owned
Manufacturing Facility ............................ Fairfield, OH 30,500 Owned
Office, Repair and Manufacturing Facility ......... Miami, FL 30,000 Leased
Office and Manufacturing Facility ................. Phoenix, AZ 25,000 Leased
Warehouse ......................................... Miami, FL 11,200 Leased
Warehouse ......................................... Miami, FL 10,000 Leased
Regional Purchasing Office ........................ Van Nuys, CA 6,300 Leased
Office and Warehouse .............................. College Park, GA 6,000 Leased
</TABLE>
LEGAL PROCEEDINGS
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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<PAGE>
PROPOSED MERGER WITH WHITEHALL
On March 26, 1998, the Company entered into the Merger Agreement with
Whitehall. Pursuant to the Merger Agreement, upon consummation of the Merger, a
wholly-owned subsidiary of the Company, WHC Acquisition Corp. will merge with
and into Whitehall, with Whitehall being the surviving corporation. As a result
of the Merger, Whitehall will become a wholly-owned subsidiary of the Company.
The Merger will become effective upon the filing with the Delaware Secretary of
State of a Certificate of Merger (the"Certificate of Merger") in accordance
with the applicable provisions of the DGCL, or at such later time as may be
agreed to by the Company and Whitehall and specified in the Certificate of
Merger. The closing of the Merger is expected to occur during the third quarter
of 1998.
Pursuant to the Merger Agreement, at the effective time of the Merger (the
"Effective Time"), each share of Whitehall Common Stock outstanding immediately
prior to the Effective Time will be converted into the right to receive, and
will be exchangeable for 0.5143 shares of the Company's Common Stock. Holders
of Whitehall common stock otherwise entitled to a fractional shares of the
Company's Common Stock will receive an amount in cash equal to the same
fraction of the current market value of a whole share of the Company's Common
Stock. Based on 5,530,000 shares of Whitehall common stock outstanding at April
27, 1998 the Company will issue 2,844,079 shares of its authorized but unissued
stock in the Merger which will represent 22.9% of the total shares of AVS
Common Stock to be outstanding immediately following the Merger.
At the Effective Time, outstanding options to purchase shares of Whitehall
common stock (collectively, "Whitehall Options") will be converted into the
right to purchase that number of shares of the Company's Common Stock as the
holder of such options would have been entitled to receive had they exercised
such options prior to the consummation of the Merger and participated in the
Merger. As of April 29, 1998, there were outstanding options to purchase
500,000 shares of Whitehall common stock, which will be exercisable to purchase
257,150 shares of the Company's common stock.
Consummation of the Merger is subject to the satisfaction of a number of
conditions, including the approval of the Merger by the shareholders of
Whitehall and the Company. In connection with the execution of the Merger
Agreement, two holders of Whitehall common stock owning approximately 34% of
Whitehall's outstanding common stock entered into a voting agreement to vote
their shares in favor of the Merger. On the same date, shareholders of the
Company holding approximately 30% of the Company's common stock entered into a
voting agreement to vote their shares in favor of the Merger.
The Company believes that the Merger will create a combined entity that
should help the Company achieve the strategic goals which it has established to
benefit from the anticipated trends in the maintenance, repair and overhaul of
aircraft and aircraft parts business and should allow the combined entity to
have significant growth opportunities after consummation of the Merger. These
trends include the expected increase in the worldwide fleet of aircraft, the
anticipated increase in the demand for aircraft heavy maintenance, which is
expected to grow by 5% per year through 2005, the belief that aircraft turnover
rates are increasingly driving the need for aircraft modification and
refurbishment and the expectation that outsourcing of maintenance activity by
airlines will continue to increase.
During 1996 and 1997 and during the first quarter of 1998, Whitehall has
primarily met its funding requirements from borrowings under its credit
facility. The credit facility expires on June 30, 1998. Management of Whitehall
has advised the Company that it anticipates that its credit facility will be
renewed or comparable financing can be obtained at June 30, 1998.
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MANAGEMENT
BOARD OF DIRECTORS
The Articles of Incorporation and By-laws of the Company presently provide
for a Board of Directors divided into three classes, as nearly equal in size as
possible, with staggered terms of three years. At the date of this report the
current members of the the Company Board and the expiration of their terms as
Directors were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS TERM EXPIRES
- ------------------------------------ ----- --------------------------------------- -------------
<S> <C> <C> <C>
Dale S. Baker(1)(4) ................ 40 Chairman of the Board, President 1999
and Chief Executive Officer
Harold M. Woody(4) ................. 52 Director and Executive Vice President 1999
of the Company and President of
Aviation Sales Leasing Company
Robert Alpert(1)(2)(3)(4) .......... 48 Director 1998
Sam Humphreys(2)(3) ................ 37 Director 2000
Kazutami Okui(2) ................... 56 Director 2000
Philip B. Schwartz ................. 44 Director 1999
</TABLE>
Tim L. Watkins, who had served as a director of the Company since its
inception, resigned from his position on April 23, 1998.
- ----------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
(4) Member of the Nominating Committee
BUSINESS EXPERIENCE
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 of GE Capital's Corporate Investment Finance Group.
HAROLD M. WOODY has been the Executive Vice President of the Company since
February 1992 and the President of Aviation Sales Leasing Company, a subsidiary
of the Company, since early 1997. Prior thereto, from 1989 to 1992, Mr. Woody
was Senior Vice President-Sales and Marketing for Japan Fleet Service
(Singapore) Pte. Ltd. and from 1987 to 1989, Mr. Woody was Executive Vice
President of the Aviation Sales Company business unit of Aviall Services, Inc.
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.
SAM HUMPHREYS is a Managing Director of Main Street Merchant Partners, a
merchant banking firm and has been a partner in that firm and its predecessor
since January 1996. Since March 1997, Mr. Humphreys has also been the Chairman
of PalEx, Inc., the largest manufacturer of pallets in the United States. From
April 1993 until March 1997, Mr. Humphreys held various executive positions
with U.S. Delivery Systems, Inc., a provider of same-day local delivery
services, and Envirofil, Inc., an environmental services company. Prior
thereto, he was a partner in the law firm of Andrews & Kurth.
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.
PHILIP B. SCHWARTZ is a shareholder in the Florida law firm of Akerman,
Senterfitt & Eidson, P.A., resident in the firm's Miami office. Prior to joining
Akerman, Senterfitt & Eidson, P.A. in September 1995, Mr. Schwartz was a partner
with Broad & Cassel, Miami, Florida, for five years. Mr. Schwartz is a member of
The Florida Bar and the American Bar Association and a former Chair of the
Business Law Section of The Florida Bar. Akerman, Senterfitt & Eidson, P.A.,
performs legal services for the Company.
APPOINTMENT OF ADDITIONAL DIRECTORS FOLLOWING THE MERGER
Under the Merger Agreement, the Company has agreed that immediately
following the Effective Time, it will appoint George F. Baker and Jeffrey N.
Greenblatt to serve as members of the Company's
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Board of Directors until the 2001 and 2000 Annual Meeting of Stockholders,
respectively. Messrs. Baker and Greenblatt are the principals of two entities
which collectively control approximately 34% of Whitehall's common stock
(approximately 8.3% of the Company's common stock after completion of the
Merger).
There is no family relationship between Dale S. Baker and George F. Baker.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board has the responsibility for establishing broad
corporate policies and for the overall performance of the Company. In January
1997, the Company's Board established several committees to assist it in
carrying out its duties. Standing committees of the the Company's Board are the
Executive Committee, the Audit Committee, the Compensation Committee and the
Nominating Committee.
The Executive Committee is authorized to act between meetings of the
Company's Board and to exercise in full the powers of the Company's Board,
subject to such limitations as are imposed by law.
The Audit Committee is responsible for maintaining communications between
the Company's Board and the Company's independent auditors, monitoring
performance of the independent auditors, reviewing audit scope and results,
reviewing the organization and performance of the Company's internal systems of
audit and financial controls, and recommending the retention or, where
appropriate, the replacement of independent auditors.
The Compensation Committee's responsibilities include reviewing and
approving compensation policies and practices for all elected corporate
executive officers and for fixing the total compensation of the Chief Executive
Officer. The Compensation Committee also administers the Company's 1996 Stock
Option Plan and the 1996 Director Stock Option Plan.
The Nominating Committee's responsibilities are to recommend to the the
Company's Board qualified candidates for election as directors and to consider
the performance of incumbent directors to determine whether they should be
recommended to the Company's Board for renomination for election.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives an annual
retainer fee at the rate of $12,000 per year for serving in such capacity. In
addition, each director who is not an employee of the Company receives $1,000
for each meeting of the Company's Board attended and $1,000 for each committee
meeting attended.
All directors receive on an annual basis mandatory stock option grants
under the 1996 Director Stock Option Plan for serving on the the Company's
Board. Five-year options to purchase 5,000 shares of Common Stock are
automatically granted to each director on July 1 of each year, at an option
exercise price equal to the closing price of the Company's Common Stock on such
date. All such options are immediately exercisable on the date of grant.
Existing directors, upon the organization of the Company, were granted
five-year options to purchase 10,000 shares of the Company's 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
Company's Board in the future will be granted options to purchase 10,000 shares
of the Company's Common Stock at the time they are appointed to the the
Company's Board, at an option exercise price equal to the closing price of the
Company's Common Stock on the date of their appointment to the the Company's
Board.
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EXECUTIVE OFFICERS
The following list reflects the executive officers of the Company, as of
this date, the capacity in which they serve the Company, and when they assumed
office:
<TABLE>
<CAPTION>
NAME AGE POSITIONS EXECUTIVE OFFICER SINCE
- ------------------------------ ----- ---------------------------------------------- ------------------------
<S> <C> <C> <C>
Dale S. Baker ................ 40 President and Chief Executive Officer February 1992
Harold M. Woody .............. 52 Executive Vice President of the Company February 1992
and President of Aviation Sales
Leasing Company
William H. Alderman .......... 35 Senior Vice President, Corporate Development September 1996
Michael A. Saso .............. 42 Senior Vice President--Purchasing December 1994
Joseph E. Civiletto .......... 38 Vice President and Chief Financial Officer February 1992
James D. Innella ............. 37 Vice President and Chief Operating Officer December 1994
</TABLE>
BUSINESS EXPERIENCE
DALE S. BAKER. See the biographical information contained in "Board of
Directors" above.
HAROLD M. WOODY. See the biographical information contained in "Board of
Directors" above.
WILLIAM H. ALDERMAN has been the Senior Vice President of Corporate
Development of the Company since September 1996. Prior thereto, from May 1995
to September 1996, Mr. Alderman was a Managing Director and principal of the
financial advisory firm of International Aviation Management Group. Prior
thereto, Mr. Alderman was Vice President of Structured Finance of GE Capital
Aviation Services.
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.
FAMILY RELATIONSHIPS
There are no family relationships between or among any of the directors
and executive officers of the Company.
53
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information about the compensation paid or
accrued during 1997, 1996 and 1995 to the Company's Chief Executive Officer and
to each of the four other most highly compensated executive officers of the
Company whose aggregate direct compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
OTHER ANNUAL ALL OTHER
NAME YEAR SALARY ($) BONUS ($) COMPENSATION COMPENSATION
- ----------------------------- ------ ------------ ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Dale S. Baker ............... 1997 258,670 212,627(1) (2) --
1996 248,416 124,208 (2) --
1995 237,500 118,750 (2) --
Harold M. Woody ............. 1997 231,442 116,385(1) --
1996 222,267 111,134 -- --
1995 212,500 106,250 -- --
Michael A. Saso ............. 1997 186,889 153,613(1) -- --
1996 135,975 67,988 -- --
1995 125,000 62,500 -- --
Joseph E. Civiletto ......... 1997 141,588 116,385(1) --
1996 135,975 67,988 -- --
1995 130,000 65,000 -- --
James D. Innella ............ 1997 153,735 126,370(1) --
1996 141,977 70,959 -- --
1995 125,000 62,500 -- --
</TABLE>
- ----------------
(1) On June 18, 1998, the Compensation Committee of the Company's Board of
Directors rescinded the December 31, 1997 issuance of 3,000 shares of the
Company's Common Stock to such person. The shares had a value of $112,875 on
the date of issuance. As a result of such rescission, such amount is not
reflected in the amount of such person's bonus for 1997. No consideration
was provided or will be provided in the future in connection with the
rescission.
(2) Mr. Baker also receives $5,000 per year for life insurance premiums. See
"Employment Agreements" below.
No long-term compensation awards were made to management during the three
years ended December 31, 1997.
OPTION GRANTS DURING LAST FISCAL YEAR
The following table sets forth information concerning options to purchase
shares of the Company Common Stock granted during the fiscal year ended
December 31, 1997 to those persons named in the Summary Compensation Table.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SHARES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION ----------------------
NAME GRANTED YEAR ($/SHARE) DATE 5%($) 10%($)
- ----------------------------- ------------ ----------- ----------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dale S. Baker ............... 10,000 4.8 $ 25.25 3/3/2002 69,761 154,154
5,000 2.4 $ 24.38 6/30/2002 33,679 74,421
Harold M. Woody ............. 10,000 4.8 $ 25.25 3/3/2002 69,761 154,154
5,000 2.4 $ 24.38 6/30/2002 33,679 74,421
Michael A. Saso ............. 10,000 4.8 $ 25.25 3/3/2002 69,761 154,154
Joseph E. Civiletto ......... 10,000 4.8 $ 25.25 3/3/2002 69,761 154,154
15,000 7.2 $ 37.62 12/30/2002 155,906 344,511
James D. Innella ............ 10,000 4.8 $ 25.25 3/3/2002 69,761 154,154
</TABLE>
- ----------------
(1) These amounts represent assumed rates of appreciation in the price of
common stock during the term of the options in accordance with rates
specified in applicable federal securities regulations. Actual gains, if
any, on stock option exercises will
54
<PAGE>
depend on the future price of the the Company Common Stock and overall stock
market conditions. There is no representation that the rates of appreciation
reflected in the table will be achieved.
AGGREGATED OPTIONS EXERCISED DURING LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth information concerning the exercise of
stock options to purchase the Company Common Stock during the 1997 fiscal year
and the value of unexercised stock options to purchase the Company Common Stock
at the end of the 1997 fiscal year for the persons named in the Summary
Compensation Table.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
NUMBER OF SHARES AT FISCAL YEAR END AT FISCAL YEAR END($)*
ACQUIRED ON --------------------------- --------------------------
NAME EXERCISE VALUE REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- ----------------- ------------------ --------------------------- --------------------------
<S> <C> <C> <C> <C>
Dale S. Baker ........... -- -- 21,667 / 3,333 $334,870 / $41,230
Harold M. Woody ......... -- -- 21,667 / 3,333 $334,870 / $41,230
Michael A. Saso ......... -- -- 6,667 / 3,333 $82,470 / $41,230
Joseph E. Civiletto ..... -- -- 21,667 / 13,333 $268,670 / $41,230
James D. Innella ........ -- -- 14,999 / 6,667 $195,950 / $82,470
</TABLE>
- ----------------
* Computed based upon the difference between the closing price of the Company
Common Stock at December 31, 1997 and the exercise price. No value has been
assigned to options which are not in-the-money.
EMPLOYMENT AGREEMENTS
Effective December 2, 1994, the Company entered into an employment
agreement with Mr. Baker. 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.
Mr. Woody has an employment agreement with the Company 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 which expired on December 31, 1997, and
runs 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
55
<PAGE>
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 250% of their base salary (under the
Company's 1997 EBITDA Incentive Compensation Plan, such percentages increase to
be between 20% and 250% of base salary for calendar years commencing January 1,
1997 or thereafter). Further, each of the employment agreements provides that
in the event of (a) a change in control of the Company including the vesting of
decision-making authority in one of the Company's current principal
stockholders; (b) 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 (c) 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 Internal Revenue Code of 1986, as amended (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.
STOCK OPTIONS
The Company's Board and stockholders have 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 the Company Common Stock then outstanding may be
granted to directors of the Company. Pursuant to the 1996 Stock Option Plan,
options to acquire a maximum of the greater of 650,000 shares 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
401,057 shares at exercise prices ranging from $19.00 per share to $37.62 per
share are currently outstanding under the Plans, 254,800 of which are
immediately exercisable.
The Plans are administered by the Compensation Committee of the Company
Board which was formed in January 1997. Prior to the formation of the
Compensation Committee, the the Company Board administered the Plans. The
Compensation Committee determines 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 to directors. See "Compensation
of Directors." 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 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
56
<PAGE>
share fair market value of the common stock on the date the particular options
are granted. Options granted under the Plans may have maximum terms of not more
than ten 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 the Company Board .
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 (a) 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 was a holder of common
stock on July 2, 1996, the date of the Company's initial public offering); (b)
a change occurs in the composition of a majority of the Company's Board during
a two-year period, provided that a change with respect to a member of the the
Company Board shall be deemed not to have occurred if the appointment of a
member of the Company's Board is approved by a vote of at least 75% of the
individuals who constitute the then existing the Company Board ; or (c) 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended December 31, 1996, the Company did not have a
Compensation Committee. In January 1997, the Board organized a Compensation
Committee. During the past fiscal year' none of the Company's directors or
executing officers served as a member of the compensation committee or similar
committee of another entity, one of whose executive officers served on the
Company's Board; served as a director of another entity, one of whose executive
officers served on the Company's Board or served as a member of the
compensation committee or similar committee of any other entity, one of whose
executive officers served as a director of the Company.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of the date of this Prospectus, certain
information regarding the the Company Common Stock, owned of record or
beneficially by (i) each person who owns beneficially more than 5% of the
outstanding the Company Common Stock; (ii) each of the the Company directors
and named executive officers; and (iii) all directors and executive officers of
the Company as a group. Unless otherwise specified, the address for each
beneficial owner is c/o Aviation Sales Company, 6905 N.W. 25th Street, Miami,
Florida.
<TABLE>
<CAPTION>
SHARES APPROXIMATE
BENEFICIALLY PERCENT OF
NAME OWNED (1) CLASS
- --------------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Robert Alpert(2)(3) ................................................. 2,362,000 24.6%
Japan Fleet Service (Singapore) Pte. Ltd(4) ......................... 750,500 7.8%
Tomen Corporation (5) ............................................... 630,500 6.6%
FMR Corp. (6) ....................................................... 608,000 6.3%
Dale S. Baker(3)(7)(8) .............................................. 339,667 3.4%
Harold M. Woody(3)(7)(8) ............................................ 221,667 2.3%
Kazutami Okui(3)(9) ................................................. 15,000 *
Sam Humphreys(3) .................................................... 15,000 *
Philip B. Schwartz(10) .............................................. 10,400 *
Michael A. Saso(8) .................................................. 81,667 *
James D. Innella(7)(11) ............................................. 89,999 *
Joseph E. Civiletto(7)(12) .......................................... 46,667 *
All directors and executive officers as a group (10 persons) ........ 3,195,374 32.8%
</TABLE>
- ----------------
* Less than one percent
(1) Unless otherwise indicated, each person named in the table has the sole
voting and investment power with respect to the shares beneficially owned.
(2) Shares are primarily owned of record by two corporate entities controlled
by Mr. Alpert.
(3) Includes five-year options to purchase 10,000 shares at an option
exercise price of $19.00 per share and five-year options to purchase 5,000
shares at an option exercise price of $24.38 per share.
(4) Shares are owned of record by a corporate entity controlled by Japan Fleet
Service (Singapore) Pte. Ltd. ("JFSS").
(5) Shares are owned of record by two corporate entities controlled by Tomen
Corporation.
(6) As of December 31, 1997, based upon a Schedule 13G filed with the
Securities and Exchange Commission on February 9, 1998. The address shown
in the Schedule 13G is 82 Devonshire Street, Boston, Massachusetts.
(7) Shares shown as beneficially owned, except for currently exercisable
options, are pledged to secure payment of the certain promissory notes
representing the purchase price paid for their interest in the Company.
(8) Includes five-year options to purchase 6,667 shares at an option exercise
price of $25.25 per share.
(9) Mr. Okui, an employee of Tomen Corporation, disclaims beneficial ownership
of the shares owned by Tomen Corporation.
(10) Includes five-year options to purchase 10,000 shares at an option exercise
price of $37.06.
(11) Includes (i) five-year options to purchase 1,666 shares at an option
exercise price of $19.00 per share, and (ii) five-year options to purchase
13,333 shares at an option exercise price of $25.25 per share.
(12) Includes (i) five-year options to purchase 10,000 shares at an option
exercise price of $19.00 per share, (ii) five-year options to purchase
6,667 shares at an option exercise price of $25.25 per share and (iii)
five-year options to purchase 5,000 shares at an option exercise price of
$37.62 per share. Excludes five-year option to purchase 10,000 shares at
an option exercise price of $37.62, which options have not vested.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED 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 (a) AVAC Corporation ("AVAC") and (b) J/T Aviation
Partners, a Delaware general partnership ("J/T"). The sole stockholder and
president of AVAC is Robert Alpert, a principal stockholder and director of the
Company. J/T was also a principal stockholder of the Company through December
1997.
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 $2.5 million loan to Aviation
Properties, which loan bears interest at 8.0% 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
"Pearland Property"). Until it acquired the Pearland Property through a
wholly-owned subsidiary, the Company made annual payments under such lease in
the amount of $114,468. The sole partners of AVTEX are AVAC and J/T.
In March, 1998, Aviation Sales Operating Company ("ASOC"), a wholly-owned
subsidiary of the Company, acquired the Pearland Property from AVTEX in
exchange for (i) ASOC's cancellation of all outstanding principal balance and
unpaid accrued interest on a promissory note of AVTEX held by ASOC in the
principal amount of $434,244 and (ii) ASOC's assumption of indebtedness in the
principal amount of $1,128,855 which was secured by a deed of trust in favor of
a third party.
The Company believes the terms of the Loan Agreement, the terms of the
leases with Aviation Properties and AVTEX and the then terms of the purchase of
the Pearland Property are no less favorable than could be obtained from an
unaffiliated third party.
At January 1, 1995, Messrs. Baker, Woody, Saso, Civiletto and Innella were
granted options (the "Options") by the partners of ASC Acquisition Partners, LP
d/b/a Aviation Sales Company (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 "Promissory Notes") in the aggregate principal amounts set forth below,
representing the payment in full of the exercise price of the Options:
<TABLE>
<CAPTION>
LIMITED PARTNER'S
PERCENTAGE INTEREST IN
PARTNERSHIP ACQUIRED PRINCIPAL AMOUNT
NAME UPON EXERCISE OF OPTIONS OF PROMISSORY NOTES
- ----------------------------- -------------------------- --------------------
<S> <C> <C>
Dale S. Baker ............... 6.0% $638,678
Harold M. Woody ............. 4.0% 425,785
James D. Innella ............ 1.5% 159,669
Michael A. Saso ............. 1.5% 159,669
Joseph E. Civiletto ......... 0.5% 53,223
</TABLE>
Management's interests in the Partnership were subject to a first priority
pledge to the lenders under the Company's revolving credit facility and a
second priority pledge to AVAC and J/T to secure the repayment of their
respective Promissory Notes. The Promissory 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 Promissory Notes. Immediately prior to the
Company's initial public offering in June 1996, management contributed their
59
<PAGE>
interests in the Partnership to the Company in exchange for shares of Common
Stock. At such time, management pledged their shares of the Company Common
Stock to secure the repayment of their respective Promissory Notes. The
exercise price of the Options after giving effect to the exchange of
Partnership interests for shares of common stock would effectively have been
$2.13 per share. In April 1998, Mr. Saso paid in full the amounts outstanding
under his Promissory Notes to AVAC and J/T.
The Company was 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 expired in February 1997.
Mr. Schwartz is a shareholder in Akerman, Senterfitt & Eidson, P.A., which
has in the past and continues to perform legal services for the Company. The
fees paid by the Company to Akerman, Senterfitt & Eidson, P.A. for legal
services rendered are no greater than those that would be charged to the Company
by an unrelated third party law firm.
60
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
The Company and its subsidiaries have entered into the Credit Facility
with certain financial institutions. At present, the Credit Facility consists
of a $91.2 million revolving loan and letter of credit facility, subject to an
availability calculation based on the eligible borrowing base (the "Revolving
Credit Facility"). The eligible borrowing base includes certain receivables and
inventories of the Company. The letter of credit portion of the Revolving
Credit Facility is subject to a $15.0 million sublimit, with the imposition of
certain borrowing criteria based on the satisfaction of certain debt ratios.
The interest rate on the Credit Facility 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 a 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 March 31, 1998, the margin was .25% for
prime rate loans and 1.75% for LIBOR rate loans.
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 the proceeds of a sale of assets or an issuance of equity or
debt securities or as a result of insufficient collateral to meet the borrowing
base requirements thereunder. Substantially all of the Company's assets are
pledged as collateral for amounts borrowed. The Revolving Credit Facility will
terminate on July 31, 2002. At June 15, 1998, the Company was in compliance
with all covenants of the Credit Facility and $41.1 million was outstanding
under the Credit Facility.
The Indenture permits the Company and its subsidiaries to incur
substantial additional indebtedness, including Senior Debt. Under the
Indenture, the Company may borrow unlimited additional amounts so long as after
incurring such debt the Company satisfies a fixed charge coverage ratio for the
most recent four fiscal quarters of 2.0 to 1 until February 15, 2000 and 2.25
to 1 thereafter. At March 31, 1998, the Company's fixed charge coverage ratio
for the last four fiscal quarters was 3.1 to 1. Additionally, the Indenture
allows the Company to borrow and have outstanding additional amounts of
indebtedness (even if the Company does not meet the required fixed charge
coverage ratios), up to enumerated limits, including up to $150.0 million of
Senior Debt (at present, the maximum amount available under the Credit Facility
is $91.2 million, $50.1 million of which was available for borrowing as of June
15, 1998). The Notes are also effectively subordinated in right of payment to
all existing and future liabilities of any subsidiaries of the Company which do
not guarantee the Notes.
On August 5, 1997, a subsidiary of the Company, Aviation Sales SPS I,
Inc., entered into a term loan agreement in a principal amount of $7.2 million
which was guaranteed by the Company, 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 June 15,
1998, the Company was in compliance with all covenants of this term loan.
In connection with its acquisition of Kratz-Wilde Machine Company the
Company/Kratz-Wilde Machine Company, a subsidiary of the Company, delivered a
non-interest bearing promissory note in the original principal amount of $2.2
million, which was guaranteed by the Company, to the seller. At June 15, 1998,
the Company was in compliance with the terms of this promissory note.
In connection with its acquisition of Caribe, on March 6, 1998 Aviation
Sales Manufacturing & Repair Company, a subsidiary of the Company, delivered a
promissory note in the original principal amount of $5.0 million, which was
guaranteed by the Company, to the seller. The note is payable over a two year
period with interest at the rate of 8% per annum.
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DESCRIPTION OF NOTES
GENERAL
The New Notes, like the Old Notes, will be issued pursuant to the
Indenture dated February 17, 1998 (the "Indenture") among the Company, the
Subsidiary Guarantors and SunTrust Bank Central Florida, National Association,
as trustee (the "Trustee"). The material terms of the Indenture are summarized
in this section. The terms of the New Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "Trust Indenture Act"). The New Notes are subject to
all such terms, and Holders of Old Notes are referred to the Indenture and the
Trust Indenture Act for a statement thereof. The terms of the New Notes are
substantially identical to the terms of the Old Notes in all material respects
(including interest rate and maturity), except that the New Notes will not be
subject to (i) the restrictions on transfer (other than with respect to holders
that are broker-dealers, persons who participated in the distribution of the
Old Notes or affiliates) and (ii) the Registration Rights Agreement covenants
regarding exchange and the related Liquidated Damages (other than those that
have accrued and were not paid, if any). The following summary does not purport
to be complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
Indenture and Registration Rights Agreement are available as set forth below
under "--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions." For
purposes of this summary, the term "Company" refers only to Aviation Sales
Company and not to any of its Subsidiaries.
The Notes are and will be general unsecured obligations of the Company and
will be subordinated in right of payment to all current and future Senior Debt.
As of June 15, 1998, the Company and the Subsidiary Guarantors had Senior Debt
of approximately $47.9 million outstanding. The Indenture permits the
incurrence of additional Senior Debt in the future.
As of the date of the Prospectus, all of the Company's Subsidiaries are
Restricted Subsidiaries. However, under certain circumstances, the Company will
be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $250.0 million, of
which $165.0 million was outstanding as of the date of this Prospectus, and
will mature on February 15, 2008. Interest on the Notes accrues at the rate of
8 1/8% per annum and is payable semi-annually in arrears on February 15 and
August 15, commencing on August 15, 1998, to Holders of record on the
immediately preceding February 1 and August 1. Interest on the Notes accrues
from the most recent date to which interest has been paid or, if no interest
has been paid, from the date of original issuance. Interest is computed on the
basis of a 360 day year comprised of twelve 30 day months. Principal, premium,
if any, and interest and unpaid Liquidated Damages, if any, on the Notes is
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company, payment
of interest and Liquidated Damages may be made by check mailed to the Holders
of the Notes at their respective addresses set forth in the register of Holders
of Notes; provided that all payments of principal, premium, interest and
Liquidated Damages with respect to Notes the Holders of which have given wire
transfer instructions to the Company will be required to be made by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Notes are issued in denominations of $1,000 and integral
multiples thereof.
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SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes is
subordinated in right of payment, as set forth in the Indenture, to the prior
payment in full of all Senior Debt, whether outstanding on the date of the
Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt) before the Holders of Notes will be
entitled to receive any payment with respect to the Notes, and until all
Obligations with respect to Senior Debt are paid in full, any distribution to
which the Holders of Notes would be entitled shall be made to the holders of
Senior Debt (except that Holders of Notes may receive and retain Permitted
Junior Securities and payments made from the trust described under "--Legal
Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") if (i) a default in the payment
of the principal of, premium, if any, or interest on Designated Senior Debt
occurs and is continuing beyond any applicable period of grace or (ii) any
other default occurs and is continuing with respect to Designated Senior Debt
that permits holders of the Designated Senior Debt as to which such default
relates to accelerate its maturity and the Trustee receives a notice of such
default (a "Payment Blockage Notice") from the Company or the holders of any
Designated Senior Debt. Payments on the Notes may and shall be resumed (a) in
the case of a payment default, upon the date on which such default is cured or
waived and (b) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the maturity
of any Designated Senior Debt has been accelerated. No new Payment Blockage
Notice shall be effective unless and until (i) 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the Notes
that have come due have been paid in full in cash. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been waived for a period of not
less than 90 days.
The Indenture requires that the Company promptly notify holders of Senior
Debt if payment of the Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders of Notes may recover less ratably than
creditors of the Company who are holders of Senior Debt. On June 15, 1998, the
Company and the Subsidiary Guarantors had approximately $47.9 million of Senior
Debt outstanding. The Indenture limits, subject to certain financial tests, the
amount of additional Indebtedness, including Senior Debt, that the Company and
its subsidiaries can incur. See "--Certain Covenants-Incurrence of Indebtedness
and Issuance of Preferred Stock."
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes are jointly and
severally and fully and unconditionally guaranteed (the "Subsidiary
Guarantees") by the Subsidiary Guarantors. The Subsidiary Guarantee of each
Subsidiary Guarantor is unsecured and is subordinated to the prior payment in
full in cash of all Senior Debt of such Subsidiary Guarantor. The obligations
of each Subsidiary Guarantor under its Subsidiary Guarantee are limited so as
not to constitute a fraudulent conveyance under applicable law. See, however,
"Risk Factors--Fraudulent Conveyances and Preferential Transfers."
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The Indenture provides that no Subsidiary Guarantor may consolidate with
or merge with or into (whether or not such Subsidiary Guarantor is the
surviving Person), another corporation, Person or entity whether or not
affiliated with such Subsidiary Guarantor unless (i) except in the case of a
merger of a Subsidiary Guarantor with or into the Company or another Subsidiary
Guarantor but subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor
pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the Notes, the Indenture and the
Registration Rights Agreement; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; (iii) except in the case of
a merger of a Subsidiary Guarantor, with or into the Company or another
Subsidiary Guarantor such Subsidiary Guarantor, or any Person formed by or
surviving any such consolidation or merger, would have Consolidated Net Worth
(immediately after giving effect to such transaction), equal to or greater than
the Consolidated Net Worth of such Subsidiary Guarantor immediately preceding
the transaction; and (iv) except in the case of a merger of a Subsidiary
Guarantor with or into the Company or another Subsidiary Guarantor, the Company
would be permitted by virtue of the Company's pro forma Fixed Charge Coverage
Ratio, immediately after giving effect to such transaction, to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the covenant described below under the caption "--Incurrence
of Indebtedness and Issuance of Preferred Stock."
The Indenture provides that in the event of (i) a sale or other
disposition of all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation or otherwise; (ii) a sale or other disposition of all of the
capital stock of any Subsidiary Guarantor; or (iii) such Subsidiary Guarantor
is designated as an Unrestricted Subsidiary in accordance with the Indenture,
then such Subsidiary Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock
of such Subsidiary Guarantor or designation as a Unrestricted Subsidiary) or
the corporation acquiring the property (in the event of a sale or other
disposition of all of the assets of such Subsidiary Guarantor) will be released
and relieved of any obligations under its Subsidiary Guarantee; provided that,
in the case of a sale or other disposition, the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the Indenture. See "Redemption or Repurchase at Option of Holders--Asset
Sales."
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to February 15,
2003. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, upon not less than 30 nor more than
60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest and
Liquidated Damages thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on February 15 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- -------------------------------- -------------
<S> <C>
2003 .......................... 104.063%
2004 .......................... 102.708%
2005 .......................... 101.354%
2006 and thereafter. .......... 100.000%
</TABLE>
Notwithstanding the foregoing, on or prior to February 15, 2001, the
Company may on any one or more occasions redeem up to 35% of the aggregate
principal amount of Notes originally issued under the Indenture at a redemption
price of 108 1/8% of the principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the redemption date, with
the net cash proceeds of a public offering of common stock of the Company;
provided that at least 65% of the aggregate principal amount of Notes
originally issued under the Indenture remain outstanding immediately after the
occurrence of such redemption (excluding Notes held by the Company and its
Subsidiaries); and PROVIDED, further, that such redemption shall occur within
45 days of the date of the closing of such public offering.
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SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed, or, if the Notes are not so listed, on a pro rata basis,
by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than 60
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. Notices of redemption may not be conditional. If any Note
is to be redeemed in part only, the notice of redemption that relates to such
Note shall state the portion of the principal amount thereof to be redeemed. A
new Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Note. Notes called for redemption become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on Notes or
portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to $1,000
or an integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase (the
"Change of Control Payment"). Within ten days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier than
30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Notes as a result of a
Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will either
repay or cause to be repaid all outstanding Senior Debt or obtain the requisite
consents, if any, under all agreements governing outstanding Senior Debt to
permit the repurchase of Notes required by this covenant. The Company will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of
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Control, the Indenture does not contain provisions that permit the Holders of
the Notes to require that the Company repurchase or redeem the Notes in the
event of a takeover, recapitalization or similar transaction.
The Credit Facility currently prohibits the Company from purchasing any
Notes prior to maturity, and also provides that certain change of control
events with respect to the Company would constitute a default thereunder. Any
future credit agreements or other agreements relating to Senior Debt to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change of Control occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute a default
under the Credit Facility. In such circumstances, the subordination provisions
in the Indenture would likely restrict payments to the Holders of Notes.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act), (ii) the adoption of a plan relating to the liquidation or
dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of
which is that any "person" (as defined above) becomes the "beneficial owner"
(as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a
subsequent condition), directly or indirectly, of more than 50% of the Voting
Stock of the Company (measured by voting power rather than number of shares).
or (iv) the first day on which a majority of the members of the Board of
Directors of the Company are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Company and its Restricted Subsidiaries taken as a
whole. Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a Holder of Notes to require
the Company to repurchase such Notes as a result of a sale, lease, transfer,
conveyance or other disposition of less than all of the assets of the Company
and its Restricted Subsidiaries taken as a whole to another Person or group may
be uncertain.
"CONTINUING DIRECTORS" means, as of-any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value
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of the assets or Equity Interests issued or sold or otherwise disposed of and
(ii) at least 80% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of cash; provided that the amount of (x)
any liabilities (as shown on the Company's or such Restricted Subsidiary's most
recent balance sheet), of the Company or any Restricted Subsidiary (other than
contingent liabilities and liabilities that are by their terms subordinated to
the Notes or any guarantee thereof) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases the
Company or such Restricted Subsidiary from further liability and (y) any
securities, notes or other obligations received by the Company or any such
Restricted Subsidiary from such transferee that are contemporaneously (subject
to ordinary settlement periods) converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to
be cash for purposes of this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay or cause
to be repaid Senior Debt, or (b) to the acquisition of a majority of the assets
of, or a majority of the Voting Stock of, another Permitted Business, the
making of a capital expenditure or the acquisition of other long-term assets
that are used or useful in a Permitted Business. Pending the final application
of any such Net Proceeds, the Company may temporarily reduce revolving credit
borrowings or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not
applied or invested as provided in the first sentence of this paragraph will be
deemed to constitute "Excess Proceeds." When the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company will be required to make an offer
to all Holders of Notes and all holders of pari passu Indebtedness containing
provisions similar to those set forth in the Indenture with respect to offers
to purchase or redeem with the proceeds of sales of assets (an "Asset Sale
Offer") to purchase the maximum principal amount of Notes and such other
Indebtedness that may be purchased out of the Excess Proceeds, at an offer
price in cash in an amount equal to 100% of the principal amount thereof plus
accrued and unpaid interest and Liquidated Damages thereon, if any, to the date
of purchase, in accordance with the procedures set forth in the Indenture and
such other Indebtedness. To the extent that any Excess Proceeds remain after
consummation of an Asset Sale Offer, the Company may use such Excess Proceeds
for any purpose not otherwise prohibited by the Indenture. If the aggregate
principal amount of Notes and such other Indebtedness tendered into such Asset
Sale Offer surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes and such other Indebtedness to be
purchased on a pro rata basis. Upon completion of such offer to purchase, the
amount of Excess Proceeds shall be reset at zero. In determining the fair
market value of any assets or Equity Interests issued, sold or otherwise
disposed of, such determination shall be evidenced by a resolution of the Board
of Directors set forth in an Officers' Certificate delivered to the Trustee if
such fair market value exceeds $15.0 million.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving the Company or any of its Restricted Subsidiaries) or to the direct
or indirect holders of the Company's or any of its Restricted Subsidiaries'
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company or to the Company or a Restricted Subsidiary of the Company); (ii)
purchase, redeem or otherwise acquire or retire for value (including, without
limitation, in connection with any merger or consolidation involving the
Company) any Equity Interests of the Company or any direct or indirect parent
of the Company; (iii) make any payment on or with respect to, or purchase,
redeem, defease or otherwise acquire or retire for value any Indebtedness that
is PARI PASSU with or subordinated to the Notes, except a payment of interest
or principal at Stated Maturity; or (iv) make any Restricted Investment (all
such
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payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments") unless, at the time of and
after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and
Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the date of the Indenture (excluding Restricted Payments
permitted by clauses (ii), (iii), (iv) and (vi) of the next succeeding
paragraph), is less than the sum, without duplication, of (i) 50% of the
Consolidated Net Income of the Company for the period (taken as one
accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indenture to the end of the Company's most
recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated
Net Income for such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate net cash proceeds received by the Company since
the date of the Indenture as a contribution to its common equity capital or
from the issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock or debt
securities of the Company that have been converted into such Equity
Interests (other than Equity Interests (or Disqualified Stock or
convertible debt securities) sold to a Subsidiary of the Company), plus
(iii) to the extent that any Restricted Investment that was made after the
date of the Indenture is sold for cash or otherwise liquidated or repaid
for cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) 50% of any
dividends received by the Company or a Subsidiary Guarantor after the date
of the Indenture from an Unrestricted Subsidiary of the Company, to the
extent that such dividends were not otherwise included in Consolidated Net
Income of the Company for such period, plus (v) to the extent that any
Unrestricted Subsidiary is redesignated as a Restricted Subsidiary after
the date of the Indenture, the lesser of (A) the fair market value of the
Company's Investment in such Subsidiary as of the date of such
redesignation or (B) such fair market value as of the date on which such
Subsidiary was originally designated as an Unrestricted Subsidiary.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any PARI PASSU or subordinated Indebtedness or Equity Interests
of the Company in exchange for, or out of the net cash proceeds of the
substantially concurrent sale (other than to a Subsidiary of the Company) of,
other Equity Interests of the Company (other than any Disqualified Stock);
PROVIDED that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c) (ii) of the preceding paragraph; (iii) the
defeasance, redemption, repurchase or other acquisition of PARI PASSU or
subordinated Indebtedness with the net cash proceeds from an incurrence of
Permitted Refinancing Indebtedness; (iv) the payment of any dividend by a
Subsidiary of the Company to the holders of its common Equity Interests on a
pro rata basis; (v) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any Subsidiary
of the Company held by any member of the Company's (or any of its
Subsidiaries') management pursuant to any management equity subscription
agreement or stock option agreement in effect as of the date of the Indenture;
PROVIDED that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $3.0 million in any
twelve-month period and no Default or Event of Default
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shall have occurred and be continuing immediately after such transaction; (vi)
the making and consummation of (A) an Asset Sale Offer to holders of
Indebtedness PARI PASSU with or subordinate to the Notes in accordance with the
provisions described above under "Asset Sales", or (B) a Change of Control
Offer to holders of indebtedness PARI PASSU with or subordinate to the Notes at
a price not greater than 101% of the principal amount of such Indebtedness in
accordance with provisions similar to those described above under "Change of
Control"; PROVIDED, that prior to consummation of a Change of Control Offer
with respect to subordinated Indebtedness and concurrently with consummation of
a Change of Control Offer with respect to PARI PASSU Indebtedness, the Company
shall have consummated the Change of Control Offer with respect to the Notes;
and (vii) the making of additional Restricted Payments in an amount not to
exceed $10.0 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments (to
the extent they otherwise fall within the definition thereof) at the time of
such designation and will reduce the amount available for Restricted Payments
under the first paragraph of this covenant. All such outstanding Investments
will be deemed to constitute Investments in an amount equal to the fair market
value of such Investments at the time of such designation. Such designation
will only be permitted if such Restricted Payment would be permitted at such
time and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment in excess of $10.0 million
shall be determined by the Board of Directors whose resolution with respect
thereto shall be delivered to the Trustee, such determination to be based upon
an opinion or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if such fair market value exceeds $15.0
million. Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the
Indenture.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that the Company will not issue any Disqualified Stock and
will no, permit any of its Subsidiaries to issue any shares of preferred stock,
PROVIDED, HOWEVER, that the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock and the Subsidiary Guarantors may
incur Indebtedness or issue preferred stock if the Fixed Charge Coverage Ratio
for the Company's most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the date on
which such additional Indebtedness is incurred or such Disqualified Stock or
preferred stock is issued would have been at least 2.0 to 1 if such
Indebtedness is incurred or such Disqualified Stock or preferred stock is
issued on or prior to February 15, 2000, or would have been at least 2.25 to 1
if such Indebtedness is incurred or such Disqualified Stock or preferred stock
is issued thereafter, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom) as if the additional Indebtedness
had been incurred, or the Disqualified Stock or preferred stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to
the incurrence of any of the. following items of Indebtedness (collectively,
"Permitted Debt"):
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(i) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness under the Credit Facility; PROVIDED that the aggregate principal
amount of all such Indebtedness (with letters of credit being deemed to have a
principal amount equal to the maximum potential liability of the Company and
the Subsidiary Guarantors thereunder) outstanding under the Credit Facility
after giving effect to such incurrence does not exceed an amount equal to
$150.0 million less the aggregate amount of all Net Proceeds of Asset Sales
applied to repay such Indebtedness;
(ii) the incurrence by the Company and its Restricted Subsidiaries of the
Existing Indebtedness;
(iii) the incurrence by the Company and the Subsidiary Guarantors of
Indebtedness represented by the Notes and the Subsidiary Guarantees;
(iv) the incurrence by the Company or any of the Subsidiary Guarantors of
Indebtedness represented by Capital Lease Obligations, mortgage financings or
purchase money obligations, in each case incurred for the purpose of financing
all or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of the Company or such
Subsidiary Guarantor, in an aggregate principal amount not to exceed $10.0
million at any time outstanding;
(v) the incurrence by the Company or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the Indenture to be incurred
under the first paragraph hereof or clause (ii) of this paragraph;
(vi) the incurrence by the Company or any of the Subsidiary Guarantors of
intercompany Indebtedness or preferred stock between or among the Company and
any of the Subsidiary Guarantors; PROVIDED, HOWEVER, that (A) any subsequent
issuance or transfer of Equity Interests that results in any such Indebtedness
or preferred stock being held by a Person other than the Company or a
Subsidiary Guarantor and (B) any sale or other transfer of any such
Indebtedness or preferred stock to a Person that is not either the Company or a
Subsidiary Guarantor shall be deemed, in each case, to constitute an incurrence
of such Indebtedness or an issuance of such Preferred Stock by the Company or
such Subsidiary Guarantor, as the case may be, that was not permitted by this
clause (vi);
(vii) the incurrence by the Company or any of the Subsidiary Guarantors of
Hedging Obligations;
(viii) the guarantee by the Company or any of the Subsidiary Guarantors of
Indebtedness of the Company or a Subsidiary Guarantor that was permitted to be
incurred by another provision of this covenant; and
(ix) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt, PROVIDED, HOWEVER, that if any such Indebtedness ceases to
be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed
to constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company that was not permitted by this clause (ix);
(x) the incurrence by the Company or any of the Subsidiary Guarantors of
additional Indebtedness in an aggregate principal amount (or accreted value, as
applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness incurred
pursuant to this clause (x), not to exceed $30.0 million.
For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness meets the criteria of more than one of the
categories of Permitted Debt described in clauses (i) through (x) above or is
entitled to be incurred pursuant to the first paragraph of this covenant, the
Company shall, in its sole discretion, classify such item of Indebtedness in
any manner that complies with this covenant. Accrual of interest, accretion or
amortization of original issue discount, the payment of interest on any
Indebtedness in the form of additional Indebtedness with the same terms, and
the payment of dividends on Disqualified Stock in the form of additional shares
of the
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same class of Disqualified Stock will not be deemed to be an incurrence of
Indebtedness or an issuance of Disqualified Stock for purposes of this
covenant; provided, in each such case, that the amount thereof is included in
Fixed Charges bf the Company as accrued.
LIENS
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien securing Indebtedness or trade payables on any asset now
owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, except Permitted Liens.
DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any indebtedness owed to the
Company or any of its Restricted Subsidiaries, (ii) make loans or advances to
the Company or any of its Restricted Subsidiaries or (iii) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries.
However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indenture, (b) the Credit Facility as in effect as of
the date of the Indenture, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof, provided that such amendments, modifications, restatements, renewals,
increases, supplements, refundings, replacement or refinancings are no more
restrictive, taken as a whole, with respect to such dividend and other payment
restrictions than those contained in the Credit Facility as in effect on the
date of the Indenture, (c) the Indenture and the Notes, (d) applicable law, (e)
any instrument governing Indebtedness or Capital Stock of a Person acquired by
the Company or any of its Restricted Subsidiaries as in effect at the time of
such acquisition (except to the extent such Indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person, or the property or assets of the Person, so
acquired, provided that, in the case of Indebtedness, such Indebtedness was
permitted by the terms of the Indenture to be incurred, (f) customary
non-assignment provisions in leases entered into in the ordinary course of
business and consistent with past practices, (g) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions
of the nature described in clause (iii) above on the property so acquired, (h)
any agreement for the sale of a Restricted Subsidiary that restricts
distributions by that Restricted Subsidiary pending its sale, (i) Permitted
Refinancing Indebtedness, provided that the restrictions contained in the
agreements governing such Permitted Refinancing Indebtedness are no more
restrictive, taken as a whole, than those contained in the agreements governing
the Indebtedness being refinanced, (j) secured Indebtedness otherwise permitted
to be incurred pursuant to the provisions of the covenant described above under
the caption "--Liens" that limits the right of the debtor to dispose of the
assets securing such Indebtedness, (k) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business
and (1) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
ADDITIONAL SUBSIDIARY GUARANTEES
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another Subsidiary after the date of the
Indenture (other than an Unrestricted Subsidiary properly designated as such),
then such newly acquired or created Subsidiary shall become a Subsidiary
Guarantor and execute a Supplemental Indenture and deliver an Opinion of
Counsel, in accordance with the terms of the Indenture.
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MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indenture provides that the Company may not consolidate or merge with
or into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) the Company is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than the Company) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Registration Rights Agreement, the Notes
and the Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; and (iv) except in the case of a merger of
the Company with or into a Subsidiary Guarantor, the Company or the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of the Company immediately preceding the transaction and (B) will, at the
time of such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "-- Incurrence of
Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Restricted Subsidiary
than those that would have been obtained in a comparable transaction by the
Company or such Restricted Subsidiary with an unrelated Person and (ii) the
Company delivers to the Trustee (a) with respect to any Affiliate Transaction
or series of related Affiliate Transactions involving aggregate consideration
in excess of $5.0 million, a resolution of the Board of Directors set forth in
an Officers' Certificate certifying that such Affiliate Transaction complies
with clause (i) above and that such Affiliate Transaction has been approved by
a majority of the disinterested members of the Board of Directors and (b) with
respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $10.0 million (or,
in the case of a purchase of inventory from JFSS in the ordinary course of
business, $15.0 million) an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an accounting,
appraisal or investment banking firm of national standing. Notwithstanding the
foregoing, the following items shall not be deemed to be Affiliate
Transactions: (i) any employment agreement entered into by the Company or any
of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted Subsidiary,
(ii) transactions between or among the Company and/or its Restricted
Subsidiaries, (iii) payment of reasonable directors fees to Persons who are not
otherwise Affiliates of the Company, (iv) Restricted Payments that are
permitted by the provisions of the Indenture described above under the caption
"--Restricted Payments," and (v) any transactions undertaken pursuant to any
contractual obligations in existence on the date of the Indenture (as in effect
on such date) as described herein under the caption "Certain Relationships and
Related Transactions."
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NO SENIOR SUBORDINATED DEBT
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes, and (ii) no Subsidiary Guarantor will
incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness that is subordinate or junior in right of payment to the Senior
Debt of such Subsidiary Guarantor and senior in any respect in right of payment
to the Subsidiary Guarantees.
BUSINESS ACTIVITIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any business other than Permitted Businesses, except to such extent
as would not be material to the Company and its Subsidiaries taken as a whole.
PAYMENTS FOR CONSENT
The Indenture provides that neither the Company nor any of its
Subsidiaries will, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder of
any Notes for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Indenture or the Notes unless such consideration
is offered to be paid or is paid to all Holders of the Notes that consent,
waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" that describes
the financial condition and results of operations of the Company and its
consolidated Subsidiaries (showing in reasonable detail, either on the face of
the financial statements or in the footnotes thereto and in Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
financial condition and results of operations of the Company and its Restricted
Subsidiaries separate from the financial condition and results of operations of
the Unrestricted Subsidiaries of the Company) and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports, in each case within the time periods specified in the Commission's
rules and regulations. In addition, following the consummation of the exchange
offer contemplated hereby, whether or not required by the rules and regulations
of the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, the Company and
the Subsidiary Guarantors have agreed that, for so long as any Notes remain
outstanding, they will furnish to the Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Notes (whether or not prohibited by the
subordination provisions of the Indenture); (ii) default in payment when due of
the principal of or premium, if any, on the Notes (whether or not prohibited by
the
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subordination provisions of the Indenture); (iii) failure by the Company or any
of its Subsidiaries to comply with the provisions described under the captions
"--Change of Control," "--Asset Sales," "--Restricted Payments" or
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; (iv) failure by
the Company or any of its Subsidiaries for 60 days after notice to comply with
any of its other agreements in the Indenture or the Notes; (v) default under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness for money borrowed by
the Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Subsidiaries) whether such Indebtedness
or guarantee now exists, or is created after the date of the Indenture, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $10.0 million or more; (vi) failure by the Company or
any of its Subsidiaries to pay final judgments (including foreign judgments
only to the extent enforcement thereof is sought in the United States or in any
foreign jurisdiction where the Company owns assets of $10.0 million or more)
aggregating in excess of $10.0 million, which judgments are not paid,
discharged or stayed for a period of 60 days; (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries; and (viii) except as permitted by the Indenture, any Subsidiary
Guarantee shall be held in any judicial proceeding to be unenforceable or
invalid or shall cease for any reason to be in full force and effect or any
Subsidiary Guarantor, or any Person acting on behalf of any Subsidiary
Guarantor, shall deny or disaffirm its obligations under its Subsidiary
Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency, with respect to the Company, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute
a Significant Subsidiary, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes. If an Event of Default occurs prior to
February 15, 2003 by reason of any willful action (or inaction) taken (or not
taken) by or on behalf of the Company with the intention of avoiding the
prohibition on redemption of the Notes prior to such date, then the premium
specified in the Indenture shall also become immediately due and payable to the
extent permitted by law upon the acceleration of the Notes.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Notes, the Indenture or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the Notes, cash U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest and Liquidated Damages
on the outstanding Notes on the stated maturity or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company shall have delivered to the Trustee an opinion
of counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the date of the Indenture, there
has been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel shall confirm that,
the Holders of the outstanding Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the Indenture) to which
the Company or any of its Subsidiaries is a party or by which the Company or
any of its Subsidiaries is bound; (vi) the Company must have delivered to the
Trustee an opinion of counsel to the effect that after the 91st day following
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the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) the Company must deliver to the Trustee an
Officers' Certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders of Notes over the other creditors of the
Company with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (viii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, Notes), and any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders
of at least a majority in aggregate principal amount of the Notes and a waiver
of the payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in,
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal of or premium, if
any, or interest on the Notes, (vii) waive a redemption payment with respect to
any Note (other than a payment required by one of the covenants described above
under the caption "--Repurchase at the Option of Holders") (viii) make any
change in the foregoing amendment and waiver provisions or (ix) release any
Subsidiary Guarantor from any of its obligations under its Subsidiary Guarantee
or the Indenture, except in accordance with the terms of the Indenture. In
addition, any amendment to the provisions of Article 10 or Article 12 of the
Indenture (which relate to subordination) will require the consent of the
Holders of at least 75% in aggregate principal amount of the Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Subsidiary Guarantors and the Trustee may amend or supplement
the Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
Notes in
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the case of a merger or consolidation or sale of all or substantially all of
the Company's assets, to make any change that would provide any additional
rights or benefits to the Holders of Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, to comply with
requirements of the Commission in order to effect or maintain the qualification
of the Indenture under the Trust Indenture Act to provide for the issuance of
additional Notes in accordance with the limitations set forth in the Indenture
or to provide for additional Subsidiary Guarantors in accordance with the terms
of the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Notes, unless such Holder shall have offered to
the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the New Notes will initially be
issued in the form of one or more Global Notes (the "Global Notes"). The Global
Notes will be deposited with, or on behalf of, The Depository Trust Company
(the "Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary (such nominee being referred to herein as the "Global Note Holder").
New Notes that are issued as described below under "--Certificated
Securities" will be issued in the form of registered definitive certificates
(the "Certificated Securities"). Upon the transfer of Certificated Securities,
such Certificated Securities may, unless all Global Notes have previously been
exchanged for Certificated Securities, be exchanged for an interest in the
Global Note representing the principal amount of Notes being transferred,
subject to the transfer restrictions set forth in the Indenture.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's system
is also available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants" or the "Depositary's
Indirect Participants") that dear through or maintain a custodial relationship
with a Participant, either directly or indirectly. Persons who are not
Participants may beneficially own securities held by or on behalf of the
Depositary only thorough the Depositary's Participants or the Depositary's
Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Notes and (ii) ownership of the Notes
evidenced by the Global Notes will be shown on, and the transfer of ownership
thereof will be effected
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only through, records maintained by the Depositary (with respect to the
interests of the Depositary's Participants), the Depositary's Participants and
the Depositary's Indirect Participants. Prospective purchasers are advised that
the laws of some states require that certain persons take physical delivery in
definitive form of securities that they own. Consequently, the ability to
transfer Notes evidenced by the Global Note will be limited to such extent. For
certain other restrictions on the transferability of the Notes, see "Notice to
Investors."
So long as the Global Note Holder is the registered owner of any Notes,
the Global Note Holder will be considered the sole Holder under the Indenture
of any Notes evidenced by the Global Notes. Beneficial owners of Notes
evidenced by the Global Notes will not be considered the owners or Holders
thereof under the Indenture for any purpose, including with respect to the
giving of any directions instructions or approvals to the Trustee thereunder.
Neither the Company nor the Trustee will have any responsibility or liability
for any aspect of the records of the Depositary or for maintaining, supervising
or reviewing any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, interest and
Liquidated Damages, if any, on any Notes registered in the name of the Global
Note Holder on the applicable record date will be payable by the Trustee to or
at the direction of the Global Note Holder in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving such
payments. Consequently, neither the Company nor the Trustee has or will have
any responsibility or liability for the payment of such amounts to beneficial
owners of Notes. The Company believes, however, that it is currently the policy
of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
CERTIFICATED SECURITIES
Subject to certain conditions, any person having a beneficial interest in
a Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Securities. Upon any such
issuance, the Trustee is required to register such Certificated Securities in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). All such certificated Notes would be subject to
the legend requirements described herein under "Notice to Investors."In
addition, if (i) the Company notifies the Trustee in writing that the
Depositary is no longer willing or able to act as a depositary and the Company
is unable to locate a qualified successor entity 90 days or (ii) the Company,
at its option, notifies the Trustee in writing that it elects to cause the
issuance of Notes in the form of Certificated Securities under the Indenture,
then, upon surrender by the Global Note Holder of its Global Note, Notes in
such form will be issued to each person that the Global Note Holder and the
Depositary identify as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
next day funds to the accounts specified by the Global Note Holder. With
respect to Certificated Securities, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts
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specified by the Holders thereof or, if no such account is specified, by
mailing a check to each such Holder's registered address. The Company expects
that secondary trading in the Certificated Securities will also be settled in
immediately available funds.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
The Company, the Subsidiary Guarantors and the Initial Purchasers have
entered into the Registration Rights Agreement. Pursuant to the Registration
Rights Agreement, the Company agreed to file with the Commission the Exchange
Offer Registration Statement on the appropriate form under the Securities Act
with respect to the New Notes. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company will offer to the Holders of Transfer
Restricted Securities pursuant to the Exchange Offer who are able to make
certain representations the opportunity to exchange their Transfer Restricted
Securities for New Notes. If (i) the Company is not required to file the
Exchange Offer Registration Statement or permitted to consummate the Exchange
Offer because the Exchange Offer is not permitted by applicable law or
Commission policy or (ii) any Holder of Transfer Restricted Securities notifies
the Company prior to the 20th business day following consummation of the
Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company, the Company will file with the Commission a Shelf Registration
Statement to cover resales of the Notes by the Holders thereof who satisfy
certain conditions relating to the provision of information in connection with
the Shelf Registration Statement. The Company will use its best efforts to
cause the applicable registration statement to be declared effective as
promptly as possible by the Commission. For purposes of the foregoing,
"Transfer Restricted Securities" means each Note until (i) the date on which
such Note has been exchanged by a person other than a broker-dealer for a New
Note in the Exchange Offer, (ii) following the exchange by a broker-dealer in
the Exchange Offer of a Note for a New Note, the date on which such New Note is
sold to a purchaser who receives from such broker-dealer on or prior to the
date on which such New Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on which
such Note has been effectively registered under the Securities Act and disposed
of in accordance with the Shelf Registration Statement or (iv) the date on
which such Note is distributed to the public pursuant to Rule 144 under the
Act.
The Registration Rights Agreement provides that (i) the Company will use
its best efforts to have the Exchange Offer Registration Statement declared
effective by the Commission on or prior to 120 days after the Closing Date,
(ii) unless the Exchange Offer would not be permitted by applicable law or
Commission policy, the Company will commence the Exchange Offer and use its
best efforts to issue on or prior to 30 business days after the date on which
the Exchange Offer Registration Statement was declared effective by the
Commission, New Notes in exchange for all Notes tendered prior thereto in the
Exchange Offer and (iii) if obligated to file the Shelf Registration Statement,
the Company will use its best efforts to file the Shelf Registration Statement
with the Company on or prior to 30 days after such filing obligation arises and
to cause the Shelf Registration to be declared effective by the Commission on
or prior to 90 days after such obligation arises. If (a) the Company fails to
file any of the Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b) any of such
Registration Statements is not declared effective by the Commission on or prior
to the date specified for such effectivenesss (the "Effectiveness Target
Date"), or (c) the Company fails to consummate the Exchange Offer within 30
business days of the Effectiveness Target Date with respect to the Exchange
Offer Registration Statement, or (d) the Shelf Registration Statement or the
Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement without being succeeded immediately by a post-effective amendment to
such registration statement that cures such failure and that is itself declared
immediately effective (each such event referred to in clauses (a) through (d)
above a
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"Registration Default"), then the Company will pay Liquidated Damages to each
Holer of Notes, with respect to the first 90-day period immediately following
the occurrence of the first Registration Default in an amount equal to $.05 per
week per $1,000 principal amount of Notes held by such Holder. The amount of
the Liquidated Damages will increase by an additional $.05 per week per $1,000
principal amount of Notes with respect to each subsequent 90-day period until
all Registration Defaults have been cured, up to a maximum amount of Liquidated
Damages for all Registration Defaults of $.50 per week per $1,000 principal
amount of Notes. All accrued Liquidated Damages will be paid by the Company on
each Damages Payment Date to the Global Note Holder by wire transfer of
immediately available funds or by federal funds check and to Holders of
Certificated Securities by wire transfer to the accounts specified by them or
by mailing checks to their registered addresses if no such accounts have been
specified. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver certain
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding Liquidated Damages set forth above.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales or leases of inventory in the ordinary course of
business or sales of leases or of assets subject to leases in the ordinary
course of business (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole will be governed by the provisions of
the Indenture described above under the caption "--Change of Control" and/or
the provisions described above under the caption "--Merger, Consolidation or
Sale of Assets" and not by the provisions of the Asset Sate covenant), and (ii)
the issue or sale by the Company or any of its Restricted Subsidiaries of
Equity Interests of any of the Company's Restricted Subsidiaries, in the case
of either clause (i) or (ii), whether in a single transaction or a series of
related transactions (a) that have a fair market value in excess of $2.0
million or (b) for net proceeds in excess of $2.0 million. Notwithstanding the
foregoing, the following items shall not be deemed to be Asset Sales: (i) a
transfer of assets by the Company to a Wholly Owned Restricted Subsidiary or by
a Wholly Owned Restricted Subsidiary to the Company or to another Wholly Owned
Restricted Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly
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Owned Restricted Subsidiary, and (iii) a Restricted Payment that is permitted
by the covenant described above under the caption "--Restricted Payments."
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisitioD, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in excess of $500 million and a Thompson Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above, (v) commercial
paper having the highest rating obtainable from Moody's Investors Service, Inc.
or Standard & Poor's Corporation and in each case maturing within six months
after the date of acquisition and (vi) money market funds at least 95% of the
assets of which constitute Cash Equivalents of the kinds described in clauses
(i) - (v) of this definition.
"CONSOLIDATED CASH FLOW" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or accrued
and whether or not capitalized (including, without limitation, amortization of
debt issuance costs and original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future period
or amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, plus (v) an amount equal to 1/3 of the
Consolidated Lease Expense of such Person and its Restricted Subsidiaries for
such period, to the extent that any such expense was deducted in computing such
Consolidated Net Income, minus (vi) non-cash items increasing such Consolidated
Net Income for such period, in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization and other non-cash expenses of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Restricted
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Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted- Subsidiary
without prior governmental approval (that has not been obtained), and without
direct or indirect restriction pursuant to the terms of its charter and all
agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"CONSOLIDATED LEASE EXPENSE" means, with respect to any Person for any
period, the aggregate rental obligations of such Person and its consolidated
Restricted Subsidiaries determined on a consolidated basis in accordance with
GAAP payable in respect of such period under leases of real and/or personal
property (net of income from subleases thereof, but including taxes, insurance,
maintenance and similar expenses that the lessee is obligated to pay under the
terms of such leases), whether or not such obligations are reflected as
liabilities or commitments on a consolidated balance sheet of such Person and
its Restricted Subsidiaries or in the notes thereto.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that
by its terms is not entitled to the payment of dividends unless such dividends
may be declared and paid only out of net earnings in respect of the year of
such declaration and payment, but only to the extent of any cash received by
such Person upon issuance of such preferred stock, less (x) all write-ups
(other than write-ups resulting from foreign currency translations and
write-ups of tangible assets of a going concern business made within 12 months
after the acquisition of such business) subsequent to the date of the Indenture
in the book value of any asset owned by such Person or a consolidated
Subsidiary of such Person, (y) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Subsidiaries (except,
in each case, Permitted Investments), and (z) all unamortized debt discount and
expense and unamortized deferred charges as of such date, all of the foregoing
determined in accordance with GAAP.
"CREDIT FACILITY" means that certain Third Amended Credit Agreement. dated
as of October 17, 1997, by and among the Company, Aviation Sales Operating
Company, Aerocell Structures. Inc. and the Company/Kratz-Wilde Machine Company,
the Institutions from time to time party thereto as Lenders, the Institutions
from time to time party thereto as Issuing Banks, Citicorp USA. Inc.. as Agent,
and Citicorp Securities, Inc., as Arranger, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith. and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"DEFAULT" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
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"DESIGNATED SENIOR DEBT" means (i) any Indebtedness outstanding under the
Credit Facility and (ii) any other Senior Debt permitted under the Indenture
the principal amount of which is $25.0 million or more and that has been
designated by the Company as Designated Senior Debt.
"DISQUALIFIED STOCK" means any Capital Stock that. by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof). or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the Notes mature; provided, however, that any Capital Stock that would
constitute Disqualified Stock solely because the holders thereof have the right
to require the Company to repurchase such Capital Stock upon the occurrence of
a Change of Control or an Asset Sale shall not constitute Disqualified Stock if
the terms of such Capital Stock provide that the Company may not repurchase or
redeem any such Capital Stock pursuant to such provisions unless such
repurchase or redemption complies with the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"EQUITY INTERESTS" means Capital Stock and all warrants. options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING INDEBTEDNESS" means up to $9.5 million in aggregate principal
amount of Indebtedness of the Company and its Subsidiaries (other than
Indebtedness under the Credit Facility) in existence on the date of the
Indenture, until such amounts are repaid.
"FIXED CHARGES" means, with respect to any Person and its Restricted
Subsidiaries for any period, the sum. without duplication, of (i) the
consolidated interest expense of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued (including, without limitation.
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations. commissions. discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations) and (ii) the consolidated interest of
such Person and its Restricted Subsidiaries that was capitalized during such
period, and (iii) any interest expense on Indebtedness of another Person that
is Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such Guarantee or Lien is called upon). (iv) the product of (a)
all dividend payments. whether or not in cash. on any series of preferred stock
of such Person or any of its Restricted Subsidiaries. other than dividend
payments on Equity Interests payable solely in Equity Interests of the Company
(other than Disqualified Stock) or to the Company or a Restricted Subsidiary of
the Company times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP and (v) an amount equal to
1/3 of the Consolidated Lease Expense of such Person and its Restricted
Subsidiaries for such period. whether paid or accrued.
"FIXED CHARGE COVERAGE RATIO" means with respect to any Person and its
Restricted Subsidiaries for any period, the ratio of the Consolidated Cash Flow
of such Person and its Restricted Subsidiaries for such period to the Fixed
Charges of such Person for such period. In the event that the referrent Person
or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems
any Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated but prior to date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Restricted
Subsidiaries, including
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through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to
have occurred on the first day of the four-quarter reference period and
Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income, and (ii) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, and
(iii) the Fixed Charges attributable to discontinued operations, as determined
in accordance with GAAP, and operations or businesses disposed of prior to the
Calculation Date, shall be excluded, but only to the extent that the
obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such Indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness issued with original issue discount,
and (ii) the principal amount thereof, together with any interest thereon that
is more than 30 days past due, in the case of any other Indebtedness.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If the Company or any Subsidiary' of the Company sells or otherwise disposes of
any Equity Interests of any direct or indirect Subsidiary of the Company such
that, after giving effect to any such sale or disposition, such Person is no
longer a Subsidiary of the Company, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the fair market
value of the Equity Interests of such Subsidiary not sold or disposed of in an
amount determined as provided in the final paragraph of the covenant described
above under the caption "--Restricted Payments."
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"LIEN" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"NET PROCEEDS" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax audits or deductions and any tax sharing
arrangements), any business or activities conducted by the Company on the date
of the Indenture and any business or activities reasonably related, ancillary
or complementary to such business or activities amounts required to be applied
to the repayment of Indebtedness secured by a Lien on the asset or assets that
were the subject of such Asset Sale and any reserve for adjustment in respect
of the sale price of such asset or assets established in accordance with GAAP.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Notes) of the Company or any of its Restricted Subsidiaries to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"PERMITTED BUSINESS" means any business or activities conducted by the
Company on the date of the Indenture and any business or activities related,
ancillary or complementary to such business or activities.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Subsidiary Guarantor; (b) any Investment in Cash Equivalents; (c) any
Investment by the Company or any Subsidiary of the Company in a Person, if as a
result of such Investment (i) such Person becomes a Wholly Owned Restricted
Subsidiary of the Company or (ii) such Person is merged, consolidated or
amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, the Company or a Wholly Owned Restricted
Subsidiary of the Company; (d) any Investment made as a result of the receipt
of non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant described above under the caption "--Repurchase at
the Option of Holders--Asset Sales"; (e) any acquisition of assets solely in
exchange for the issuance of Equity Interests (other than
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Disqualified Stock) of the Company; and (f) other Investments in any Person
having an aggregate fair market value (measured on the date each such
Investment was made and without giving effect to subsequent changes in value),
when taken together with all other Investments made pursuant to this clause (f)
that are at the time outstanding, not to exceed $10.0 million.
"PERMITTED JUNIOR SECURITIES" means Equity Interests in the Company or any
Subsidiary Guarantor or debt securities that are subordinated to all Senior
Debt (and any debt- securities issued in exchange for Senior Debt) to
substantially the same extent as, or to a greater extent than, the Notes are
subordinated to Senior Debt pursuant to Article 10 of the Indenture.
"PERMITTED LIENS" means (i) Liens on assets of the Company or any
Subsidiary Guarantor to secure Senior Debt of the Company or such Subsidiary
Guarantor that was permitted by the terms of the Indenture to be incurred; (ii)
Liens in favor of the Company or a Subsidiary Guarantor; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with the Company or any Subsidiary of the Company; provided that
such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (iv) Liens on property existing
at the time of acquisition thereof by the Company or any Subsidiary of the
Company, provided that such Liens were in existence prior to the contemplation
of such acquisition; (v) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of
a like nature incurred in the ordinary course of business; (v) Liens to secure
Indebtedness (including Capital Lease Obligations) permitted by clause (iv) of
the second paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock" covering only the assets acquired with such
Indebtedness; (vi) Liens existing on the date of the Indenture; (vii) Liens for
taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded, provided that any reserve or
other appropriate provision as shall be required in conformity with GAAP shall
have been made therefor; (viii) Liens incurred in the ordinary course of
business of the Company or any Subsidiary of the Company with respect to
obligations that do not exceed $10.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the ordinary course
of business) and (b) do not in the aggregate materially detract from the value
of the property or materially impair the use thereof in the operation of
business by the Company or such Subsidiary; (ix) Liens to secure the Notes or
the Subsidiary Guarantees; and (x) Liens on assets of Unrestricted Subsidiaries
that secure Non-Recourse Debt of Unrestricted Subsidiaries.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); provided that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable),
plus accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of reasonable expenses.
incurred in connection therewith); (ii) such Permitted Refinancing Indebtedness
has a final maturity date later than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded: (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and is subordinated in
right of payment to, the Notes on terms at least as favorable to the Holders of
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
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"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SENIOR DEBT" means (i) all Indebtedness outstanding under the Credit
Facility, all Hedging Obligations with respect thereto and, after a default has
occurred and is continuing under the Credit Facility, all other Indebtedness
arising from intercompany loans and advances and owing by the Company or any of
the Subsidiary Guarantors which constitutes part of the collateral security for
the Credit Facility and such Hedging Obligations, including without limitation,
Indebtedness evidenced by intercompany notes pledged or assigned in connection
with the Credit Facility, (ii) any other Indebtedness permitted to be incurred
by the Company or a Subsidiary Guarantor under the terms of the Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to the
Notes and (iii) all Obligations with respect to the foregoing. Notwithstanding
anything to the contrary in the foregoing, Senior Debt will not include (w) any
liability for federal, state, local or other taxes owed or owing by the Company
or a Subsidiary Guarantor, (x) any Indebtedness between or among the Company,
any of its Subsidiaries or any of its other Affiliates except to the extent the
same is subject to clause (i) above, (y) any trade payables or (z) any
Indebtedness that is incurred in violation of the Indenture.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
"SUBSIDIARY GUARANTORS" means each of (i) Aviation Sales Operating
Company, Aviation Sales Bearings Company, Aviation Sales Leasing Company,
Aviation Sales Manufacturing & Repair Company, Aviation Sales Finance Company,
AVS/Kratz-Wilde Machine Company, Aerocell Structures, Inc., Apex Manufacturing,
Inc., Caribe Aviation, Inc., Aircraft Interior Design, Inc. and Aviation Sales
SPS I, Inc. and (ii) any other subsidiary that executes a Subsidiary Guarantee
in accordance with the provisions of the Indenture, and their respective
successors and assigns.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Restricted Subsidiaries has any direct
or indirect obligation (x) to subscribe for additional Equity Interests or (y)
to maintain or preserve such Person's financial condition or to cause such
Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted
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Subsidiaries; and (e) has at least one director on its board of directors that
is not a director or executive officer of the Company or any of its Restricted
Subsidiaries and has at least one executive officer that is not a director or
executive officer of the Company or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
filing with the Trustee a certified COW of the Board Resolution giving effect
to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the caption "Certain Covenants-Restricted
Payments." If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, it shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described under the
caption "Incurrence of Indebtedness and Issuance of Preferred Stock." the
Company shall be in default of such covenant). The Board of Directors of the
Company may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary: provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant described under the caption "Certain Covenants-Incurrence of
Indebtedness and Issuance of Preferred Stock, calculated on a pro forma basis
as if such designation had occurred at the beginning of the four-quarter
reference period, (ii) no Default or Event of Default would be in existence
following such designation, and (iii) such Subsidiary becomes a Subsidiary
Guarantor and executes a Supplemental Indenture and delivers an Opinion of
Counsel, in accordance with the terms of the Indenture.
"VOTING STOCK" of any Person as of any date means the Capital Stock of
such Person that is at the time entitled to vote in the election of the Board
of Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes all material United States federal
income tax consequences to U.S. Holders and Non-U.S. Holders of owning and
disposing of the Notes. Hereinafter, the terms "U.S. Holder" and "Non-U.S.
Holder" refer, respectively, to holders of Notes that are or are not classified
as United States persons for United States federal income and estate tax
purposes. A holder that does not know whether such holder is a U.S. person or
Non-U.S. person should consult their own tax advisor.
This discussion does not purport to deal with tax consequences arising
under the laws of any foreign, state or local jurisdiction. It is, based upon
the provisions of existing law on the date hereof, including, in particular,
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury
regulations promulgated thereunder and other administrative and judicial
interpretations thereof, all of which are subject to change at any time, with
or without retroactive effect. This discussion is limited to initial purchasers
who hold the Notes as capital assets within the meaning of Section 1221 of the
Code.
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This discussion also does not address the tax consequences to Non-U.S. Holders
that are subject to United States federal income tax on a net basis on income
realized with respect to a Note because such income is effectively connected
with the conduct of a United States trade or business. Such Non-U.S. Holders
are generally taxed in a similar manner to U.S. Holders, but certain special
rules do apply. This discussion is for general information only and does not
address all of the tax consequences that may be relevant to particular initial
purchasers in light of their circumstances or to certain types of initial
purchasers (such as certain financial institutions, insurance companies, tax-
exempt entities, dealers in securities or persons who have hedged the risk of
owning a Note). This summary discusses the tax considerations applicable to the
initial purchasers of the Notes who purchase the Notes at their "issue price"
as defined in Section 1273 of the Code and does not discuss the impact of
ownership of the Notes on subsequent owners. The Company has not sought a
ruling from the Internal Revenue Service ("IRS") with respect to the matters
discussed herein and there is no assurance that the IRS will agree with this
discussion or the conclusions stated herein.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS
OR ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES)
IN APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
U.S. HOLDERS
GENERALLY. As used herein, the term U.S. Holder means a person who is
considered to be a U.S. resident for federal income tax purposes, or a person
who is considered to be domiciled in the U.S. for federal estate and gift tax
purposes. A person other than a U.S. Holder is referred to herein as a Non-U.S.
Holder.
INTEREST ON NOTES. Interest on a Note will generally be taxable to a U.S.
Holder as ordinary interest income in accordance with the U.S. Holder's method
of tax accounting at the time that such interest is accrued or (actually or
constructively) received.
DISPOSITION OF NOTES. In general, a U.S. Holder of a Note will recognize
gain or loss upon the sale, redemption, retirement or other disposition of the
Note measured by the difference between the amount of cash and fair market
value of other property received (except to the extent attributable to the
payment of accrued interest) and the U.S. Holder's adjusted tax basis in the
Note. A U.S. Holder's adjusted tax basis in a Note generally will equal the
cost of the Note to the U.S. Holder, less any principal payments received by
such U.S. Holder with respect to the Note. Any portion of the amount realized
on the sale or other disposition of a Note that represents accrued but unpaid
interest will be treated as a payment of such interest. With respect to
non-corporate U.S. Holders, the gain or loss on such disposition of Notes will
be a long-term capital gain or loss taxed if Notes have been held at the time
of such disposition as capital assets for more than one year but not more than
18 months at a rate no higher than 28% or if held more than 18 months at a rate
no higher than 20% and as a short-term capital gain or loss if the Notes have
been held for not more than 12 months.
NON-U.S. HOLDERS
PAYMENT OF INTEREST. In general, a Non-U.S. Holder will not be subject to
United States federal income tax by withholding or otherwise on the payment of
interest on a Note provided that the beneficial owner of the Note provides a
Form W-8 or a substitute Form W-8 (or a suitable successor form) unless (A)
such Non-U.S. Holder actually or constructively owns 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote
or is a "controlled foreign corporation" with respect to which the Company is a
"related person", or (B) such interest is effectively connected with the
conduct of a trade or business by the Non-U.S. Holder in the United States. A
Non-U.S. Holder that is not exempt from tax under such rules will be subject to
United States federal income tax withholding at a rate of 30% unless the
interest is effectively connected with the conduct of a United States trade or
business.
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GAIN ON DISPOSITION OF NOTES. A Non-U.S. Holder will not be subject to
United States federal income tax by withholding or otherwise on gain realized
on the disposition of a Note unless the gain is effectively connected with the
conduct of a trade or business by the Non-U.S. Holder in the United States.
EFFECTIVELY CONNECTED INCOME. To the extent that interest income or gain
on the disposition of Notes is effectively connected with the conduct of a
trade or business of the Non-U.S. Holder in the United States, such income will
be subject to United States federal income tax at the same rates generally
applicable to United States persons. Additionally, in the case of a non-U.S.
Holder which is a corporation, such effectively connected income may be subject
to the United States branch profits tax at the rate of 30%. Effectively
connected interest may be subject to withholding unless a properly completed
IRS Form 4224 is delivered to the payor.
ESTATE TAX. Notes held at the time of death by an individual Non-U.S.
Holder will not be subject to United States estate tax, provided that at such
time, (i) such Non-U.S. Holder did not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote, and (ii) the Notes were not held in connection with such
Non-U.S. Holder's trade or business in the United States.
TREATIES. Applicable treaties between the United States and a country in
which a Non-U.S. Holder is a resident may alter the tax consequences described
above.
NEW FINAL WITHHOLDING REGULATIONS. The Treasury Department recently
promulgated final regulations regarding the withholding rules described above
and backup withholding and information reporting rules described below that are
applicable to Non-U.S. Holders ("New Final Withholding Regulations"). In
general, the New Final Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements but rather unify
current certification procedures and forms and clarify reliance standards. The
New Final Withholding Regulations are generally effective for payments made
after December 31, 1998, subject to certain transition rules.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. HOLDERS
In general, information reporting to the IRS will apply to payments with
respect to the Notes and certain sales of the Notes. The payor will be required
to withhold backup withholding at a 31% rate (i) if the U.S. Holder fails to
provide a taxpayer identification number or otherwise establish exemption from
backup withholding, (ii) the IRS notifies the payor that the taxpayer
identification number is incorrect or (iii) there has been a failure to certify
that the U.S. Holder is not subject to backup withholding. Generally, amounts
paid as backup withholding will be a credit against the U.S. Holders' federal
income tax.
NON-U.S. HOLDERS
Generally, backup withholding of United States federal income tax at a
rate of 31% and information reporting may apply to payments of principal,
interest and premium (if any) to Non-U.S. Holders that are not "Exempt
Recipients" and that fail to provide certain information as may be required by
United States law and applicable regulations. Under currently effective United
States Treasury regulations, information reporting and backup withholding will
not apply to payments of interest on the Notes with respect to which either the
requisite certification, as described above under "Non-U.S. Holders--Payment of
Interest," has been received or an exemption has otherwise been established,
provided that neither the Company nor its paying agent has actual knowledge
that the holder is a United States person or that the conditions of any other
exemption are not in fact satisfied. Additionally, the payment of the proceeds
on the disposition of Notes to a Non-U.S. Holder by or through the United
States office of a broker will be subject to information reporting and backup
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withholding at a rate of 31% unless the owner certifies its status as a
Non-U.S. Holder under penalties of perjury or otherwise establishes an
exemption. Proceeds of the disposition by a Non-U.S. Holder of the Notes paid
to a Non-U.S. Holder by or through a foreign office of a broker generally will
not be subject to backup withholding. However, if such broker is a U.S. person,
a controlled foreign corporation or a foreign person 50% or more of whose gross
income from all sources for a specified three-year period is from activities
that are effectively connected with a United States trade or business,
information reporting will apply unless such broker has documentary evidence
(other than merely a foreign address) in its files of the owner's status as a
Non-U.S. Holder and has no actual knowledge to the contrary. Both backup
withholding and information reporting will apply to the proceeds from such
dispositions if the broker has actual knowledge that the payee is a U.S.
Holder.
Withholding, information reporting and backup withholding are highly
complex subjects and U.S. Holders and Non-U.S. Holders are urged to consult
their tax advisors regarding the application of withholding tax, information
reporting and backup withholding in their particular situation and the
availability of an exemption therefrom, and the procedures for obtaining any
such exemption including the impact of the New Final Withholding Regulations.
LIQUIDATED DAMAGES
As more fully described under "Description of Notes--Registration Rights;
Liquidated Damages," the Company may be required to pay Liquidated Damages to
U.S. Holders of the Old Notes. Although the matter is not free from doubt, the
Company intends to take the position that a U.S. Holder of an Old Note should
be required to report any Liquidated Damages as ordinary income for United
States federal income tax purposes only at the time it accrues or is received
in accordance with such holder's method of accounting. It is possible, however,
that the Internal Revenue Service may take a different position, in which case
the timing, character and amount of income may be different.
EXCHANGE OFFER
For federal income tax purposes, the exchange of Old Notes for New Notes
pursuant to the Exchange Offer will not result in recognition of gain or loss
by U.S. Holders of Notes, the holding period of the New Notes will include the
holding period of the Old Notes and the basis of the New Notes will be the same
as the basis of the Old Notes immediately before the exchange. In the case of a
holder of the Old Notes who is a cash basis taxpayer and whose taxable year
ends prior to the date on which the first interest payment under the Notes is
paid, the exchange of the Notes could result in the acceleration of interest
income accrued during the holding period of the Old Notes through the date of
the exchange.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of the New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes
acquired as a result of market-making activities or other trading activities.
The Company has agreed that it will make this prospectus available to any
broker-dealer for use in connection with any such resale for a period of one
year after the Expiration Date or until all participating broker-dealers have
so resold. Any such broker-dealer who intends to use this Prospectus in
connection with the resale of New Notes received in exchange for Old Notes
pursuant to the Exchange Offer must notify the Company, or cause the Company to
be notified, on or prior to the Expiration Date, that it is such a
broker-dealer.
The Company will not receive any proceeds from the issuance of the New
Notes offered hereby or from any sale of New Notes by broker-dealers. New Notes
received by broker-dealers for their own
91
<PAGE>
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concession from any such
broker-dealer and/or the purchasers of any New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker-dealer that participates in a distribution of New
Notes may be deemed to be an "underwriter" within the meaning of the Securities
Act, and any profit on any resale of New Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
The Company has not entered into any arrangement or understanding with any
person to distribute the New Notes to be received in the Exchange Offer, and to
the best of the Company's information and belief, each person participating in
the Exchange Offer is acquiring the New Notes in its ordinary course of
business and has no arrangement or understanding with any person to participate
in the distribution of the New Notes to be received in the Exchange Offer.
LEGAL MATTERS
The validity of the New Notes will be passed upon for the Company by
Akerman, Senterfitt & Eidson, P.A., Miami, Florida. Philip B. Schwartz, a
shareholder of Akerman, Senterfitt & Eidson, P.A., is a director of the Company
and certain attorneys employed by Akerman, Senterfitt & Eidson, P.A.
beneficially own shares of Company common stock as of the date hereof.
EXPERTS
The Company's consolidated financial statements included herein, to the
extent and for the periods indicated in their report, have been audited by
Arthur Andersen LLP, independent certified public accountants, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
Whitehall's consolidated financial statements included herein, to the
extent and for the periods indicated in their report, have been audited by
Arthur Andersen LLP, independent certified public accountants, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
Kratz's financial statements included herein, to the extent and for the
periods indicated in their report, have been audited by Clark, Schaefer,
Hackett & Co., independent certified public accountants, and are incorporated
by reference herein in reliance upon the authority of said firm as experts in
giving said report.
92
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
AVS'S CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
Report of Independent Certified Public Accountants .................................... F-3
Consolidated Balance Sheets at December 31, 1996 and 1997 ............................. F-4
Consolidated Statements of Income for the three years ended December 31, 1997 ......... F-6
Consolidated Statements of Partners' Capital and Stockholders' Equity
for the three years ended December 31, 1997 ......................................... F-7
Consolidated Statements of Cash Flows for the three years ended December 31, 1997 ..... F-8
Notes to AVS's Consolidated Financial Statements ...................................... F-9
Three Months Ended March 31, 1998 and 1997 (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1997 and March 31, 1998 ...... F-28
Condensed Consolidated Statements of Income
for the Three Months Ended March 31, 1997 and 1998 .................................. F-29
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1997 and 1998 .................................. F-30
Notes to Condensed Consolidated Financial Statements .................................. F-31
KRATZ-WILDE MACHINE COMPANY FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants .................................... F-38
Balance Sheets at October 31, 1996 and 1995 (audited) and at September 30, 1997
(unaudited) ......................................................................... F-39
Income Statements for the year ended October 31, 1996 (audited) and for the nine months
ended September 30, 1997 and 1996 (unaudited) ....................................... F-40
Statement of Retained Earnings ........................................................ F-41
Statements of Cash Flows for the year ended October 31, 1996 (audited) and the nine
months ended September 30, 1997 and 1996 (unaudited) ................................ F-42
Notes to Financial Statements ......................................................... F-44
WHITEHALL'S CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
Report of Independent Certified Public Accountants .................................... F-49
Consolidated Balance Sheets at December 31, 1996 and 1997 ............................. F-50
Consolidated Statements of Operations for the three years ended December 31, 1997 ..... F-52
Consolidated Statements of Shareholders' Equity for the three years ended
December 31, 1997 ................................................................... F-53
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997 ................................................................... F-54
Notes to Whitehall's Consolidated Financial Statements ................................ F-55
Three Months Ended March 31, 1998 and 1997 (unaudited)
Condensed Consolidated Balance Sheets at March 31, 1998 and December 31, 1997 ......... F-70
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Condensed Consolidated Statements of Income for the Three Months Ended
March 31, 1998 and 1997 .................................................... F-71
Condensed Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 .................................................... F-72
Notes to Whitehall's Condensed Consolidated Financial Statements ............. F-73
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Condensed Combined Balance Sheet ......................... P-2
Unaudited Pro Forma Condensed Combined Statements of Operations .............. P-3
Notes to Unaudited Pro Forma Condensed Combined Financial Statements ......... P-7
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Aviation Sales Company:
We have audited the accompanying consolidated balance sheets of Aviation
Sales Company (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income, partners' capital
and stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the financial position of Aviation Sales Company and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
March 2, 1998
(except with respect to the matters discussed
in Note 14 as to which the date is June 18, 1998).
F-3
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 1,262,149 $ 4,985,751
Accounts receivable, net of allowance for doubtful accounts of
$3,779,580 and $3,474,532 in 1996 and 1997, respectively......... 37,086,899 66,545,155
Inventories ....................................................... 72,974,397 139,313,722
Prepaid expenses .................................................. 4,067,332 3,111,728
Deferred income taxes ............................................. 1,972,410 2,004,148
------------ ------------
Total current assets ............................................ 117,363,187 215,960,504
------------ ------------
EQUIPMENT ON LEASE, net of accumulated amortization of
$2,601,069 and $3,626,522 in 1996 and 1997, respectively.......... 17,950,783 22,758,149
------------ ------------
FIXED ASSETS:
Property and equipment ............................................ 4,333,070 25,502,943
Less--Accumulated depreciation .................................... (2,027,197) (5,008,668)
------------ ------------
Total fixed assets .............................................. 2,305,873 20,494,275
------------ ------------
AMOUNTS DUE FROM RELATED PARTIES ................................... 2,914,615 2,891,343
------------ ------------
OTHER ASSETS:
Goodwill .......................................................... -- 17,712,145
Deposits and other ................................................ 369,191 1,009,369
Deferred income taxes ............................................. 3,406,331 1,485,380
Deferred financing costs, net ..................................... 872,568 2,675,684
------------ ------------
Total other assets .............................................. 4,648,090 22,882,578
------------ ------------
Total assets .................................................... $145,182,548 $284,986,849
============ ============
(CONTINUED)
</TABLE>
F-4
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ................................................. $ 15,736,288 $ 18,136,462
Accrued expenses ................................................. 8,501,372 16,362,777
Notes payable, current maturities--
Senior .......................................................... 7,428,571 12,258,391
Revolver ........................................................ 16,697,985 86,413,959
------------ ------------
Total current liabilities ...................................... 48,364,216 133,171,589
------------ ------------
LONG-TERM LIABILITIES:
Deferred income .................................................. 890,065 962,063
Notes payable--
Senior .......................................................... 14,857,143 50,412,550
Other ........................................................... -- 2,200,000
------------ ------------
Total long-term liabilities .................................... 15,747,208 53,574,613
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
outstanding .................................................... -- --
Common stock, $.001 par value, 30,000,000 shares authorized,
9,422,042 and 9,399,932 shares outstanding in 1996 and 1997,
respectively ................................................... 9,422 9,400
Additional paid-in capital ....................................... 71,304,446 70,660,457
Retained earnings ................................................ 9,757,256 27,570,790
------------ ------------
Total stockholders' equity ..................................... 81,071,124 98,240,647
------------ ------------
Total liabilities and stockholders' equity ..................... $145,182,548 $284,986,849
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1995 1996 1997
----------------- --------------- ---------------
<S> <C> <C> <C>
OPERATING REVENUES:
Sales of aircraft parts, net ............................... $ 108,434,709 $151,407,093 $243,819,616
Rentals from leases and other .............................. 5,368,174 10,536,776 13,079,138
------------- ------------ ------------
113,802,883 161,943,869 256,898,754
COST OF SALES ............................................... 71,314,263 110,358,502 180,712,495
------------- ------------ ------------
42,488,620 51,585,367 76,186,259
------------- ------------ ------------
OPERATING EXPENSES:
Operating .................................................. 8,988,894 9,319,981 14,286,220
Selling .................................................... 4,820,081 6,977,518 9,665,535
General and administrative ................................. 8,640,423 10,681,242 16,771,700
Depreciation and amortization .............................. 1,465,915 2,322,791 3,093,599
Gain on litigation settlement with former employee ......... -- -- (2,625,000)
------------- ------------ ------------
23,915,313 29,301,532 41,192,054
------------- ------------ ------------
INCOME FROM OPERATIONS ...................................... 18,573,307 22,283,835 34,994,205
INTEREST EXPENSE AND AMORTIZATION OF
DEFERRED FINANCING COSTS .................................. 8,287,584 5,350,020 7,431,916
------------- ------------ ------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ........................................ 10,285,723 16,933,815 27,562,289
INCOME TAX (BENEFIT) EXPENSE ................................ -- (426,033) 10,781,519
------------- ------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM ............................ 10,285,723 17,359,848 16,780,770
EXTRAORDINARY ITEM, NET OF INCOME
TAXES ..................................................... -- 1,862,140 --
------------- ------------ ------------
NET INCOME .................................................. $ 10,285,723 $ 15,497,708 $ 16,780,770
============= ============ ============
BASIC EARNINGS PER SHARE:
Income before extraordinary item ........................... $ 2.22 $ 1.78
Extraordinary item, net of income taxes .................... 0.24 --
------------ ------------
Net income ................................................. $ 1.98 $ 1.78
============ ============
DILUTED EARNINGS PER SHARE:
Income before extraordinary item ........................... $ 2.22 $ 1.77
Extraordinary item, net of income taxes .................... 0.24 --
------------ ------------
Net income ................................................. $ 1.98 $ 1.77
============ ============
PRO FORMA DILUTED AND BASIC EARNINGS
PER SHARE
Pro forma income before extraordinary item ................. $ 1.00 $ 1.32
Extraordinary item, net of income taxes .................... -- 0.24
------------- ------------
Pro forma net income ....................................... $ 1.00 $ 1.08
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL COMMON STOCK
PARTNERS' -----------------------
CAPITAL SHARES AMOUNT
---------------- ------------ ----------
<S> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1994 .................. $ 7,078,698 859,542 $ 859
Net income ...................................... 10,285,723 -- --
Distribution to partners ........................ (3,306,854) -- --
Acquisition of AvEng Trading Partners, Inc.
(Note 2) ....................................... -- 400,000 400
-------------- ------- ------
BALANCE AS OF DECEMBER 31, 1995 .................. 14,057,567 1,259,542 1,259
Distributions to partners prior to initial
public offering ................................ (3,041,936) -- --
Net income ...................................... 5,881,480 -- --
Exchange of partnership interests for
common stock (Note 1) .......................... (16,897,111) 4,425,000 4,425
Net proceeds from initial public offering ....... -- 3,737,500 3,738
-------------- --------- ------
BALANCE AS OF DECEMBER 31, 1996 .................. -- 9,422,042 9,422
Impact of immaterial poolings (Note 2) .......... -- -- --
Net income ...................................... -- -- --
Stock options exercised ......................... -- 34,890 35
Gain on litigation settlement with former
employee (Note 7) .............................. -- (75,000) (75)
Issuance of common stock to employees
(Note 6) ....................................... -- 18,000 18
-------------- --------- ------
BALANCE AS OF DECEMBER 31, 1997 .................. $ -- 9,399,932 $9,400
============== ========= ======
<CAPTION>
TOTAL
ADDITIONAL TOTAL PARTNERS' CAPITAL
PAID-IN RETAINED STOCKHOLDERS' AND STOCKHOLDERS'
CAPITAL EARNINGS EQUITY EQUITY
-------------- -------------- --------------- ------------------
<S> <C> <C> <C> <C>
BALANCE AS OF DECEMBER 31, 1994 .................. $ (859) $ -- $ -- $ 7,078,698
Net income ...................................... -- -- -- 10,285,723
Distribution to partners ........................ -- -- -- (3,306,854)
Acquisition of AvEng Trading Partners, Inc.
(Note 2) ....................................... -- 141,028 141,428 141,428
------------ ----------- ------------ --------------
BALANCE AS OF DECEMBER 31, 1995 .................. (859) 141,028 141,428 14,198,995
Distributions to partners prior to initial
public offering ................................ -- -- -- (3,041,936)
Net income ...................................... -- 9,616,228 9,616,228 15,497,708
Exchange of partnership interests for
common stock (Note 1) .......................... 6,732,436 -- 6,736,861 (10,160,250)
Net proceeds from initial public offering ....... 64,572,869 -- 64,576,607 64,576,607
------------ ----------- ------------ --------------
BALANCE AS OF DECEMBER 31, 1996 .................. 71,304,446 9,757,256 81,071,124 81,071,124
Impact of immaterial poolings (Note 2) .......... 582,764 1,032,764 1,615,528 1,615,528
Net income ...................................... -- 16,780,770 16,780,770 16,780,770
Stock options exercised ......................... 720,940 -- 720,975 720,975
Gain on litigation settlement with former
employee (Note 7) .............................. (2,624,925) -- (2,625,000) (2,625,000)
Issuance of common stock to employees
(Note 6) ....................................... 677,232 -- 677,250 677,250
------------ ----------- ------------ --------------
BALANCE AS OF DECEMBER 31, 1997 .................. $ 70,660,457 $27,570,790 $ 98,240,647 $ 98,240,647
============ =========== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER
31,
----------------
1995
----------------
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income .............................................................................. $ 10,285,723
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization .......................................................... 2,132,522
Gain on sale of equipment on lease, net of proceeds .................................... --
Provision for doubtful accounts ........................................................ 360,000
Deferred income taxes .................................................................. --
Extraordinary item, net of income taxes ................................................ --
Issuance of common stock to employees .................................................. --
Gain on litigation settlement with former employee ..................................... --
Increase in accounts receivable, net ................................................... (7,204,803)
(Increase) decrease in inventories ..................................................... 4,330,960
(Increase) decrease in prepaid expenses ................................................ (95)
(Increase) decrease in deposits and other .............................................. (662,426)
Increase in accounts payable ........................................................... 4,270,902
Increase in accrued expenses ........................................................... 365,864
Increase in deferred income ............................................................ 103,575
--------------
Net cash provided by (used in) operating activities .................................. 13,982,222
--------------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash acquired ......................................... (1,060,538)
Purchases of equipment .................................................................. (897,544)
Purchases of spare parts on lease ....................................................... (2,722,054)
Payments to/from related parties ........................................................ (60,059)
--------------
Net cash used in investing activities ................................................ (4,740,195)
--------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of senior debt ................................................................ (5,000,000)
Net issuance (repayment) of senior revolving facility ................................... (2,109,400)
Distributions to partners--ASC partnership .............................................. (3,306,854)
Payment of initial public offering proceeds to original credit facility and subordinated --
debt
Payments to J/T Aviation Partners ....................................................... --
Borrowings under new credit facility .................................................... --
Payments under new credit facility ...................................................... --
Issuance of senior debt under acquisition facility ...................................... --
Payments of senior debt under acquisition facility ...................................... --
Proceeds from note to prior owners of Kratz-Wilde ....................................... --
Proceeds from equipment loan ............................................................ --
Payments on equipment loan .............................................................. --
Proceeds from initial public offering ................................................... --
Stock options exercised ................................................................. --
Payment of deferred financing costs ..................................................... (54,745)
--------------
Net cash provided by (used in) financing activities .................................. (10,470,999)
--------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... (1,228,972)
--------------
CASH AND CASH EQUIVALENTS, beginning of period ........................................... 1,482,279
--------------
CASH AND CASH EQUIVALENTS, end of period ................................................. $ 253,307
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ........................................................................... $ 7,717,005
==============
Income taxes paid ....................................................................... $ --
==============
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income .............................................................................. $ 15,497,708 $ 16,780,770
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization .......................................................... 2,938,974 4,276,863
Gain on sale of equipment on lease, net of proceeds .................................... -- 3,796,929
Provision for doubtful accounts ........................................................ 1,954,000 3,081,063
Deferred income taxes .................................................................. (5,378,741) 1,331,943
Extraordinary item, net of income taxes ................................................ 1,862,140 --
Issuance of common stock to employees .................................................. -- 677,250
Gain on litigation settlement with former employee ..................................... -- (2,625,000)
Increase in accounts receivable, net ................................................... (12,366,644) (25,528,342)
(Increase) decrease in inventories ..................................................... (18,017,715) (57,836,421)
(Increase) decrease in prepaid expenses ................................................ (4,010,369) 975,076
(Increase) decrease in deposits and other .............................................. 503,273 (21,106)
Increase in accounts payable ........................................................... 5,238,370 571,706
Increase in accrued expenses ........................................................... 3,786,258 5,629,642
Increase in deferred income ............................................................ 12,750 71,998
-------------- --------------
Net cash provided by (used in) operating activities .................................. (7,979,996) (48,817,629)
-------------- --------------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash acquired ......................................... (8,953,820) (39,946,846)
Purchases of equipment .................................................................. (1,111,368) (4,394,433)
Purchases of spare parts on lease ....................................................... (7,829,797) (10,528,415)
Payments to/from related parties ........................................................ 116,583 23,272
-------------- --------------
Net cash used in investing activities ................................................ (17,778,402) (54,846,422)
-------------- --------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of senior debt ................................................................ (5,000,000) --
Net issuance (repayment) of senior revolving facility ................................... 15,763,592 --
Distributions to partners--ASC partnership .............................................. (3,041,936) --
Payment of initial public offering proceeds to original credit facility and subordinated (52,806,400) --
debt
Payments to J/T Aviation Partners ....................................................... (10,160,250) --
Borrowings under new credit facility .................................................... 16,697,985 66,270,149
Payments under new credit facility ...................................................... (2,857,143) (4,642,857)
Issuance of senior debt under acquisition facility ...................................... 6,000,000 40,000,000
Payments of senior debt under acquisition facility ...................................... (857,143) (2,000,000)
Proceeds from note to prior owners of Kratz-Wilde ....................................... -- 2,200,000
Proceeds from equipment loan ............................................................ -- 7,200,000
Payments on equipment loan .............................................................. -- (171,916)
Proceeds from initial public offering ................................................... 64,576,607 --
Stock options exercised ................................................................. -- 720,975
Payment of deferred financing costs ..................................................... (1,548,072) (2,188,698)
-------------- --------------
Net cash provided by (used in) financing activities .................................. 26,767,240 107,387,653
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... 1,008,842 3,723,602
-------------- --------------
CASH AND CASH EQUIVALENTS, beginning of period ........................................... 253,307 1,262,149
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period ................................................. $ 1,262,149 $ 4,985,751
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ........................................................................... $ 4,884,720 $ 5,978,262
============== ==============
Income taxes paid ....................................................................... $ 3,002,431 $ 6,518,025
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Aviation Sales Company ("ASC" or the "Company") is a Delaware corporation.
The operations of the Company were initially conducted by AJT Capital Partners
d/b/a Aerospace International Services ("AIS"). AIS was formed in February 1992
to acquire certain aircraft spare parts owned by Eastern Air Lines, Inc. (the
"EAL Inventory") and certain outstanding accounts receivable. On December 2,
1994, (effective November 30, 1994) AIS organized ASC Acquisition Partners,
L.P. (the "Partnership") to acquire the Aviation Sales Company business unit
from Aviall Services, Inc. ("Aviall") and to operate the business of AIS and
the Partnership on a going forward basis. Simultaneously with the acquisition,
AIS contributed all of its assets to the Partnership. For accounting purposes,
the Partnership and AIS were considered related parties as the ultimate
ownership interests of the Partnership were held by parties who owned
substantially the same ownership percentage in AIS. As a result, the
combination was accounted for in a manner similar to a pooling of interests.
The Company was formed on June 26, 1996, when: (i) all but one of the
parties holding interests in the Partnership contributed their interests in the
Partnership to the Company in exchange for 2,924,000 shares of the Company's
common stock, and (ii) one of the parties holding an interest in the
Partnership, J/T Aviation Partners ("J/T"), contributed its interest in the
Partnership to the Company in exchange for 1,501,000 shares of the Company's
common stock and an amount equal to the proceeds to be received by the Company
for 575,000 shares of common stock sold in the offering, as more completely
described below.
On June 26, 1996, the Company's registration statement on Form S-1 was
declared effective. On July 2, 1996, the Company closed its public offering of
3,250,000 shares of its common stock at $19 per share. In addition, the Company
granted the underwriters of its public offering a 30-day option to purchase up
to 487,500 additional shares of its common stock to cover the over-allotment
option. On July 25, 1996, the underwriters exercised the over-allotment option
and the Company sold an additional 487,500 shares of its common stock.
The net proceeds from the offering after all expenses were $64,576,607. Of
such proceeds, $10,160,250 was used to pay indebtedness due to J/T in
connection with the formation of the Company. The remaining proceeds were used
to repay senior and subordinated indebtedness. See Note 5.
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 wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
F-9
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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, 1996 and 1997, include cash held by the Company in demand deposit accounts.
REVENUE RECOGNITION
Sales of aircraft parts are recognized as revenues when the product is
shipped and title has passed to the customer. The Company records reserves for
estimated sales returns in the period sales are made. Reserves for returns as
of December 31, 1996 and 1997 were $1,227,598 and $1,740,813, respectively. The
Company also warehouses and sells inventories on behalf of others under
consignment arrangements. The Company records commission revenues on the sale
of consignment inventories upon shipment of the product. The Company exchanges
rotable parts in need of service or overhaul for new, overhauled or serviceable
parts in its inventory for a fee. Fees on exchanges are recorded in revenue at
the time the product is shipped. The Company performs inventory repair
management and warehouse management services to customers on a contractual
basis. These service fees are recorded in revenue over the course of the
contract as the services are rendered. Gain on sale of equipment on lease is
included in rentals from leases and other.
INVENTORIES
Inventories, which consist primarily of aviation parts, are stated at the
lower of cost or market on primarily a specific identification basis. In
instances where bulk purchases of inventory items are made, cost is determined
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 and are expensed as the parts associated with the
re-certification are sold. The Company enters into consignment arrangements for
bulk quantities of inventory items. Costs to disassemble and warehouse bulk
items are capitalized and expensed as the consigned items are sold. As a result
of the acquisitions of Aerocell and Kratz in 1997, the Company maintains raw
materials and work in progress inventories in support of those manufacturing
and overhaul facilities. At December 31, 1996 and 1997, inventories consisted
of the following:
<TABLE>
<CAPTION>
1996 1997
-------------- ----------------
<S> <C> <C>
Finished goods ........... $72,974,397 $ 131,582,005
Work in process .......... -- 2,114,408
Raw materials ............ -- 5,617,309
----------- -------------
$72,974,397 $ 139,313,722
=========== =============
</TABLE>
EQUIPMENT ON LEASE
The Company, primarily through Aviation Sales Leasing Company, leases
engines and spare parts 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
equipment on lease is amortized, principally on a straight-line basis, to the
estimated remaining net realizable value over the lease term or the economic
life of the equipment.
F-10
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
PROPERTY AND EQUIPMENT
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
--------------- ---------------
<S> <C> <C>
Land ................................. $ -- $ 396,810
Buildings ............................ -- 3,890,493
Machinery and equipment .............. 475,666 14,452,515
Furniture and fixtures ............... 3,857,404 6,763,125
------------ ------------
4,333,070 25,502,943
Accumulated depreciation .......... (2,027,197) (5,008,668)
------------ ------------
$ 2,305,873 $ 20,494,275
============ ============
</TABLE>
For financial reporting purposes, the Company provides for depreciation of
property and equipment using the straight-line method at annual rates
sufficient to amortize the cost of the assets less estimated salvage values
over their estimated useful lives. Estimated useful lives range from 3 to 15
years for the Company's property and equipment.
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, 1995, 1996 and 1997.
Depreciation expense amounted to $510,455, $746,626 and $1,777,559 for the
years ended December 31, 1995, 1996 and 1997, respectively.
INTANGIBLE ASSETS
The costs associated with obtaining financing are included in the
accompanying consolidated 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, 1995, 1996 and 1997 was
$666,607, $616,183 and $385,582, respectively. During the first quarter of
1998, the Company completed the offering and sale of $165 million in senior
subordinated notes, using a portion of the proceeds to retire existing debt. In
connection with these transactions, the Company will write off the deferred
financing costs related to the term loan agreements eliminated with the
proceeds. See Note 14.
The excess of the purchase price over the fair values of the net assets
acquired from Kratz-Wilde Machine Company, Inc. in 1997 was approximately $17.9
million. This amount has been recorded as goodwill, which is being amortized on
a straight-line basis over 20 years. Amortization expense for the year ended
December 31, 1997 was $189,602.
F-11
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
Deferred financing costs:
Original basis ................... $1,055,184 $ 3,243,882
Accumulated amortization ......... (182,616) (568,198)
---------- -----------
$ 872,568 $ 2,675,684
========== ===========
Goodwill
Original basis ................... $ -- $17,901,747
Accumulated amortization ......... -- (189,602)
---------- -----------
$ -- $17,712,145
========== ===========
</TABLE>
The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of intangible
assets or whether the remaining balance of intangible assets should be
evaluated for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the intangible assets in
measuring their recoverability.
DEFERRED INCOME
Advance payments and deposits received on operating leases are initially
deferred and subsequently recognized as the Company's obligations under the
lease agreement are fulfilled.
STOCK COMPENSATION PLANS
At December 31, 1997, the Company has two stock-based compensation plans,
which are more fully described in Note 12. The Company accounts for the fair
value of its grants under those plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25").
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") on January 1, 1996.
INCOME TAXES
Prior to June 26, 1996, the business of the Company was conducted by the
Partnership and therefore was not subject to income taxes. The Company, 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, became subject to federal and
state income taxes. At that time, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Deferred income taxes, which arose primarily as a result of temporary
differences between the Partnership's book and tax basis of certain assets and
liabilities, were recorded, resulting in an adjustment to the Company's
reported earnings in the period of adoption. A deferred income tax benefit of
$914,459 was credited to operations at the time of adoption. The transfer of
J/T's interest in the Partnership to the Company described in Note 1 resulted
in a step-up in basis in the Company's net assets for tax purposes. As a
result, during 1996, a deferred tax benefit of $3,962,498 was recorded. See
Note 11.
F-12
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Under SFAS 109, deferred tax assets or liabilities are computed based upon
the difference between the financial statement and income tax basis of assets
and liabilities using the enacted marginal tax rate applicable when the related
asset or liability is expected to be realized or settled. Deferred income tax
expenses or benefits are based on the changes in the asset or liability from
period to period. If available evidence suggests that it is more likely than
not that some portion or all of the deferred tax assets will not be realized, a
valuation allowance is required to reduce the deferred tax assets to the amount
that is more likely than not to be realized. Future changes in such valuation
allowance would be included in the provision for deferred income taxes in the
period of change.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short maturity of the
instruments and the provision for what management believes to be adequate
reserves for potential losses. Management believes the fair value of long-term
debt approximates the carrying amount of long-term debt in the accompanying
consolidated balance sheets as substantially all of the Company's long-term
debt reprices to market based on variable interest rate terms.
YEAR 2000 SYSTEMS COSTS
The Company utilizes software and related technologies throughout its
businesses that will be affected by the date change in the year 2000. The
Company is currently in the early stages of purchasing and implementing a new
management information system which management believes will mitigate the Year
2000 issues currently inherent in the Company's existing systems. However, the
Company cannot measure the impact that the Year 2000 issue will have on its
vendors, suppliers, customers and other parties with which it conducts
business. The cost of the new MIS system is expected to be approximately $8.0
million, which will be incurred over approximately a two-year period.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 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. Earnings per share have been restated to
comply with SFAS 128 for all periods presented. See Note 10.
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of" ("SFAS 121") in 1996. SFAS 121 establishes accounting
standards for recording the impairment of long-lived assets, certain
identifiable intangibles and goodwill. The adoption of SFAS 121 did not have a
material impact on the Company's financial position or results of its
operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), was issued by the Financial Accounting
Standards Board in June 1997. This statement establishes standards for the
reporting and display of comprehensive income and its components in a
F-13
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
full set of financial statements. The objective of SFAS 130 is to report a
measure (comprehensive income) of all changes in equity of an enterprise that
result from transactions and other economic events in a period other than
transactions with owners. Management believes the adoption of SFAS 130 will not
have a material impact on the Company's consolidated financial statements, and
upon adoption, will disclose comprehensive income in the consolidated statement
of stockholders' equity.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), was issued by
the Financial Accounting Standards Board in June 1997. This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires reporting of selected information
about operating segments in interim financial reports issued to shareholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. The Company will adopt SFAS 131
effective December 31, 1998.
NOTE 2--BUSINESS COMBINATIONS
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING:
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 $9.0 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.
In connection with the acquisition, the Company borrowed $6,000,000 of senior
notes payable to financial institutions and paid the balance in cash. See Note
5.
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, including acquisition costs
and net cash acquired, of approximately $39.6 million in cash and notes and the
assumption of certain liabilities of Kratz-Wilde in the approximate amount of
$2.2 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 and accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon the fair values at the date of
acquisition. The operations of Kratz-Wilde since the acquisition have been
included in the accompanying consolidated financial statements from the date of
acquisition. As a result of the Kratz-Wilde acquisition, the Company's
operating revenues increased approximately $6.5 million from the date of the
acquisition through December 31, 1997. In connection with the acquisition, the
Company borrowed $40.0 million of senior notes payable to financial
institutions, with the remainder of the acquisition price payable to the prior
owners over a two year period. See Note 5.
F-14
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BUSINESS COMBINATIONS--(CONTINUED)
The Company's unaudited pro forma consolidated results of operations
assuming the Kratz-Wilde acquisition had occurred on January 1, 1996 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997
---------------- -----------
(IN $ MILLIONS EXCEPT EARNINGS
PER SHARE)
<S> <C> <C>
Revenue ...................................................... $ 186.5 $ 286.6
Income before extraordinary item ............................. 8.0 (a) 19.3
Diluted earnings per share before extraordinary item ......... $ 1.03 $ 2.03
</TABLE>
- ----------------
(a) Includes an adjustment to record pro forma income tax expense as if the
Company had been a C corporation since January 1, 1996.
The unaudited pro forma results of operations are presented for
informational purposes only and may not necessarily reflect the future results
of operations of the Company or what the results of operations would have been
had the Company owned and operated this business as of January 1, 1996.
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING:
Shares issued to consummate acquisitions accounted for under the pooling
of interests method of accounting are reflected as outstanding for all periods
presented in the accompanying financial statements.
On December 10, 1996, the Company acquired AvEng Trading Partners, Inc.
("AvEng"), a company that was formed in 1995, 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 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 was accounted for using the pooling of interests
method of accounting, the accompanying consolidated financial statements prior
to December 31, 1996 have not been restated to give retroactive effect for the
acquisition due to the immateriality of the restated amounts.
On December 31, 1997, the Company acquired Apex Manufacturing, Inc.
("Apex") for consideration of 238,572 shares of the Company's common stock.
Although the acquisition was accounted for using the pooling of interests
method of accounting, the accompanying consolidated financial statements prior
to December 31, 1996 have not been restated to give retroactive effect for the
acquisition due to the immateriality of the restated amounts.
F-15
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BUSINESS COMBINATIONS--(CONTINUED)
Details of the results of operations of the Company and the pooled
entities for the periods before the pooling of interest combinations were
consummated are as follows:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
(IN $ MILLIONS)
<S> <C> <C>
Revenue:
The Company ............................................... $ 152.6 $ 230.3
AvEng ..................................................... 9.3 --
Aerocell and Apex ......................................... -- 26.6
-------- --------
$ 161.9 $ 256.9
======== ========
Income from continuing operations before extraordinary item:
The Company ............................................... $ 16.6 $ 13.7
AvEng ..................................................... 0.8 --
Aerocell and Apex ......................................... -- 3.1
-------- --------
$ 17.4 $ 16.8
======== ========
</TABLE>
The preliminary purchase price allocations for business combinations
accounted for under the purchase method of accounting (including historical
accounts of immaterial acquisitions accounted for under the pooling of
interests method of accounting) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1995 1996 1997
------------- -------------- ---------------
<S> <C> <C> <C>
Cash and cash equivalents ................................ $ -- $ -- $ 2,970,714
Accounts receivable ...................................... -- 2,898,460 7,010,977
Inventories .............................................. (522,439) 6,000,000 8,502,904
Prepaid expenses ......................................... -- -- 19,472
Deposits and other ....................................... -- -- 619,072
Fixed assets ............................................. -- 100,000 15,571,528
Goodwill ................................................. -- -- 17,901,747
Accounts payable ......................................... 1,582,977 (44,640) (1,828,468)
Accrued expenses ......................................... -- -- (2,231,763)
Deferred income taxes .................................... -- -- (557,270)
Notes payable ............................................ -- -- (3,445,825)
Common stock issued and paid in capital received ......... -- -- (1,615,528)
---------- ---------- ------------
1,060,538 8,953,820 42,917,560
Less cash acquired ....................................... -- -- (2,970,714)
---------- ---------- ------------
Cash used in acquisitions, net of cash acquired .......... $1,060,538 $8,953,820 $ 39,946,846
========== ========== ============
</TABLE>
F-16
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--ACCOUNTS RECEIVABLE
The Company 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 Company's
credit risks consist of accounts receivable from customers in the aviation
industry. The Company 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 or
accounts receivable for the years ended December 31, 1995, 1996 or 1997.
NOTE 4--EQUIPMENT ON LEASE
In the normal course of business, the Company leases engines and spare
parts to third parties pursuant to noncancelable operating leases ranging from
one to ten years. The cost and accumulated amortization of equipment on lease
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Equipment on lease, at cost ......... $ 20,551,852 $ 26,384,671
Accumulated amortization ............ (2,601,069) (3,626,522)
------------ ------------
$ 17,950,783 $ 22,758,149
============ ============
</TABLE>
At December 31, 1996 and 1997, $8,464,366 and $5,417,271, respectively, of
equipment on lease was maintained in the Far East.
Deposits of $890,065 and $962,063, respectively, received from the leases
are recorded as deferred income in the accompanying December 31, 1996 and 1997
consolidated balance sheets and will be applied in connection with final
settlement of these leases.
Amortization expense amounted to $955,460, $1,576,165 and $1,924,120 for
the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum lease receivables under the leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- ---------------------------
<S> <C>
1998 ................ $ 3,989,647
1999 ................ 3,205,884
2000 ................ 2,888,948
2001 ................ 1,707,384
2002 ................ 1,398,474
Thereafter .......... 3,744,000
-----------
$16,934,337
===========
</TABLE>
F-17
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--NOTES PAYABLE
At December 31, 1996 and 1997, notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
Amended Term Loan ................................... $ 17,142,857 $ 17,642,857
Amended Revolving Credit Facility:
Revolving loan ..................................... 16,697,985 86,413,959
Acquisition loan facility .......................... 5,142,857 38,000,000
Term loan--leased assets ............................ -- 7,028,084
Note payable to prior owners of Kratz-Wilde ......... -- 2,200,000
Less--Current maturities ............................ (24,126,556) (98,672,350)
------------- -------------
Net long-term notes payable ......................... $ 14,857,143 $ 52,612,550
============= =============
</TABLE>
Future maturities of notes payable at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
YEARS ENDING DECEMBER 31,
- -----------------------------
1998 ................. $ 98,672,350
1999 ................. 13,346,159
2000 ................. 13,522,188
2001 ................. 12,414,538
2002 ................. 13,329,665
------------
$151,284,900
============
</TABLE>
Prior to July 2, 1996, the Company financed its working capital needs
primarily through, (a) a series of term loans (with $55 million in principal
outstanding at December 31, 1995) payable periodically through November 30,
2000, and (b) a $20 million revolving credit facility expiring November 30,
1999.
On July 2, 1996, the Company completed the repayment of indebtedness and
restructuring of its Revolving Credit Facility per the terms of an amended
credit facility (the "Amended Credit Facility") dated June 27, 1996. The
Amended Credit Facility consisted of (a) a term loan facility in an original
principal amount of $20.0 million and (b) a $50.0 million revolving loan,
letter of credit and acquisition loan facility. In connection with the
repayment and restructuring of the previous bank lending agreement, the Company
wrote-off $3,052,688 of deferred financing costs (resulting in an extraordinary
item, net of income taxes of $1,862,140).
On August 22, 1997, the Company amended its Amended Credit Facility
pursuant to the terms of a Second Amended and Restated Credit Agreement, which
was, itself, amended on October 17, 1997.
On October 17, 1997, the Company amended the Second Amended Credit
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
F-18
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--NOTES PAYABLE--(CONTINUED)
$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 December 31, 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 other covenants and mandatory prepayment events, as defined. At
December 31, 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. On December 31,
1997, the outstanding balances under the Third Amended Term Loan and Third
Amended Revolving Credit Facility were $55.6 million (including $38.0 million
borrowed under the acquisition subfacility) and $86.4 million, respectively.
The Company entered into a subordinated loan agreement (the "Subordinated
Debt") on December 2, 1994, whereby the Partnership borrowed $7.0 million from
the partners which was 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. Upon the earlier to occur of June 2, 2001 or the repayment
of the Subordinated Debt in full, the Company was required to pay to the
partners an additional facility fee of $350,000, provided that, if the
Subordinated Debt was prepaid in full prior to June 2, 1996, the Company would
be released from its obligation to pay such facility fee. On July 2, 1996, the
Company repaid the Subordinated Debt in full and the facility fee with a
portion of the proceeds of the initial public offering. The Subordinated Debt
bore interest at prime plus 5 percent.
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 a 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 December
31, 1997, the Company was in compliance with all covenants of this term loan.
As described in Note 2, the Company borrowed $6.0 million on August 9,
1996, under the acquisition loan portion of the Amended Revolving Credit
Facility for the acquisition of certain assets of the business of Dixie. This
credit facility has since been amended, as described above.
F-19
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--NOTES PAYABLE--(CONTINUED)
In connection with the October 17, 1997 acquisition of Kratz-Wilde (See
Note 2), the company entered into an agreement with the prior owners to pay
$2.2 million of the acquisition price over a two year period. Payments of
$1,250,000 are due on January 1, 1999 and January 1, 2000. Interest on this
note has been imputed at 8%.
NOTE 6--RELATED-PARTY TRANSACTIONS
The Company leases its corporate headquarters and warehouse in Miami,
Florida (the "Miami Property") and a warehouse in Pearland, Texas (the
"Pearland Property") from entities controlled by certain shareholders of the
Company. The lease on the Miami Property calls for annual payments in the
amount of $892,990 expiring on December 2, 2014. The Company is required to
make annual payments under the Pearland Property lease in the amount of
$114,468. This lease expires December 2, 2000. The Company believes the terms
of these leases are no less favorable than could be obtained from an
unaffiliated third party. As described more thoroughly in Note 14, the Company
purchased the Pearland Property on March 13, 1998 for approximately $1.8
million.
In connection with the purchase of the Miami Property by the related
party, the Company made an unsecured $2,465,519 loan to the related party,
which bears interest at 8% per annum, with principal and interest due in a
single payment on December 2, 2004. The outstanding balance is included in
amounts due from related parties in the accompanying balance sheets. The
Company believes the terms of this loan are no less favorable than could be
obtained from an unaffiliated third party.
At December 31, 1997, as payment of bonuses, six officers of the Company
were each granted 3,000 shares of the Company's common stock. The fair value of
these shares on the date of issuance, $677,250, has been included in general
and administrative expenses in the accompanying 1997 statement of operations.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company 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 Company.
The Company 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, based upon a sliding percentage scale
of their base salaries, provided the Company achieves certain financial
operating results, as defined. Further, each of the employment agreements
provides that in the event of (a) a change in control of the Company including
the vesting of decision-making authority in one of the Company's current
officers; (b) 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 (c) 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.
At January 1, 1995, five officers and employees of the Company were
granted options (the "Options") by the partners to purchase an aggregate of
13.5% of the outstanding limited partnership
F-20
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
interests in the Partnership for an aggregate exercise price of $1,437,027,
which was greater than the fair market value, as determined by an independent,
third party, 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.
On November 26, 1997, the Company settled an outstanding legal claim
against a former employee and shareholder of the Company. As part of this
settlement, the employee agreed to leave the Company and transfer 75,000 shares
of the Company's common stock back to the Company, which shares the Company
immediately retired. The fair value of the shares at the date of the
settlement, approximately $2.6 million, is included in the accompanying 1997
statement of operations as gain on litigation settlement with former employee.
The Company has purchase commitments to various airlines whereby the
Company sells aircraft inventory as agent for such airlines. Pursuant to such
agreements, the Company has commitments to various airlines requiring the
Company to purchase a minimum amount of inventory from such airlines if minimum
sales targets are not met. Such commitments, which total approximately
$15,000,000, are to be fulfilled over the next four years. In the opinion of
management, the Company's commitments will be realized through future sales of
aircraft inventory owned by such airlines.
Effective January 1, 1995, the Company established a qualified defined
contribution plan (the "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 Company may elect, at its discretion, to
make contributions to the Plan in any year. The Company contributed
approximately $197,000, $309,000 and $296,000 to the Plan in 1995, 1996 and
1997, respectively. The Company does not provide retired employees any health
or life insurance benefits.
NOTE 8--LEASES
The Company leases certain buildings and office equipment under operating
lease agreements. Two of the buildings are leased from related parties of the
Company (See Note 6). For the years ended December 31, 1995, 1996 and 1997,
rent expense under these leases amounted to $1,554,677, $1,813,113 and
$2,300,585, respectively. Minimum rental commitments under operating leases are
as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31, TO RELATED PARTIES TO THIRD PARTIES
- --------------------------- -------------------- -----------------
<S> <C> <C>
1998 ................ $ 1,007,458 $1,466,654
1999 ................ 1,007,458 760,537
2000 ................ 997,919 461,099
2001 ................ 892,990 377,960
2002 ................ 892,990 293,522
Thereafter .......... 10,715,884 290,688
----------- ----------
$15,514,699 $3,650,460
=========== ==========
</TABLE>
F-21
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--DOMESTIC AND EXPORT SALES INFORMATION
Substantially all of the Company's operating profits and identifiable
assets are sourced from or located in the United States. Information about the
Company's domestic and export sales for the three years ended December 31, 1997
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- -----------
<S> <C> <C> <C>
NET REVENUES BY GEOGRAPHICAL AREAS
United States ................... $ 68,052 $ 94,591 $179,876
Export Sales:
Europe ......................... 28,666 40,308 43,318
Far East ....................... 7,525 13,907 13,852
Latin America .................. 9,560 13,138 19,853
-------- -------- --------
$113,803 $161,944 $256,899
======== ======== ========
</TABLE>
NOTE 10--EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share" during 1997. SFAS 128 establishes standards
for computing and presenting basic and diluted earnings per share. Basic
earnings per share is computed by dividing net income by the weighted average
common shares outstanding during the year. Diluted earnings per share is based
on the combined weighted average number of common shares and common share
equivalents outstanding which include, where appropriate, the assumed exercise
of options. In computing diluted earnings per share, the Company has utilized
the treasury stock method. All prior period earnings per share data have been
restated to conform with SFAS 128.
The computation of weighted average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Weighted average shares outstanding used in calculating
basic earnings per share ............................... 6,259,542 7,811,229 9,423,195
Effect of dilutive options .............................. -- 8,608 60,902
--------- --------- ---------
Weighted average common and common equivalent shares
used in calculating diluted earnings per share ......... 6,259,542 7,819,837 9,484,097
========= ========= =========
</TABLE>
For business combinations accounted for as pooling of interests, earnings
per share computations are based on the aggregate of the weighted-average
outstanding shares of the constituent businesses, adjusted to equivalent shares
of the surviving business for all periods presented.
PRO FORMA EARNINGS PER SHARE
Prior to June 26, 1996, the operations of the Company were conducted by
the Partnership, a Delaware general partnership and, therefore, the results of
operations for the year ended December 31, 1995 and for the period January 1,
1996 through June 26, 1996, do not include a provision for income taxes, as the
income of the Partnership passed directly to its partners.
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 consolidated statements
of income for the years ended December 31, 1995 and 1996:
F-22
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--EARNINGS PER SHARE--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Historical income before income taxes
and extraordinary item ............................ $10,285,723 $16,933,815
Pro forma provision for income taxes ............... 4,011,432 6,604,188
----------- -----------
Pro forma income before extraordinary item ......... 6,274,291 10,329,627
Extraordinary item, net of income taxes ............ -- 1,862,140
----------- -----------
Pro forma net income ............................... $ 6,274,291 $ 8,467,487
=========== ===========
</TABLE>
Pro forma basic earnings per share have been computed by dividing pro
forma net income by the weighted average number of common shares outstanding.
Pro forma diluted earnings per share is based on the combined weighted average
number of common shares and common share equivalents outstanding which include,
where appropriate, the assumed exercise of options. For periods prior to the
closing of the Company's public offering, the pro forma weighted average number
of common shares outstanding assumes that the 4,425,000 shares issued to the
partners and the 575,000 shares of common stock, the net proceeds in respect of
which were paid to J/T, were outstanding in all periods.
NOTE 11--INCOME TAXES
The income tax (benefit) expense for the years ended December 31, 1996 and
1997 consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1997
--------------- -------------
<S> <C> <C>
Current
Federal ..................................... $ 3,279,832 $ 8,480,389
State ....................................... 482,328 969,187
------------ -----------
3,762,160 9,449,576
------------ -----------
Deferred
Federal ..................................... (4,689,159) 1,195,333
State ....................................... (689,582) 136,610
------------ -----------
(5,378,741) 1,331,943
------------ -----------
Total income tax (benefit) expense ......... (1,616,581) 10,781,519
Less: benefit for income taxes relating to
extraordinary item ...................... (1,190,548) --
------------ -----------
Income tax (benefit) expense relating to
continuing operations ................... $ (426,033) $10,781,519
============ ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of December 31, 1996 and 1997 are as
follows:
F-23
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--INCOME TAXES--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Deferred tax assets, net:
Allowance for doubtful accounts ......... $1,103,384 $ 534,106
Inventories ............................. 1,144,941 1,783,222
Property and equipment .................. 3,735,079 2,215,910
Spare parts on lease .................... (198,626) (692,936)
Other ................................... 11,706 66,969
---------- ----------
5,796,484 3,907,271
Less: valuation allowance .............. (417,743) (417,743)
---------- ----------
Net deferred tax assets ................ $5,378,741 $3,489,528
========== ==========
</TABLE>
The reconciliation of the federal statutory rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ----------
<S> <C> <C>
Federal income tax at the statutory rate ........................... 35.0% 35.0%
Increases (reductions) in tax rate resulting from:
Partnership income not subject to taxation ........................ (12.2) 0.0
Step-up in tax basis resulting from transfer of J/T's interest (see
Note 1) ......................................................... (21.0) 0.0
Transfer of net assets of the Partnership to the Company (see
Note 1) ......................................................... ( 7.1) 0.0
State income taxes, net of federal tax benefit .................... 4.6 4.1
Other ............................................................. ( 1.8) 0.0
----- ----
Effective income tax rate .......................................... ( 2.5)% 39.1%
===== ====
</TABLE>
NOTE 12--STOCK OPTION PLANS
In connection with the organization of the Company, the Company 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 then
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 then outstanding may be granted to executive officers, employees
(including employees who are directors), independent contractors and
consultants of the Company. 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 the particular options are granted. Options granted under the
Plans may have maximum terms of not more than ten 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.
F-24
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--STOCK OPTION PLANS--(CONTINUED)
A summary of activity in the Company's stock option plans through December
31, 1997 is as follows:
<TABLE>
<CAPTION>
SHARES UNDER WEIGHTED AVERAGE
OPTION EXERCISE PRICE
-------------- -----------------
<S> <C> <C>
Outstanding at January 1, 1996 .................. -- --
Granted ........................................ 197,600 $ 19.00
-------
Outstanding at December 31, 1996 ................ 197,600 $ 19.00
Granted(a) ..................................... 208,800 $ 25.08
Exercised ...................................... (34,890) $ 20.65
Cancelled ...................................... (13,614) $ 20.84
-------
Outstanding at December 31, 1997 ................ 357,896 $ 22.32
=======
Options exercisable:
At December 31, 1996 ........................... 122,200 $ 19.00
At December 31, 1997 ........................... 224,384 $ 21.45
Available to grant at December 31, 1997 ......... 442,104
</TABLE>
- ----------------
(a) 1997 grant prices ranged from $24.07 per share to $25.86 per share.
The following table summarizes information about outstanding and
exercisable stock options at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
CONTRACTUAL EXERCISE EXERCISE
RANGE OF EXERCISE PRICE SHARES LIFE PRICE SHARES PRICE
- -------------------------- --------- ------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
$ 19.00 162,325 8.5 $ 19.00 131,833 $ 19.00
$24.07 - $25.86 195,571 9.5 $ 25.07 92,551 $ 24.93
------- -------
357,896 9.0 $ 22.32 224,384 $ 21.45
======= =======
</TABLE>
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-25
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--STOCK OPTION PLANS--(CONTINUED)
The Company accounts for the fair value of its grants under those plans in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" whereby no compensation cost related to stock
options is deducted in determining net income. Had compensation cost for the
Company's stock option plans been determined pursuant to Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Company's net income and earnings per share would have decreased
accordingly. Using the Black-Scholes option pricing model, the Company's pro
forma net income, pro forma earnings per share and pro forma weighted average
fair value of options granted, with related assumptions, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
Pro forma net income ........................... $14,679,681 $15,286,498
Pro forma basic earnings per share ............. $ 1.88 $ 1.62
Pro forma diluted earnings per share ........... $ 1.88 $ 1.61
Risk free interest rates ....................... 6% 7%
Expected lives ................................. 7 years 7 years
Expected volatility ............................ 40% 40%
Weighted average grant date fair value ......... $ 9.80 $ 13.43
</TABLE>
NOTE 13--QUARTERLY FINANCIAL DATA (UNAUDITED)
Results have been restated for pooling transactions in the year of
acquisition. See Note 2.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ---------------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C>
1997:
Operating revenues ......................................... $ 54,853 $ 58,118 $ 67,104 $ 76,824
Income from operations ..................................... 6,087 8,475 9,207 11,225(a)
Net income ................................................. 3,048 4,251 4,484 4,998
Diluted income before extraordinary item per share ......... $ 0.32 $ 0.45 $ 0.47 $ 0.53
Diluted net income per share ............................... $ 0.32 $ 0.45 $ 0.47 $ 0.53
1996:
Operating revenues ......................................... $ 35,554 $ 36,159 $ 41,181 $ 49,050
Income from operations ..................................... 5,426 5,027 5,911 5,920
Net income ................................................. 3,395 3,904 5,079 3,120
Pro forma diluted income before extraordinary item
per share ................................................. $ 0.26 $ 0.30 $ 0.51 $ 0.24
Pro forma diluted net income per share ..................... $ 0.26 $ 0.30 $ 0.27 $ 0.24
1995:
Operating revenues ......................................... $ 28,451 $ 28,749 $ 28,781 $ 27,822
Income from operations ..................................... 6,034 5,165 3,966 3,408
Net income ................................................. 3,951 3,065 1,872 1,398
Pro forma diluted income before extraordinary item
per share ................................................. $ 0.38 $ 0.30 $ 0.18 $ 0.14
Pro forma diluted net income per share ..................... $ 0.38 $ 0.30 $ 0.18 $ 0.14
</TABLE>
- ----------------
(a) Includes gain on legal settlement with former employee of approximately $2.6
million.
F-26
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14-- SUBSEQUENT EVENTS
On March 9, 1998 the Company completed the acquisition of Caribe Aviation,
Inc. (Caribe) and Caribe's wholly owned subsidiary Aircraft Interior Design,
Inc. ("Aircraft"). The purchase price was approximately $25 million, consisting
of $5 million in cash, and $5 million in promissory notes payable over two
years; the issuance of 182,143 shares of the Company's authorized, but
unissued, common stock; and the repayment of approximately $7.5 million of
indebtedness owed by Caribe and Aircraft to a financial institution. The
acquisition will be accounted for using the purchase method of accounting and
accordingly, the purchase price will be allocated to the assets purchased and
the liabilities assumed based upon the fair market value at the date of
acquisition. The estimated excess of the purchase price over the fair values of
the net assets acquired is approximately $10.7 million. This amount will be
recorded as goodwill and will be amortized on a straight-line basis over 20
years. The operations of Caribe and Aircraft will be included in the Company's
consolidated financial statements from the date of acquisition. Caribe and
Aircraft had consolidated fiscal 1997 revenues of approximately $27 million.
The pre-acquisition operations of Caribe are not material to the operations of
the Company.
On February 17, 1998, the Company completed the offering and sale of $165
million in senior subordinated notes (the "Notes") due in 2008 with a coupon
rate of 8.125% at a price of 99.395%. Proceeds were used to repay debt and for
general corporate purposes, including acquisitions, working capital needs and
capital expenditures. In connection with this transaction, the Company will
write off the deferred financing costs related to term loan agreements
eliminated with the proceeds from the senior subordinated notes. The Notes are
unconditionally guaranteed, on a senior subordinated basis, by substantially
all of the Company's existing subsidiaries.
On March 13, 1998, the Company entered into an agreement to purchase its
Pearland, Texas warehouse facility from a related party (see Note 6). The total
purchase price of approximately $1.8 million was paid in cash and through the
reduction of amounts receivable from the related party at the date of the
transaction.
On March 26, 1998, the Company entered into a definitive agreement with
Whitehall Corporation, pursuant to which the two companies will merge. Under
the terms of the agreement, at the effective date of the merger, the
shareholders of Whitehall will receive 0.5143 shares of Aviation Sales common
stock for each share of Whitehall stock outstanding on such date. Based on the
approximately 6.0 million Whitehall shares outstanding, Aviation Sales will
issue approximately 3.1 million shares of Aviation Sales' common stock to
Whitehall's stockholders in the merger transaction. Based upon the closing
price of Aviation Sales' common stock on March 25, 1998, the value of the
transaction is approximately $142 million, which includes the assumption of
approximately $9.4 million of Whitehall's outstanding indebtedness. The
transaction, which will be accounted for as a pooling of interest, is expected
to close at the end of the second quarter of 1998. Whitehall had fiscal 1997
revenues of approximately $65.8 million.
On June 18, 1998, the Company's Compensation Committee rescinded the
December 31, 1997 issuance of 18,000 shares of the Company's common stock as
bonuses to six officers of the Company. No consideration was provided or will be
provided in the future in connection with the rescission.
F-27
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 MARCH 31, 1998
------------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......................................... $ 4,985,751 $ 5,074,019
Accounts receivable, net ........................................... 66,545,155 76,209,381
Inventories ........................................................ 139,313,722 179,850,077
Prepaid expenses ................................................... 3,111,728 3,418,913
Deferred income taxes .............................................. 2,004,148 2,454,148
------------ ------------
Total current assets ............................................. 215,960,504 267,006,538
------------ ------------
SPARE PARTS ON LEASE, net ........................................... 22,758,149 16,823,403
FIXED ASSETS
Property and equipment ............................................. 25,502,943 33,274,233
Less--Accumulated depreciation ..................................... (5,008,668) (5,809,024)
------------ ------------
Total fixed assets ............................................... 20,494,275 27,465,209
AMOUNTS DUE FROM RELATED PARTIES .................................... 2,891,343 2,354,153
------------ ------------
OTHER ASSETS
Goodwill ........................................................... 17,712,145 27,051,995
Deposits and other ................................................. 1,009,369 1,414,261
Deferred income taxes .............................................. 1,485,380 1,243,580
Deferred financing costs, net ...................................... 2,675,684 6,180,248
------------ ------------
Total other assets ............................................... 22,882,578 35,890,084
------------ ------------
Total assets ..................................................... $284,986,849 $349,539,387
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ................................................... $ 18,136,462 $ 21,209,327
Accrued expenses ................................................... 16,362,777 15,774,618
Notes payable, current maturities
Senior ............................................................ 12,258,391 555,396
Revolver .......................................................... 86,413,959 25,238,424
Other ............................................................. -- 3,500,000
------------ ------------
Total current liabilities ........................................ 133,171,589 66,277,765
------------ ------------
LONG-TERM LIABILITIES
Deferred income .................................................... 962,063 1,240,147
Notes Payable--
Senior ............................................................ 50,412,550 6,340,795
Other ............................................................. 2,200,000 3,700,000
Bonds payable, net ................................................. -- 164,014,228
------------ ------------
Total long-term liabilities ...................................... 53,574,613 175,295,170
------------ ------------
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,
9,399,932 and 9,593,560 shares outstanding at December 31, 1997 and
March 31, 1998, respectively ...................................... 9,400 9,594
Additional paid-in capital ......................................... 70,660,457 76,635,371
Retained earnings .................................................. 27,570,790 31,321,487
------------ ------------
Total stockholders' equity ....................................... 98,240,647 107,966,452
------------ ------------
Total liabilities and stockholders' equity ....................... $284,986,849 $349,539,387
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-28
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
OPERATING REVENUES
Sales of aircraft parts, net .......................................... $ 52,476,263 $ 80,329,623
Rentals from leases and other ......................................... 2,376,639 2,126,480
------------ ------------
54,852,902 82,456,103
COST OF SALES .......................................................... 39,749,192 57,860,554
------------ ------------
15,103,710 24,595,549
------------ ------------
OPERATING EXPENSES
Operating ............................................................. 3,405,776 3,305,454
Selling ............................................................... 1,941,325 2,734,140
General and administrative ............................................ 2,995,444 6,752,868
Depreciation and amortization ......................................... 673,936 1,111,319
------------ ------------
9,016,481 13,903,781
------------ ------------
INCOME FROM OPERATIONS ................................................. 6,087,229 10,691,768
OTHER EXPENSES
Interest expense and amortization of deferred financing costs ......... 1,072,221 3,630,049
------------ ------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ............................................... 5,015,008 7,061,719
INCOME TAX EXPENSE ..................................................... 1,966,830 2,712,351
------------ ------------
INCOME BEFORE EXTRAORDINARY ITEM ....................................... 3,048,178 4,349,368
EXTRAORDINARY ITEM, NET OF
INCOME TAXES (Note 3) ................................................ -- 598,671
------------ ------------
NET INCOME ............................................................. $ 3,048,178 $ 3,750,697
============ ============
BASIC EARNINGS PER SHARE:
Income before extraordinary item ...................................... $ 0.32 $ 0.46
Extraordinary item, net of income taxes ............................... -- 0.06
------------ ------------
Net income ............................................................ $ 0.32 $ 0.40
============ ============
DILUTED EARNINGS PER SHARE:
Income before extraordinary item ...................................... $ 0.32 $ 0.45
Extraordinary item, net of income taxes ............................... -- 0.06
------------ ------------
Net income ............................................................ $ 0.32 $ 0.39
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-29
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------------
1997 1998
-------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 3,048,178 $ 3,750,697
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization .................................... 882,583 1,695,019
Extraordinary item, net of income taxes .......................... -- 598,671
Gain on sale of spare parts on lease, net of proceeds ............ 2,158,162 -
Provision for doubtful accounts .................................. 285,000 390,000
Increase in accounts receivable .................................. (6,937,167) (5,914,090)
Increase in inventory ............................................ (8,426,633) (31,412,002)
(Increase) decrease in prepaid expenses .......................... 1,675,621 (307,185)
Increase in deferred income taxes ................................ (155,595) (208,200)
Increase in deposits and other ................................... (466,415) (298,941)
Increase in accounts payable ..................................... (5,949,618) (278,772)
Increase (decrease) in accrued expenses .......................... 4,272,355 (205,402)
Increase in deferred revenue ..................................... -- 278,084
------------ -------------
Net cash (used in) operating activities ........................ (9,613,529) (31,912,121)
------------ -------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash used in acquisitions ......................................... (341,595) (12,564,442)
Purchases of equipment ............................................ (712,735) (4,104,948)
Transfer of spare parts on lease to inventory ..................... -- 7,506,528
Purchase of spare parts on lease .................................. (1,098,226) (2,020,618)
Payments from related parties ..................................... 79,335 537,190
------------ -------------
Net cash used in investing activities .......................... (2,073,221) (10,646,290)
------------ -------------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (payments) under senior revolving facility ......... 13,321,711 (61,175,535)
(Payments) under term and acquisition loan facilities ............. (1,857,143) (55,642,857)
Payment on equipment loan ......................................... -- (131,893)
Proceeds from issuance of senior subordinated notes ............... -- 164,001,750
Stock options exercised ........................................... -- 256,387
Payment of deferred financing costs ............................... (80,244) (4,661,173)
------------ -------------
Net cash provided by financing activities ...................... 11,384,324 42,646,679
------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... (302,426) 88,268
------------ -------------
CASH AND CASH EQUIVALENTS, beginning of period ..................... 1,262,149 4,985,751
------------ -------------
CASH AND CASH EQUIVALENTS, end of period ........................... $ 959,723 $ 5,074,019
============ =============
Interest paid ..................................................... $ 822,033 $ 2,560,308
============ =============
Income taxes paid ................................................. $ 425,230 $ 4,798,530
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-30
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION:
INTERIM CONDENSED CONSOLIDATED 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 consolidated financial statements should be read in
conjunction with the Company's December 31, 1997 financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-11775).
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements of Aviation Sales Company ("AVS") and
subsidiaries (the "Company") contain all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial position of
the Company as of March 31,1998 and the results of its operations and cash
flows for the three month periods ended March 31, 1998 and 1997. The results of
operations and cash flows for the three month period ended March 31, 1998 are
not necessarily indicative of the results of operations or cash flows which may
be reported for the year ending December 31, 1998.
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 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. Earnings per share have been restated to
comply with SFAS 128 for all periods presented.
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), during the quarter ended March
31, 1998. SFAS 130 was issued by the Financial Accounting Standards Board in
June 1997 and establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
The objective of SFAS 130 is to report a measure (comprehensive income) of all
changes in equity of an enterprise that result from transactions and other
economic events in a period other than transactions with owners. The adoption
of SFAS 130 did not have a material impact on the Company's consolidated
financial statements, as comprehensive income was equal to net income for all
periods presented.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), was issued by
the Financial Accounting Standards
F-31
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION:--(CONTINUED)
Board in June 1997. This statement establishes standards for reporting
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company will adopt SFAS 131 effective December 31, 1998.
2. ACQUISITIONS:
On March 26, 1998, the Company entered into a definitive agreement with
Whitehall Corporation ("Whitehall"), pursuant to which the two companies agreed
to merge. Under the terms of the agreement, at the effective date of the
merger, the shareholders of Whitehall will receive 0.5143 shares of the
Company's common stock for each share of Whitehall stock outstanding on such
date. Based on the approximately 6.0 million Whitehall shares outstanding as of
March 31, 1998, the Company will issue approximately 3.1 million shares of the
Company's common stock to Whitehall's stockholders in the merger transaction.
Based upon the closing price of the Company's common stock on March 25, 1998,
the value of the transaction is approximately $142 million, which includes the
assumption of approximately $9.4 million of Whitehall's outstanding
indebtedness. The transaction, which will be accounted for as a pooling of
interest, is expected to close during the third quarter of 1998. Whitehall had
revenues of approximately $65.8 million for the fiscal year ended December 31,
1997. During the quarter ended March 31, 1998, the Company incurred merger
expenses of approximately $.7 million relating to the Whitehall transaction,
which are included in general and administrative expenses in the accompanying
condensed consolidated statement of income for such period.
On March 6, 1998 the Company completed the acquisition of Caribe Aviation,
Inc. ("Caribe") and Caribe's wholly-owned subsidiary Aircraft Interior Design,
Inc. ("AIDI"). The purchase price paid by the Company to acquire Caribe and
AIDI was approximately $23.3 million, consisting of: (i) $5.0 million in cash,
(ii) $5.0 million in promissory notes payable over two years, (iii) the
issuance of 182,143 shares of the Company's authorized, but unissued, common
stock, and (iv) the repayment of approximately $7.6 million of indebtedness
owed by Caribe and AIDI to a financial institution. The acquisition has been
accounted for using the purchase method of accounting and accordingly, the
purchase price has been allocated to the assets purchased and the liabilities
assumed based upon the fair market value at the date of acquisition. The excess
of the purchase price over the fair values of the net assets acquired is
approximately $9.6 million. This amount has been recorded as goodwill and will
be amortized on a straight-line basis over 20 years. The operations of Caribe
and AIDI have been included in the accompanying condensed consolidated
financial statements from the date of acquisition. Caribe and AIDI contributed
approximately $2.2 million to the Company's first quarter 1998 operating
revenues. Caribe and AIDI had consolidated revenues of approximately $27
million for the fiscal year ended December 31, 1997. The pre-acquisition
operations of Caribe and AIDI were not material to the operations of the
Company.
On December 31, 1997, the Company acquired Apex Manufacturing, Inc.
("Apex") for consideration of 238,572 shares of the Company's common stock. The
acquisition was accounted for using the pooling of interests method of
accounting and, accordingly, the accompanying condensed consolidated financial
statements have been restated to include the accounts of Apex.
F-32
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
2. ACQUISITIONS:--(CONTINUED)
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, including acquisition costs
and net cash acquired, of approximately $39.6 million in cash and notes and the
assumption of certain liabilities of Kratz-Wilde in the approximate amount of
$2.2 million. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon the fair values at the date of
acquisition. The operations of Kratz-Wilde since the acquisition have been
included in the accompanying condensed consolidated financial statements from
the date of acquisition. Kratz-Wilde contributed approximately $10.5 million to
the Company's first quarter 1998 operating revenues. In connection with the
acquisition, the Company borrowed $40,000,000 of senior notes payable to
financial institutions, with the remainder of the acquisition price payable to
the prior owners over a two-year period (see Note 3).
The Company's unaudited pro forma consolidated results of operations
assuming the Kratz-Wilde acquisition had occurred on January 1, 1997 are as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1997
----------------------
(IN THOUSANDS, EXCEPT
EARNINGS PER SHARE)
<S> <C>
Revenue ......................................................... $ 65,142
Income before extraordinary item(a) ............................. 4,112
Diluted earnings per share before extraordinary item(a) ......... $ .43
</TABLE>
- ----------------
(a) Includes an adjustment to record pro forma income tax expense as if
Kratz-Wilde had been a C corporation since January 1, 1997 and adjustments
to record goodwill amortization and incremental interest, depreciation and
salaries as if the acquisition had occurred on January 1, 1997.
On September 30, 1997, the Company acquired Aerocell Structures, Inc.
("Aerocell") 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, accordingly, the accompanying condensed consolidated financial
statements have been restated to include the accounts of Aerocell.
F-33
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
2. ACQUISITIONS:--(CONTINUED)
The preliminary purchase price allocations for business combinations
accounted for under the purchase method of accounting (including historical
accounts of immaterial acquisitions accounted for under the pooling of
interests method of accounting) were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Accounts receivable .............. $ 1,820,751 $ 4,140,136
Inventories ...................... 1,922,774 9,124,353
Prepaid expenses ................. 10,168 --
Deposits and other ............... 4,576 115,951
Fixed assets ..................... 4,089,883 3,666,777
Goodwill ......................... -- 9,587,583
Accounts payable ................. (1,063,497) (3,351,637)
Accrued expenses ................. (824,437) --
Deferred income taxes ............ (557,270) --
Notes payable .................... (3,445,825) (5,000,000)
Common stock issued .............. (1,615,528) (5,718,721)
------------ ------------
Cash used in acquisition ......... $ 341,595 $ 12,564,442
============ ============
</TABLE>
3. NOTES PAYABLE:
On October 17, 1997, the Company amended its banking 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
obtained a credit facility consisting of (a) a term loan facility in a
principal amount of $18.6 million, and (b) a $131.4 million revolving loan,
letter of credit and acquisition loan facility (the "Third Amended Revolving
Credit Facility"), subject to an availability calculation based on the eligible
borrowing base (collectively, the 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 was subject to a $40 million sublimit, with the
imposition of certain borrowing criteria based on the satisfaction of certain
debt ratios. The acquisition loan portion of the Third Amended Revolving Credit
Facility was converted into a term loan in October 1997 in connection with the
acquisition of Kratz-Wilde. 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 March 31, 1998, the margin was .25% for prime rate loans and
1.75% for LIBOR rate loans.
F-34
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
3. NOTES PAYABLE:--(CONTINUED)
In connection with the Company's February 1998 sale of $165.0 million in
senior subordinated notes, the Company repaid in full and terminated the term
loan and acquisition loan portions of the Credit Facility, and repaid in full
the then current balance of the Third Amended Revolving Credit Facility. The
Third Amended Revolving Credit Facility presently allows the Company to borrow
up to $91.4 million and terminates on July 31, 2002. The Third Amended Credit
Agreement contains financial and other covenants and mandatory prepayment
events, as defined. At March 31, 1998, 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. On March 31, 1998, the outstanding balance under the Third Amended
Revolving Credit Facility was approximately $25.2 million.
In February 1998, in connection with the repayment of the term and
acquisition portions of the Credit Facility, the Company wrote off $981,428 of
deferred financing costs resulting in an extraordinary item, net of income
taxes, of $598,671.
On February 17, 1998 the Company completed the offering and sale of $165
million in senior subordinated notes (the "Notes") due in 2008 with a coupon
rate of 8.125% at a price of 99.395%. Proceeds were used (as described above)
to repay all amounts then outstanding under the Company's term, acquisition and
revolving credit facilities and to fund the cash requirements related to the
acquisition of Caribe and AIDI.
AVS and each of the Subsidiary Guarantors (as defined below) are
co-registrants of AVS's Registration Statement on Form S-4 (file no.
333-48669). As a result, AVS and each of the Subsidiary Guarantors will become
subject to the informational requirements of the Securities Exchange Act of
1934 (the "Exchange Act") upon the effectiveness of the Registration Statement.
AVS is a holding company with no assets or operations other than its
investments in its subsidiaries. The Notes are unconditionally guaranteed, on a
senior subordinated basis, by substantially all of AVS's existing subsidiaries
(the "Subsidiary Guarantors"). Each subsidiary that will be organized in the
future by AVS, unless such subsidiary is designated as an unrestricted
subsidiary, will jointly, severally, fully and unconditionally guarantee the
Notes on a senior subordinated basis. Subsidiary Guarantees are joint and
several, full and unconditional and general unsecured obligations of the
Subsidiary Guarantors. The Subsidiary Guarantors are all wholly-owned
subsidiaries of AVS. At present, the Subsidiary Guarantors comprise all of the
direct and indirect subsidiaries of AVS, other than one inconsequential
subsidiary. Subsidiary Guarantees are subordinated in right of payment to all
existing and future Senior Debt of Subsidiary Guarantors, including the Credit
Facility, and are also effectively subordinated to all secured obligations of
Subsidiary Guarantors to the extent of the assets securing such obligations,
including the Credit Facility. Furthermore, the Indenture permits Subsidiary
Guarantors to incur additional indebtedness, including Senior Debt, subject to
certain limitations. AVS has not presented separate financial statements and
other disclosures concerning each of the Subsidiary Guarantors because
management has determined that such information is not material to investors.
The Notes are redeemable, at the option of AVS, in whole or in part, at
any time after February 15, 2003, at the following redemption prices, plus
accrued and unpaid interest and liquidated damages, if any, to the redemption
date: (i) 2003--104.063%; (ii) 2004--102.708%; (iii) 2005--101.354%; and
F-35
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
3. NOTES PAYABLE:--(CONTINUED)
(iv) 2006 and thereafter--100%. In addition, on or prior to February 15, 2001,
AVS may redeem up to 35% of the aggregate principal amount of the Notes at a
redemption price of 108.125% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the redemption date
with the net proceeds of a public offering of common stock of AVS; provided,
that at least 65% of the aggregate principal amount of the Notes originally
issued remains outstanding immediately after the occurrence of such redemption.
Upon the occurrence of a change of control, AVS will be required to make
an offer to repurchase all or any part of holder's Notes at a repurchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
and liquidated damages, if any, thereon to the repurchase date. There can be no
assurance that AVS will have the financial resources necessary to purchase the
Notes upon a change of control or that such repurchase will be permitted under
the Credit Facility.
The Indenture contains certain covenants that, among other things, will
limit the ability of AVS and its subsidiaries to incur additional indebtedness
and issue preferred stock, pay dividends or make other distributions, make
investments, dispose of assets, issue capital stock of subsidiaries, create
certain liens securing indebtedness, enter into certain transactions with
affiliates, sell assets or enter into certain mergers and consolidations or
sell all or substantially all of their assets.
Pursuant to a registration rights agreement, AVS has agreed to (a) file a
registration statement on or prior to April 3, 1998 with respect to an offer to
exchange the Notes for a new issue of debt securities of AVS registered under
the Securities Act of 1933, as amended, with terms substantially identical to
those of the Notes (the "Exchange Offer") which registration statement was
filed on March 26, 1998 and (b) use their best efforts to cause the
registration statement to be declared effective by the Securities and Exchange
Commission on or prior to June 17, 1998. AVS has also agreed to file a shelf
registration statement relating to the resale of the Notes under certain
circumstances. If AVS fails to satisfy these registration obligations, it will
be required to pay liquidated damages to holders of Notes under certain
circumstances.
In connection with the Company's March 9, 1998 acquisition of Caribe and
AIDI (see Note 2), the Company entered into an agreement with the prior owners
to pay $5 million of the acquisition price over a two year period. Principal
payments of $2,500,000 plus interest accrued at 8%, are due on March 9, 1999
and March 9, 2000.
In connection with the October 17, 1997 acquisition of Kratz-Wilde (see
Note 2), the Company entered into an agreement with the prior owners to pay
$2.2 million of the acquisition price over a two year period. Payments of
$1,250,000 are due on January 1, 1999 and January 1, 2000. Interest on this
note has been imputed at 8%.
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
F-36
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1998
(UNAUDITED)
3. NOTES PAYABLE:--(CONTINUED)
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 March 31, 1998, the Company was in compliance
with all covenants of this term loan.
On March 13, 1998, the Company entered into an agreement to purchase its
Pearland, Texas warehouse facility from a related party. The total purchase
price of approximately $1.8 million was paid in cash and through the reduction
of amounts receivable from the related party at the date of the transaction.
4. EARNINGS PER SHARE:
The computation of weighted average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1998
----------- ------------
<S> <C> <C>
Weighted average shares outstanding used in calculating basic
earnings per share .............................................. 9,422,042 9,448,944
Effect of dilutive options ....................................... 41,925 143,876
--------- ---------
Weighted average common and common equivalent shares used in
calculating diluted earnings per share .......................... 9,463,967 9,592,820
========= =========
Options and warrants outstanding which are not included in the
calculation of diluted earnings per share because their impact is
antidilutive .................................................... 166,400 19,500
========= =========
</TABLE>
For business combinations accounted for as a pooling of interests,
earnings per share computations are based on the aggregate of the
weighted-average outstanding shares of the surviving business for all periods
presented.
5. SUBSEQUENT EVENT:
On June 18, 1998, the Company's Compensation Committee rescinded the
December 31, 1997 issuance of 18,000 shares of the Company's common stock as
bonuses to six officers of the Company. No consideration was provided or will be
provided in the future in connection with the rescission.
F-37
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders Kratz-Wilde Machine Company:
We have audited the accompanying balance sheets of Kratz-Wilde Machine
Company (an S Corporation) as of October 31, 1996 and 1995, and the related
statements of income, retained earnings, and cash flows for the year ended
October 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kratz-Wilde Machine Company
as of October 31, 1996 and 1995, and the results of its operations and its cash
flows for the year ended October 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 8 to the financial statements, certain misstatements
of previously reported inventories as of October 31, 1996 and 1995 were
discovered. Accordingly, an adjustment has been made to net income for 1996 and
retained earnings as of October 31, 1995 to correct the misstatements.
Clark, Schaefer, Hackett & Co.
Cincinnati, Ohio
October 10, 1997
F-38
<PAGE>
KRATZ-WILDE MACHINE COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
SEPTEMBER 30, -----------------------------
1997 1996 1995
-------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash, cash equivalents and temporary investments .................... $ 3,395,618 $ 2,534,271 $ 2,229,528
Accounts receivable:
Trade .............................................................. 5,448,703 5,171,529 3,464,616
Officers ........................................................... 7,167 7,167 7,167
Inventories ......................................................... 6,132,290 2,887,905 3,158,917
Prepaid expenses .................................................... 22,342 14,997 11,153
----------- ----------- -----------
TOTAL CURRENT ASSETS .............................................. 15,006,120 10,615,869 8,871,381
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Land ................................................................ 335,479 335,479 335,479
Buildings and improvements .......................................... 2,924,750 2,907,075 2,903,845
Production equipment ................................................ 9,357,079 8,862,699 9,586,908
Transportation equipment ............................................ 232,517 228,394 310,899
Office equipment .................................................... 364,569 364,569 364,569
----------- ----------- -----------
13,214,394 12,698,216 13,501,700
Less accumulated depreciation ....................................... 10,140,870 9,874,286 9,530,649
----------- ----------- -----------
Total property and equipment ...................................... 3,073,524 2,823,930 3,971,051
----------- ----------- -----------
OTHER ASSETS
Accounts receivable--related party .................................. 452,222 447,765 445,726
Deposits ............................................................ 298,908 151,525 209,807
Cash value of life insurance, net of policy loan of $12,276 ......... 414,496 353,641 225,196
----------- ----------- -----------
TOTAL OTHER ASSETS ................................................. 1,165,626 952,931 880,729
----------- ----------- -----------
TOTAL ASSETS ....................................................... $19,245,270 $14,392,730 $13,723,161
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--trade ............................................. $ 1,877,022 $ 1,540,947 $ 1,350,353
Accrued liabilities:
Profit sharing contribution ........................................ 521,987 569,440 499,919
Salaries and wages ................................................. 455,000 521,154 403,920
Vacation pay ....................................................... 217,439 162,325 145,872
Other .............................................................. 114,370 120,500 103,700
----------- ----------- -----------
TOTAL CURRENT LIABILITIES ......................................... 3,185,818 2,914,366 2,503,764
----------- ----------- -----------
Deferred income taxes ............................................... 247,556 247,556 247,556
STOCKHOLDERS' EQUITY:
Common stock, no par value, stated value $50 per share; 5,000
shares authorized, 2,205 shares issued and outstanding ............ 110,250 110,250 110,250
Retained earnings ................................................... 16,127,723 11,546,635 11,287,668
----------- ----------- -----------
16,237,973 11,656,885 11,397,918
Less cost of 1,470 treasury shares ................................... 426,077 426,077 426,077
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY ........................................ 15,811,896 11,230,808 10,971,841
----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................ $19,245,270 $14,392,730 $13,723,161
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
KRATZ-WILDE MACHINE COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED
------------------------------ OCTOBER 31,
1997 1996 1996
------------- -------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATING REVENUES ..................... $28,711,522 $18,751,838 $24,595,131
COST OF SALES .......................... 18,499,320 15,910,231 20,545,037
----------- ----------- -----------
10,212,202 2,841,607 4,050,094
----------- ----------- -----------
OPERATING EXPENSES
Selling ............................... 73,245 71,144 122,355
General and administrative ............ 1,805,773 1,468,362 1,999,212
----------- ----------- -----------
1,879,018 1,539,506 2,121,567
----------- ----------- -----------
INCOME FROM OPERATIONS ................. 8,333,184 1,302,101 1,928,527
OTHER INCOME (EXPENSES)
Miscellaneous income .................. 4,112 89,325 15,815
Interest income ....................... 80,063 67,956 95,044
Gain (loss) on sale of assets ......... 3,500 (34,189) (241,933)
Interest expense ...................... -- -- (614)
----------- ----------- -----------
87,675 123,092 (131,688)
----------- ----------- -----------
NET INCOME ............................. $ 8,420,859 $ 1,425,193 $ 1,796,839
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
KRATZ-WILDE MACHINE COMPANY
STATEMENT OF RETAINED EARNINGS
<TABLE>
<S> <C>
Balance as of October 31, 1995, as originally reported ......... $ 11,989,668
Adjustment to reduce previously reported inventories .......... (702,000)
------------
Balance as of October 31, 1995, as restated .................... 11,287,668
Net income .................................................... 1,796,839
Distributions to stockholders ................................. (1,537,872)
------------
Balance as of October 31, 1996 ................................. 11,546,635
Net income (unaudited) ........................................ 9,961,720
Distributions to stockholders (unaudited) ..................... (5,380,632)
------------
Balance as of September 30, 1997 (unaudited) ................... $ 16,127,723
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
KRATZ-WILDE MACHINE COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
------------------------------------ FOR THE YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31,
1997 1996 1996
---------------- ----------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers ........................ $ 27,934,420 $17,216,228 $ 22,904,033
Cash paid to suppliers and employees ................ (21,954,247) (15,376,622 ) (21,463,046)
Interest received ................................... 80,063 67,956 95,044
Interest paid ....................................... -- -- (614)
Federal income taxes refunded ....................... (147,382) 58,282 58,282
------------- ----------- -------------
Net cash provided by operating activities .......... 5,912,854 1,965,844 1,593,699
------------- ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................ (384,027) (191,431) (206,417)
Proceeds from sale of fixed assets .................. 3,500 239,747 457,372
Net decrease in temporary investments ............... 603,060
Net (increase) to related party receivables ......... (4,457) (6,813) (2,039)
------------- ----------- -------------
Net cash provided by (used in) investing
activities ....................................... (384,984) 41,503 851,976
------------- ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
S Corporation distributions paid .................... (5,380,632) (1,537,872) (1,537,872)
------------- ----------- -------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS ................................... 147,238 469,475 907,803
------------- ----------- -------------
CASH AND CASH EQUIVALENTS,
beginning of period ................................ 3,248,380 1,928,609 1,626,468
------------- ----------- -------------
CASH AND CASH EQUIVALENTS,
end of period ...................................... $ 3,395,618 $2,398,084 $ 2,534,271
============= =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
KRATZ-WILDE MACHINE COMPANY
STATEMENTS OF CASH FLOWS--(CONTINUED)
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------------- FOR THE YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, OCTOBER 31,
1997 1996 1996
-------------- --------------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net income ................................................. $8,420,859 $ 1,425,193 $ 1,796,839
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .............................................. 230,387 494,275 654,233
(Gain) loss on sale of fixed assets ....................... (3,500) 34,189 241,933
(Increase) decrease in accounts receivable--trade ......... (781,213) (1,624,935) (1,706,913)
(Increase) decrease in inventories ........................ (2,918,653) 1,129,750 271,012
(Increase) decrease in prepaid expenses ................... (22,342 ) (22,496) (3,844)
(Increase) decrease in other assets ....................... (198,095 ) (38,052) (70,163)
Increase (decrease) in accounts payable--trade ............ 972,830 222,725 190,594
Increase (decrease) in accrued expenses ................... 212,581 345,195 220,008
----------- ------------ ------------
(2,508,005) 540,651 (203,140)
----------- ------------ ------------
Net cash provided by operating activities ............... $5,912,854 $ 1,965,844 $ 1,593,699
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
KRATZ-WILDE MACHINE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The following accounting practices of the Company are set forth to
facilitate the understanding of data in the financial statements.
NATURE OF OPERATIONS
The Company's line of business is the manufacture of metal stampings which
are principally sold to customers in the aircraft, plumbing and automotive
manufacturing industries located in the United States.
CASH EQUIVALENTS
For purposes of the statement of cash flows, cash equivalents consist of
money market accounts.
TEMPORARY INVESTMENTS
Temporary investments consist of debt securities (principally certificates
of deposit, repurchase agreements and U.S. Treasury bills) with maturities of
less than one year. Such investments are intended to be held to maturity and
therefore are carried at amortized cost.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method.
BAD DEBTS
Accounts receivable have been adjusted for all known uncollectible
accounts. No allowance for bad debts is considered necessary by management at
year end.
PROPERTY AND DEPRECIATION
Property and equipment is stated at cost. The Company provides for
depreciation of property and equipment using annual rates which are sufficient
to amortize the cost of depreciable assets over their estimated useful lives,
which range from three to forty-five years. The Company uses both the straight-
line and accelerated methods of depreciation.
SPLIT DOLLAR LIFE INSURANCE
The Company records as an asset premiums paid under the split-dollar life
insurance arrangement at the lower of the policy's cash value or the premiums
paid by the Company through the balance sheet date.
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
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 period. Actual results could differ from those estimates.
F-44
<PAGE>
KRATZ-WILDE MACHINE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
INCOME TAXES
The Company has elected, effective November 1, 1988, to be taxed under
provisions of Subchapter S of the Internal Revenue Code. Under those
provisions, the Company will generally not pay Federal, Ohio or Kentucky
corporate income taxes on its taxable income. Instead, each stockholder will be
liable for individual federal and state income taxes on the Company's taxable
income.
The Company can be liable for a tax on "built-in" gains until November 1,
1988. "Built-in" gains can arise if certain appreciated assets which were held
at the time of the effective date of the S election are subsequently disposed
of within 10 years.
Deferred income taxes were previously recorded for timing differences
between financial and tax reporting. Deferred income taxes resulted principally
from the use of accelerated methods of depreciation for tax purposes and the
restoration of the LIFO inventory reserve to taxable income as a result of
electing S Corporation status. No additional deferred income taxes will be
provided on future timing differences. However, because of the possibility of a
"built-in" gains tax in the future, the Company will continue to recognize the
deferred tax liability, arising before 1989, net of any federal income tax
subsequently incurred.
RELATED PARTIES
Officers of the Company own 100% of the Company's capital stock
outstanding.
INTERIM CONDENSED FINANCIAL STATEMENTS
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 8-K/A. 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.
In the opinion of management, the accompanying unaudited interim financial
statements of Kratz-Wilde Machine 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 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.
2. CASH, CASH EQUIVALENTS AND TEMPORARY INVESTMENTS:
The Company maintains their cash deposit accounts at financial
institutions where the balances at times may exceed federally insured limits.
As of the reporting dates, cash, cash equivalents and temporary investments
consist of:
F-45
<PAGE>
KRATZ-WILDE MACHINE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. CASH, CASH EQUIVALENTS AND TEMPORARY INVESTMENTS:--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 31, OCTOBER 31,
1997 1996 1995
--------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Cash and cash equivalents:
Cash on hand ...................... $ 500 $ 500 $ 500
Cash in checking accounts ......... 2,175,699 506,018 952,176
Money market accounts ............. 1,219,419 2,027,753 673,792
---------- ---------- ----------
3,395,618 2,534,271 1,626,468
Temporary investments ............. -- -- 603,060
---------- ---------- ----------
$3,395,618 $2,534,271 $2,229,528
========== ========== ==========
</TABLE>
The amortized cost of temporary investments, by security type, at October
31, 1995 is as follows:
<TABLE>
<S> <C>
Certificates of deposit ......... $300,000
Repurchase agreements ........... 303,060
--------
$603,060
========
</TABLE>
The estimated fair value of the above debt securities approximates cost at
October 31, 1995.
3. CONCENTRATION OF CREDIT RISK:
The Company sells products to manufacturers and extends credit based on an
evaluation of the customer's financial condition, without collateral. Exposure
to losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure to credit losses and maintains
allowances, when necessary, for anticipated losses.
Three major customers accounted for sales of approximately 75% for the
nine months ended September 30, 1997 and 1996 and the year ended October 31,
1996. Accounts receivable due from these customers were approximately $4.4
million and $3.8 million at September 30, 1997 and October 31, 1996,
respectively.
4. TAX DEPOSIT:
As a corporation that has retained a fiscal year end, the Company is
required to maintain a deposit with the Internal Revenue Service while the S
Corporation election is in effect. This deposit is recalculated annually based
on the preceding year's taxable income. The Company's total deposit balance,
related to the S Corporation election, was $178,085 at September 30, 1997,
$151,525 at October 31, 1996 and $209,807 at October 31, 1995.
F-46
<PAGE>
KRATZ-WILDE MACHINE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. ACCOUNTS RECEIVABLE--RELATED PARTIES:
The following is a summary of accounts receivable-related parties at the
reporting dates:
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 31, OCTOBER 31,
1997 1996 1995
--------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Engineered Environments, Inc. ......... $448,565 446,884 444,610
Employees and others .................. 3,657 881 1,116
-------- ------- -------
$452,222 $447,765 $445,726
======== ======== ========
</TABLE>
6. PROFIT SHARING PLAN:
The Company sponsors a profit sharing plan covering employees who are at
least 21 years of age with a minimum of one year of service. The Board of
Directors of the Company determines the annual contribution, which may not
exceed 15% of the qualifying employees' compensation. Profit sharing plan
expense was $568,087 and $426,801 for the nine months ended September 30, 1997
and 1996, respectively, and $569,067 for the year ended October 31, 1996.
7. COMMITMENTS:
DISTRIBUTIONS
It is anticipated that the Company will make cash distributions to the
stockholders since they are liable for individual federal and state income
taxes on the Company's taxable income. No additional distributions, in excess
of the amounts recorded in the accompanying financial statements, have been
declared as of September 30, 1997 or October 31, 1996. Accordingly, no S
distribution payable is recognized in the accompanying financial statements.
LIFE INSURANCE PROGRAM
In 1995, the Company implemented a split dollar life insurance
arrangement. The Company will pay most of the premium cost which will be
approximately $50,000 per year. These premiums are expected to be repaid to the
Company. The Company does not own the policies but does hold a collateral
assignment that effectively pledges the policies' cash values and death
proceeds as security for the return of the premiums paid by the Company. The
cash values are expected to eventually exceed the cumulative premiums paid. The
Company's recovery of the premiums paid is contingent upon continuation of the
life insurance program in the future.
The Company is the owner and beneficiary of other life insurance policies
under a buy-sell agreement between the stockholders. The Company's annual
premium cost under this arrangement is approximately $40,000 per year.
8. INVENTORIES:
Subsequent to issuance of the reviewed financial statements for the year
ended October 31, 1996 it was determined that inventory was overstated.
Correction of these estimated misstatements resulted in a decrease of
previously reported net income for 1996 amounting to $783,000 and a decrease to
retained earnings as of October 31, 1995 amounting to $702,000. The cumulative
effect of these changes was to decrease retained earnings as of October 31,
1996 by $1,485,000.
F-47
<PAGE>
KRATZ-WILDE MACHINE COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. INVENTORIES:--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, OCTOBER 31, OCTOBER 31,
1997 1996 1995
--------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw Material ............ $ 849,527 $ 911,820 $ 638,138
Work in process ......... 1,885,031 827,759 963,564
Finished goods .......... 3,397,732 1,148,326 1,557,215
---------- ---------- ----------
$6,132,290 $2,887,905 $3,158,917
========== ========== ==========
</TABLE>
9. CONTINGENCY:
The Company is a defendant in lawsuits arising from normal business
activities. Outside counsel for the Company has advised that at this stage they
cannot offer an opinion as to their probable outcome. Management has reviewed
pending litigation and believes that the ultimate liability, if any, resulting
from them will not materially affect the Company's financial position.
Nevertheless, it is at least reasonably possible that such an effect will
occur, although the amount cannot be estimated.
10. SUBSEQUENT EVENT:
The Company agreed in September 1997 to sell principally all of its
operating assets for $42.5 million. All of the Company's operations will be
transferred to the new owner.
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Whitehall Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Whitehall
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for the three years in the period ended December 31,
1997. These consolidated financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule 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 financial statements referred to above present fairly,
in all material respects, the financial position of Whitehall Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas,
March 25, 1998
F-49
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........... $ 1,251,000 $ 2,656,000
Accounts receivable, net ............ 16,234,000 18,461,000
Income taxes receivable ............. 2,590,000 458,000
Inventories ......................... 6,029,000 6,440,000
Prepaid expenses and other .......... 636,000 656,000
Current deferred income tax ......... 1,053,000 --
Notes receivable .................... 516,000 --
----------- -----------
TOTAL CURRENT ASSETS .............. 28,309,000 28,671,000
INVESTMENTS .......................... -- 4,611,000
PROPERTY, PLANT AND EQUIPMENT:
Land ................................ 910,000 399,000
Buildings ........................... 4,880,000 1,293,000
Machinery and equipment ............. 13,718,000 11,790,000
Leasehold improvements .............. 10,259,000 8,710,000
----------- -----------
29,767,000 22,192,000
Accumulated depreciation ............ 12,200,000 12,538,000
----------- -----------
17,567,000 9,654,000
NOTES RECEIVABLE ..................... 2,723,000 2,000,000
----------- -----------
TOTAL ASSETS ....................... $48,599,000 $44,936,000
=========== ===========
(CONTINUED)
</TABLE>
The accompanying notes are an integral part of these balance
sheets.
F-50
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ......................... $ 6,618,000 $ 6,239,000
Bank line of credit .............................................. 9,713,000 2,550,000
Current portion of long term debt ................................ 283,000 280,000
Current portion of obligations under capital lease ............... 84,000 --
Accrued environmental costs ...................................... 3,954,000 379,000
------------- -------------
TOTAL CURRENT LIABILITIES ...................................... 20,652,000 9,448,000
LONG-TERM DEBT, net of current portion ............................ 263,000 546,000
OBLIGATIONS UNDER CAPITAL LEASES .................................. 4,174,000 --
OTHER NON-CURRENT LIABILITIES ..................................... 471,000 117,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $5.00 par value: authorized 500,000 shares--none
issued ......................................................... -- --
Common stock, $.10 par value: authorized 20,000,000 shares, issued
7,691,312 and 7,666,712 at December 31, 1997 and 1996 .......... 770,000 767,000
Additional paid-in capital ....................................... 1,914,000 1,766,000
Retained earnings ................................................ 36,500,000 48,437,000
------------- -------------
39,184,000 50,970,000
Less--treasury stock (2,161,312 shares at December 31, 1997 and
1996), at cost ................................................. (16,145,000) (16,145,000)
------------- -------------
23,039,000 34,825,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 48,599,000 $ 44,936,000
============= =============
</TABLE>
The accompanying notes are an integral part of these balance
sheets.
F-51
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales:
Services ................................................ $ 65,119,000 $ 65,340,000 $ 42,641,000
Products ................................................ 672,000 4,830,000 13,588,000
------------- ------------ ------------
65,791,000 70,170,000 56,229,000
Cost of sales:
Services ................................................ 63,786,000 56,033,000 37,510,000
Products ................................................ 411,000 3,776,000 10,875,000
------------- ------------ ------------
64,197,000 59,809,000 48,385,000
GROSS PROFIT ............................................ 1,594,000 10,361,000 7,844,000
Selling, engineering and administrative expenses ......... 11,590,000 4,656,000 4,969,000
------------- ------------ ------------
INCOME (LOSS) FROM OPERATIONS ........................... (9,996,000) 5,705,000 2,875,000
Other income (expense), net .............................. (5,551,000) 818,000 963,000
------------- ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ....................... (15,547,000) 6,523,000 3,838,000
Provision for (benefit from) income taxes ................ (3,610,000) 2,206,000 889,000
------------- ------------ ------------
NET INCOME (LOSS) ....................................... $ (11,937,000) $ 4,317,000 $ 2,949,000
============= ============ ============
NET INCOME (LOSS) PER SHARE
Basic ................................................... $ (2.16) $ 0.79 $ 0.54
============= ============ ============
Diluted ................................................. $ (2.16) $ 0.75 $ 0.52
============= ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ................................................... 5,518,000 5,481,000 5,426,000
Diluted ................................................. 5,518,000 5,735,000 5,642,000
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-52
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .......... -- $-- 3,786,956 $379,000
Exercise of stock options .......... -- -- 13,600 1,000
Net income ......................... -- -- -- --
-- --- --------- --------
Balance, December 31, 1995 .......... -- -- 3,800,556 380,000
Exercise of stock options (adjusted
for stock split) .................. -- -- 65,600 7,000
2 for 1 stock split effected in the
form of a 100% stock dividend ..... -- -- 3,800,556 380,000
Net income ......................... -- -- -- --
-- --- --------- --------
Balance, December 31, 1996 .......... -- -- 7,666,712 767,000
Exercise of stock options .......... -- -- 24,600 3,000
Net loss ........................... -- -- -- --
-- --- --------- --------
Balance, December 31, 1997 .......... -- $-- 7,691,312 $770,000
== === ========= ========
<CAPTION>
ADDITIONAL TREASURY STOCK
PAID-IN RETAINED ---------------------------------
CAPITAL EARNINGS SHARES AMOUNT
------------- ---------------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 .......... $1,200,000 $ 41,555,000 (1,080,656) $ (16,145,000)
Exercise of stock options .......... 160,000 -- -- --
Net income ......................... -- 2,949,000 -- --
---------- -------------- ---------- -------------
Balance, December 31, 1995 .......... 1,360,000 44,504,000 (1,080,656) (16,145,000)
Exercise of stock options (adjusted
for stock split) .................. 406,000 -- -- --
2 for 1 stock split effected in the
form of a 100% stock dividend ..... -- (384,000) (1,080,656) --
Net income ......................... -- 4,317,000 -- --
---------- -------------- ---------- -------------
Balance, December 31, 1996 .......... 1,766,000 48,437,000 (2,161,312) (16,145,000)
Exercise of stock options .......... 148,000 -- -- --
Net loss ........................... -- (11,937,000) -- --
---------- -------------- ---------- -------------
Balance, December 31, 1997 .......... $1,914,000 $ 36,500,000 (2,161,312) $ (16,145,000)
========== ============== ========== =============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-53
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997
-----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................... $ (11,937,000)
Adjustments to reconcile net income (loss) to cash used in operating activities--
Depreciation and amortization ..................................................... 1,342,000
Gain on sale of fixed assets ...................................................... --
Writeoff of preferred stock of Hydroscience Technologies, Inc. .................... 4,500,000
Investment (income) loss .......................................................... 111,000
Changes in operating assets and liabilities (excluding disposition and net of
acquisition)--
Accounts receivable, net ........................................................ 1,822,000
Income taxes receivable ......................................................... (2,132,000)
Federal income tax liability .................................................... --
Deferred income taxes ........................................................... (1,053,000)
Inventories ..................................................................... (686,000)
Prepaid expenses and other ...................................................... (13,000)
Accounts payable and accrued liabilities ........................................ 4,000
Environmental reserve ........................................................... 3,175,000
Other liabilities ............................................................... 322,000
-------------
Total adjustments .............................................................. 7,392,000
-------------
CASH USED IN OPERATING ACTIVITIES .............................................. (4,545,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in acquisition ........................................................... (1,500,000)
Capital expenditures ............................................................... (3,739,000)
Notes receivable ................................................................... (375,000)
Proceeds from sale of fixed assets ................................................. --
Proceeds from sale of segment ...................................................... 1,720,000
-------------
CASH USED IN INVESTING ACTIVITIES .............................................. (3,894,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in line of credit ..................................................... 7,163,000
Net change in long term debt ....................................................... (280,000)
Issuance of common stock from exercise of stock options ............................ 151,000
-------------
CASH PROVIDED BY FINANCING ACTIVITIES .......................................... 7,034,000
-------------
Net decrease in cash and cash equivalents ........................................... (1,405,000)
Cash and cash equivalents at beginning of period .................................... 2,656,000
-------------
Cash and cash equivalents at end of period .......................................... $ 1,251,000
=============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Income taxes ....................................................................... $ 143,000
Interest ........................................................................... 677,000
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Promissory notes received for sale of Electronics segment .......................... $ 864,000
Disposition of Ocean Systems segment inventory and fixed assets in exchange
for Hydroscience Technologies, Inc. preferred stock:
Inventory ......................................................................... $ --
Fixed assets, net ................................................................. --
Investment in Hydroscience Technologies, Inc. preferred stock ..................... --
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................... $ 4,317,000 $ 2,949,000
Adjustments to reconcile net income (loss) to cash used in operating activities--
Depreciation and amortization ..................................................... 1,096,000 1,097,000
Gain on sale of fixed assets ...................................................... (11,000) (650,000)
Writeoff of preferred stock of Hydroscience Technologies, Inc. .................... -- --
Investment (income) loss .......................................................... (440,000) 329,000
Changes in operating assets and liabilities (excluding disposition and net of
acquisition)--
Accounts receivable, net ........................................................ (1,064,000) (10,409,000)
Income taxes receivable ......................................................... (458,000) --
Federal income tax liability .................................................... (1,186,000) 1,186,000
Deferred income taxes ........................................................... -- (390,000)
Inventories ..................................................................... (3,246,000) (833,000)
Prepaid expenses and other ...................................................... 70,000 (144,000)
Accounts payable and accrued liabilities ........................................ (2,619,000) 5,006,000
Environmental reserve ........................................................... (246,000) --
Other liabilities ............................................................... (297,000) 57,000
------------ --------------
Total adjustments .............................................................. (8,401,000) (4,751,000)
------------ --------------
CASH USED IN OPERATING ACTIVITIES .............................................. (4,084,000) (1,802,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in acquisition ........................................................... -- --
Capital expenditures ............................................................... (4,438,000) (1,668,000)
Notes receivable ................................................................... -- 500,000
Proceeds from sale of fixed assets ................................................. 11,000 735,000
Proceeds from sale of segment ...................................................... -- --
------------ --------------
CASH USED IN INVESTING ACTIVITIES .............................................. (4,427,000) (433,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in line of credit ..................................................... 2,550,000 --
Net change in long term debt ....................................................... 826,000 --
Issuance of common stock from exercise of stock options ............................ 409,000 161,000
------------ --------------
CASH PROVIDED BY FINANCING ACTIVITIES .......................................... 3,785,000 161,000
------------ --------------
Net decrease in cash and cash equivalents ........................................... (4,726,000) (2,074,000)
Cash and cash equivalents at beginning of period .................................... 7,382,000 9,456,000
------------ --------------
Cash and cash equivalents at end of period .......................................... $ 2,656,000 $ 7,382,000
============ ==============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Income taxes ....................................................................... $ 3,720,000 $ --
Interest ........................................................................... 61,000 --
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Promissory notes received for sale of Electronics segment .......................... $ -- $ --
Disposition of Ocean Systems segment inventory and fixed assets in exchange
for Hydroscience Technologies, Inc. preferred stock:
Inventory ......................................................................... $ 3,943,000 $ --
Fixed assets, net ................................................................. 557,000 --
Investment in Hydroscience Technologies, Inc. preferred stock ..................... (4,500,000) --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--ACCOUNTING POLICIES AND PRACTICES
CONSOLIDATION: The consolidated financial statements of Whitehall
Corporation and subsidiaries (the "Company") include the accounts of all
subsidiaries after elimination of intercompany accounts and transactions.
USE OF ESTIMATES: Generally accepted accounting principles require
management to make estimates and assumptions that affect the reported amount 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 period. Actual results could differ from those
estimates.
RECLASSIFICATIONS: Certain reclassifications have been made to 1996 and
1995 amounts to conform with the 1997 presentation.
REVENUE RECOGNITION: For services, maintenance, and standard products,
primarily related to the Aircraft Maintenance and Electronics (see note L)
segments, revenue is recognized when services and maintenance are performed and
the Company has fulfilled its obligations, generally at shipment.
For long-term contracts, related to the Ocean Systems segment (see note D),
revenue is recognized using the percentage of completion or units of delivery
method. These long-term contracts apply to the production of products or the
provision of services that conform to the specifications prescribed by the
customer, principally the United States Government. On contracts where the
percentage of completion method is applied, revenue is accrued in the proportion
that costs incurred bear to management's estimate of total contract costs. Any
known or anticipated losses are provided for currently. The Company had no
long-term contracts in 1997.
CONCENTRATION OF CREDIT RISK: Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of
temporary cash investments and accounts receivable. The Company places its
temporary cash investments with creditworthy financial institutions and, thus,
limits the amount of credit exposure to any one entity. The Company's customer
base is comprised primarily of U.S. airlines and air transport companies.
CASH EQUIVALENTS: Cash equivalents consist of highly liquid debt
instruments purchased with an original maturity of three months or less.
INVENTORIES: Inventories are carried at average cost, not in excess of
market.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at
cost. Provisions for depreciation and amortization have been computed generally
using the straight-line method over the estimated useful lives of the assets.
LONG-LIVED ASSETS: The Company periodically reviews its long-lived assets
for impairment. The Company considers whether the expected undiscounted cash
flows associated with use of the long-lived asset exceeds its carrying value.
If this review indicates that the carrying amount of an asset may not be
recovered through future operations or sale, the carrying value of the asset
will be reduced to its fair value. In 1997, the Company recorded an impairment
loss on its investment in preferred stock (see Note D).
RESEARCH AND DEVELOPMENT: Research and development costs are included in
selling, engineering and administrative expenses and amounted to approximately
$41,000 in 1996, and $45,000 in 1995. There were no research and development
costs incurred in 1997.
FEDERAL INCOME TAXES: The Company accounts for income taxes using an asset
and liability approach for financial accounting and income tax reporting.
Deferred tax liabilities and assets are
F-55
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE A--ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
recognized for the estimated future tax effects attributable to temporary
differences and carryforwards and are adjusted whenever tax rates or other
provisions of income tax statutes change.
The Company and all subsidiaries file a consolidated Federal income tax
return. Deferred federal income taxes have been provided for temporary
differences between tax and financial reporting resulting primarily from
depreciation provisions, allowances and expense accruals.
EARNINGS (LOSS) PER SHARE: Effective January 1, 1997, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share." SFAS No. 128 simplifies the computation of earnings per share (EPS) by
replacing the presentation of primary EPS with a presentation of basic EPS.
Basic EPS is calculated by dividing the income (loss) available to common
shareholders by the weighted average number of common shares outstanding during
the period. Options and other potentially dilutive securities are excluded from
the calculation of basis EPS. Diluted EPS includes options and other
potentially dilutive securities that are excluded from basic EPS to the extent
that these securities are not anti-dilutive. Options were not included in the
1997 computation of diluted EPS because they are anti-dilutive.
The following is a reconciliation between basic and diluted EPS for the
years ended December 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------- ----------------------------- ----------------------------
LOSS SHARES INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
----------------- --------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS .................. $ (11,937,000) 5,518,000 $4,317,000 5,481,000 $2,949,000 5,426,000
Effect of
dilutive options ......... -- -- -- 254,000 -- 216,000
------------- --------- ---------- --------- ---------- ---------
Diluted EPS ................ $ (11,937,000) 5,518,000 $4,317,000 5,735,000 $2,949,000 5,642,000
============= ========= ========== ========= ========== =========
</TABLE>
In accordance with SFAS No. 128, the earnings (loss) per share for all
prior periods have been restated.
JOINT VENTURE INVESTMENT: SEE NOTE D.
TREASURY SHARES: During 1991, the Board of Directors authorized the
repurchase of up to 1,000,000 shares of the Company's common stock. An
additional authorization of 500,000 shares was made by the Board of Directors
in March 1993. As of December 31, 1997, a total of 1,257,800 shares have been
purchased under these authorizations. The Company did not acquire any treasury
stock during 1995, 1996 or 1997.
ENVIRONMENTAL COSTS: Environmental expenditures that relate to current
operations are expensed. Remediation costs that relate to existing conditions
caused by past operations are accrued when it is probable that these costs will
be incurred and can be reasonably estimated. Environmental costs are included
in selling, engineering and administrative expenses in the accompanying
consolidated statements of operations.
OTHER INCOME (EXPENSE): Other expense for 1997 includes the $4.5 million
writedown of the Company's investment in the preferred stock of Hydroscience
Technologies, Inc. Other income, net in
F-56
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE A--ACCOUNTING POLICIES AND PRACTICES--(CONTINUED)
1996 and 1995 includes interest earned of $307,000 and $671,000, respectively,
and gains on sales of fixed assets of $11,000 and $650,000, respectively.
EMPLOYEE BENEFITS: The Company offers no significant post-employment or
post-retirement benefits.
NEW ACCOUNTING PRONOUNCEMENTS: During 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 129, "Disclosure of Information About
Capital Structure," which establishes standards for disclosing certain
information about an entity's capital structure. The statement is effective for
years ending after December 15, 1997, and its adoption did not have any impact
on the Company's financial statements.
During 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a company's
financial statements. This statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This Statement does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in
that financial statement. This statement requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. SFAS No. 130 is effective for
periods beginning after December 15, 1997.
During 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This Statement is effective for financial
statements for periods beginning after December 15, 1997. As the Company is
operating in only one segment as of December 31, 1997, and plans to focus
solely on the aircraft maintenance industry, this statement is not expected to
have an impact on the Company's financial statements.
F-57
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--ACCOUNTS RECEIVABLE, NET
Accounts receivable were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Commercial accounts:
Accrued sales not billed .............................. $ 5,574,000 $ 6,578,000
Billed ................................................ 10,842,000 10,916,000
----------- -----------
16,416,000 17,494,000
Receivables from foreign governments ................... 14,000 206,000
Receivables from United States Government, net ......... 2,750,000 184,000
----------- -----------
2,764,000 390,000
Advances to joint venture (see Note D) ................. 901,000 1,095,000
Less--allowance for doubtful accounts .................. 3,847,000 518,000
----------- -----------
$16,234,000 $18,461,000
=========== ===========
</TABLE>
Accrued sales not billed will be billed on the basis of contract terms
(which are generally on completion of an aircraft) and deliveries. All accrued
amounts at December 31, 1997, are expected to be billed and collected in 1998.
Management believes that the allowance for doubtful accounts is adequate
to provide for any disputes with customers, bad debts, or other concessions.
There are no significant retainage amounts included in accounts receivable.
In April 1997, the Company was awarded the United States Air Force C-130
maintenance contract, which was subsequently canceled in June 1997 at the
convenience of the government, based on no fault or issue with the Company. The
C-130 contract provides for reimbursement by the United States Air Force of
costs incurred during its operation, and the Company has recorded a $2.8
million net receivable from the government for these costs, which is the
Company's best estimate of the amount (representing direct costs and other
incremental costs) it will collect of the total claim it has made. The Company
is currently negotiating a termination settlement with the government.
NOTE C--INVENTORIES
The components of inventories were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Finished goods ..................................... $ -- $1,175,000
Work in process .................................... -- 5,000
Aircraft parts and supplies, raw materials ......... 6,029,000 5,260,000
---------- ----------
$6,029,000 $6,440,000
========== ==========
</TABLE>
Costs included in inventories include aircraft parts and supplies, raw
materials and related labor and overhead costs in 1996. In 1997, inventories
include aircraft parts and supplies.
F-58
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE D--INVESTMENTS
In November 1996, the Company sold substantially all of the assets related
to its Ocean Systems segment to Hydroscience Technologies, Inc. ("HTI") in
exchange for 818,182 shares of HTI Preferred Stock, which carries a liquidation
preference of $5.50 per share. At the Company's election, the HTI Preferred
Stock is convertible after December 31, 1997, into 45% of HTI's Common Stock.
See Note P for pro forma information related to this transaction. In 1996, the
Company considered this investment as one that would be held to maturity and
that its carrying value approximated fair market value. The carrying value was
the net cost of assets exchanged for the stock. However, although the purchaser
of Ocean Systems provided additional capital and new management, the continuing
decline in defense spending and other concerns caused management to reevaluate
this preferred stock in 1997. Management has concluded that the value of its
investment has declined permanently. The entire amount was written off in 1997.
During 1994, the Company obtained 40% ownership of a joint venture
involved in the development of aircraft-related technology for an initial
investment of $1,000. The Company accounts for its investment in the joint
venture under the equity method. In 1994, the Company obtained a promissory
note for an advance of $2,000,000 to the joint venture. The principal balance
of the promissory note accrues interest at a maximum rate of 5% per annum and
the principal balance with accrued interest is due January 5, 1999. The note is
secured by certain assets of the joint venture. During 1997 and 1996, the
Company advanced an additional $815,000 and $75,000 to the joint venture. These
advances are included in accounts receivable.
Summarized balance sheet information for the 40% joint venture as of
December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Current assets .................. $14,358,000 $6,578,000
Noncurrent assets ............... 2,782,000 3,818,000
Current liabilities ............. 12,489,000 5,176,000
Noncurrent liabilities .......... 2,000,000 2,000,000
</TABLE>
Summarized financial information for the 40% joint venture for the years
ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Net sales .................. $17,810,000 $11,520,000 $5,244,000
Gross profit ............... 3,578,000 4,104,000 1,501,000
Net income (loss) .......... (569,000) 1,044,000 (710,000)
</TABLE>
NOTE E--ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Accounts payable .......................... $5,617,000 $5,403,000
Salaries, wages and payroll taxes ......... 1,001,000 836,000
---------- ----------
$6,618,000 $6,239,000
========== ==========
</TABLE>
F-59
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE F--LONG-TERM DEBT
The Company entered into a long-term note and a credit facility during
1996 with a bank. The credit facility consists of a $12,000,000 line of credit
agreement and a $3,000,000 standby letter of credit agreement. Advances under
the line of credit agreement accrue interest at the prime interest rate (8.5%
at December 31, 1997). The Company also pays an annual commitment fee of 1/4 of
1 % on the unused portion of the line of credit. At December 31, 1997, the
unused and available portion of the line of credit was $2,287,000. The line of
credit expires on June 30, 1998. Management is confident that this line will be
renewed or comparable financing can be obtained at June 30, 1998, for at least
another one-year period.
The credit facility is unsecured and contains certain financial covenants
related to working capital, consolidated net income and consolidated tangible
net worth, among other restrictions. The Company was in violation of certain
covenants as of December 31, 1997; however, these covenants have been waived by
the bank.
The long-term note consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note payable with interest at 7.98%, payable in monthly
installments of $23,611 principal plus interest (7.98%) on the
outstanding balance to maturity in November 1999, at which
time the remaining principal balance is due, secured by
property valued at $850,000................................... $546,000 $826,000
Less: amounts payable within one year ......................... 283,000 280,000
-------- --------
$263,000 $546,000
======== ========
</TABLE>
This debt was incurred to finance the acquisition of certain fixed assets.
The total future debt principal payments are $283,000 in 1998, $263,000 in
1999, and zero thereafter. As substantially all of the Company's debt is based
on variable interest rates, the Company believes that the carrying value
approximates fair market value.
A $1,700,000 standby letter of credit was issued, pursuant to the standby
letter of credit agreement, in order to comply with the annual financial
assurances required by the Florida Department of Environmental Protection and
related to the environmental remediation being performed at the Company's Lake
City, Florida facility (see Note O). The standby letter of credit agreement has
an annual commitment fee of 1% of the amount of the letter of credit.
NOTE G--SHAREHOLDERS' EQUITY
On January 29, 1997, the Board of Directors declared a 2 for 1 stock split
to be effected in the form of a 100% stock dividend to shareholders of record
at the close of business March 25, 1997. The dividend resulted in $384,000
being transferred from retained earnings to common stock. This amount
represents the par value of the new stock. All share and per share amounts have
been adjusted to recognize this dividend.
On March 17, 1997, the shareholders approved an amendment to the Company's
Restated Certificate of Incorporation increasing the number of authorized
shares of Common Stock from 5,000,000 shares to 20,000,000 shares.
F-60
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--INCOME TAXES
Federal and state income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------- -------------------------- ------------------------------
CURRENT DEFERRED CURRENT DEFERRED CURRENT DEFERRED
---------------- ---------------- ------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Federal ......... $ (2,016,000) $ (1,053,000) $2,086,000 $-- $1,279,000 $ (390,000)
State ........... (541,000) -- 120,000 -- -- --
------------ ------------ ---------- --- ---------- ----------
$ (2,557,000) $ (1,053,000) $2,206,000 $-- $1,279,000 $ (390,000)
============ ============ ========== === ========== ==========
</TABLE>
The provision (benefit) for income taxes differs from the amount computed
by applying the federal income tax rate to income before income taxes. The
following table summarizes the reasons for this difference:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
---------------- ------------- -------------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate ......... $ (5,286,000) $2,217,000 $1,315,000
State taxes (benefit) .................................... (541,000) 120,000 --
Alternative minimum tax .................................. -- -- (12,000)
Change in deferred tax allowance ......................... 2,425,000 (158,000) (515,000)
Other items--net ......................................... (208,000) 27,000 101,000
------------ ---------- ----------
$ (3,610,000) $2,206,000 $ 889,000
============ ========== ==========
</TABLE>
F-61
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE H--INCOME TAXES--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- -------------
<S> <C> <C>
Deferred tax assets:
Short-term--
Allowance for uncollectible accounts ......... $ 307,000 $ 307,000
Environmental accruals ....................... 1,259,000 129,000
Inventory reserve ............................ 488,000 --
Vacation accrual ............................. 112,000 84,000
------------ ----------
Total short-term ............................. 2,166,000 520,000
Long-term--
Writedown of investment ...................... 1,800,000 --
Other ........................................ 68,000 37,000
------------ ----------
Total deferred tax assets .................... 4,034,000 557,000
Less--Valuation allowance ...................... (2,609,000) (184,000)
------------ ----------
Net deferred tax asset ....................... 1,425,000 373,000
Deferred tax liabilities--
Short-term--
Costs deducted for tax purposes ............... -- 24,000
Long-term--
Difference for depreciation of property,
plant, and equipment ........................ 372,000 349,000
------------ ----------
Total deferred tax liability ................. 372,000 373,000
------------ ----------
Net deferred tax asset .......................... $ 1,053,000 $ --
============ ==========
</TABLE>
The Company has established a valuation allowance to offset the deferred
tax assets that have resulted from certain items that will only be deductible
when such items are actually incurred. The deferred tax assets primarily relate
to allowance for uncollectible accounts, environmental accruals, and a
write-down of preferred stock. Because it is difficult to predict when the
environmental expenditures will be made and when the preferred stock will
become deductible for tax purposes, the Company has elected to maintain a
valuation allowance for a portion of its deferred tax asset. The valuation
allowance will be maintained until it is more likely than not that these
deferred tax assets will be realized.
NOTE I--STOCK OPTION PLANS
In May 1992, the stockholders approved the Whitehall Corporation Incentive
Stock Option Plan ("Incentive Plan") and the Whitehall Corporation Non-Employee
Directors Stock Option Plan ("Directors Plan"). The Incentive Plan provides for
the grant of incentive stock options for up to 650,000 shares of Common Stock
to key employees. The Directors Plan provides for the grant of incentive stock
options for up to 130,000 shares of Common Stock to non-employee Directors of
the Company. Under the Plans, the exercise price for stock options will not be
less than the fair market value of the optioned stock at the date of grant.
Stock options expire ten years from the date of grant
F-62
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--STOCK OPTION PLANS--(CONTINUED)
and generally vest over a five-year period with one-fifth of the shares
becoming exercisable on each of the five anniversaries of the date of grant. As
December 31, 1997, 1996, and 1995 there were 347,100, 218,600, and 196,200
options exercisable, respectively. The option period under both Plans may not
be more than ten years from the date the option is granted.
Transactions involving the Plans are summarized as follows:
<TABLE>
<CAPTION>
SHARES
------------
<S> <C>
Options outstanding, December 31, 1994 .......... 444,000
Granted ($14.13 per share) ..................... 20,000
Canceled ....................................... --
Exercised ($5.63-$7.75 per share) .............. (27,200)
-------
Options outstanding, December 31, 1995 .......... 436,800
Granted ($17.75-$19.53 per share) .............. 130,000
Canceled ....................................... --
Exercised ($5.81-$7.75 per share) .............. (65,600)
-------
Options outstanding, December 31, 1996 .......... 501,200
Granted ($16.375 per share) .................... 40,000
Canceled ($7.75-$17.75 per share) .............. (16,600)
Exercised ($5.81-$7.75 per share) .............. (24,600)
-------
Options outstanding, December 31, 1997 .......... 500,000
=======
</TABLE>
The Company accounts for its stock option plans in accordance with
Accounting Principles Board Opinion No. 25, under which no compensation cost
has been recognized for stock option awards. In 1996, the Company adopted SFAS
No. 123, which requires that options be priced using the fair value method, and
has elected the disclosure only alternative. The fair value of each stock
option grant is estimated on the date of grant using the Black-Scholes option
pricing model. Using the fair value method to determine compensation costs, the
Company's pro forma net income and net income per share would be:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- --------------- ---------------
<S> <C> <C> <C>
Net income: As Reported .................... $(11,937,000) $4,317,000 $2,949,000
Pro Forma ................................ (11,940,000) 3,355,000 2,829,000
Net income per share: As Reported .......... $ (2.16) $ 0.75 $ 0.52
Pro Forma ................................ (2.16) 0.59 0.50
The following assumptions were used:
Risk free interest rate .................... 5.86% 7.03% 7.24%
Expected dividend yield .................... -- -- --
Expected life of options ................... 10 years 10 years 10 years
Expected volatility ........................ 37.44% 38.19% 38.33%
</TABLE>
F-63
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I--STOCK OPTION PLANS--(CONTINUED)
The weighted average fair value of the stock options granted during 1997,
1996 and 1995 was $9.91, $11.22 and $9.11, respectively. The weighted average
exercise prices of the stock options outstanding and exercisable in 1997, 1996,
and 1995 are:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Outstanding at beginning of the year .......... $ 10.12 $ 6.80 $ 6.38
Granted ...................................... 16.38 18.30 14.13
Exercised .................................... 6.10 6.24 5.90
Canceled ..................................... 16.79 -- --
Outstanding at end of year .................... 10.26 10.12 6.80
Exercisable at end of year .................... $ 7.95 $ 6.67 $ 6.47
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
NOTE J--SAVINGS PLAN
The Company implemented a voluntary 401(k) savings plan for eligible
employees (as defined by the Plan document) effective September 1, 1992. The
Company contributed $50 per enrolling employee in 1995. The Company contributes
50% of employee contributions up to 1.5% of the employee's base salary. The
Company may make future matching contributions at its discretion. Company
contributions totaled approximately $86,000 in 1997, $40,000 in 1996, and
$25,000 in 1995. The Company's contributions vest over a six-year period.
NOTE K--ACQUISITION
In July 1997, the Company acquired an aircraft maintenance company in
Macon, Georgia for approximately $6.7 million in cash and assumed liabilities.
This acquisition involved the purchase of inventories, equipment, and certain
intangible assets. This acquisition was accounted for using the purchase method
of accounting. Accordingly, operations of the acquired business are included in
the accompanying consolidated financial statements for the period subsequent to
the effective date of the acquisition. See Note P for pro forma information for
this acquisition as if it had occurred at the beginning of the fiscal year.
The preliminary estimated fair values assigned to assets acquired and
liabilities assumed is summarized as follows:
<TABLE>
<S> <C>
Assets acquired ............. $ 6,700,000
Liabilities assumed ......... (5,200,000)
------------
Cash purchase price ......... $ 1,500,000
============
</TABLE>
NOTE L--SALE OF ELECTRONICS SEGMENT
In March 1997, the Company entered into an agreement to sell its
Electronics segment to a group of private investors for approximately $2.7
million. The purchase consideration consists of
F-64
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE L--SALE OF ELECTRONICS SEGMENT--(CONTINUED)
approximately $1.9 million in cash and $864,000 in promissory notes bearing
interest at a rate of 10% per annum. See Note P for pro forma information
related to this transaction.
NOTE M--LEASES
In 1997, the Company assumed capital leases for land and buildings in the
acquisition of the aircraft maintenance facility in Macon, Georgia. Both leases
carry an interest rate of 8.25% and expire in 2018. There were no capital
leases in 1996. The following leased property included in the accompanying
balance sheets is under capital leases:
<TABLE>
<S> <C>
Land .............................................. $ 588,000
Buildings ......................................... 3,702,000
----------
Total leased property under capital lease ......... 4,290,000
Less: Accumulated depreciation .................... (89,000)
----------
$4,201,000
==========
</TABLE>
The aggregate future minimum rental commitments as of December 31, 1997,
for all noncancellable operating leases and capital leases are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES TOTAL
---------------- ------------------ ---------------
<S> <C> <C> <C>
1998 ................................ $ 432,000 $ 58,000 $ 490,000
1999 ................................ 432,000 58,000 490,000
2000 ................................ 432,000 42,000 474,000
2001 ................................ 432,000 26,000 458,000
2002 and thereafter ................. 7,092,000 539,000 7,631,000
------------ -------- ------------
8,820,000 723,000 9,543,000
Amount related to interest .......... (4,562,000) -- (4,562,000)
------------ -------- ------------
Total lease obligation .............. $ 4,258,000 $723,000 $ 4,981,000
============ ======== ============
</TABLE>
Total rental expense amounted to approximately $281,000 in 1997, $305,000
in 1996, and $105,000 in 1995.
NOTE N--INDUSTRY SEGMENTS AND MAJOR CUSTOMERS
The Company operated in two segments during 1997: Aircraft Maintenance and
Electronics. The Aircraft Maintenance segment rebuilds, modifies and maintains
turboprop and jet aircraft. The Electronics segment manufactures and
distributes quartz crystals and oscillators.
Operating profit represents total revenue less operating expenses,
excluding general corporate expenses and interest expense. Identifiable assets
are those assets used in each segment. Corporate assets are principally cash,
prepaid items and capital assets.
F-65
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE N--INDUSTRY SEGMENTS AND MAJOR CUSTOMERS--(CONTINUED)
Information about the Company's operations in the different segments is
summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
-------------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Sales:
Aircraft Maintenance .......................... $ 65,119 $65,340 $ 42,641
Electronics ................................... 672 2,884 3,640
Ocean Systems ................................. -- 1,946 9,948
-------- ------- --------
$ 65,791 $70,170 $ 56,229
======== ======= ========
Operating profit and income (loss) before taxes:
Aircraft Maintenance .......................... $ (9,764) $ 7,026 $ 3,430
Electronics ................................... (6) 557 796
Ocean Systems ................................. -- (789) 419
---------- ------- --------
(9,770) 6,794 4,645
Corporate:
Writedown of investment ....................... (4,500) -- --
Interest income ............................... 112 307 671
Investment income (loss) ...................... (111) 440 --
Gain (loss) on sale of assets ................. (314) 11 650
General and administrative expenses ........... (337) (968) (2,128)
Interest expense .............................. (627) (61) --
---------- ------- --------
Income (loss) before taxes$ ................... $(15,547) $ 6,523 $ 3,838
========== ======= ========
Identifiable assets:
Aircraft Maintenance .......................... $ 38,803 $32,507 $ 24,078
Electronics ................................... -- 2,216 2,627
Ocean Systems ................................. -- -- 6,518
Corporate ..................................... 9,796 10,213 7,959
---------- ------- --------
$ 48,599 $44,936 $ 41,182
========== ======= ========
Depreciation and amortization:
Aircraft Maintenance .......................... $ 1,179 $ 776 $ 813
Electronics ................................... -- 50 27
Ocean Systems ................................. -- 193 219
Corporate ..................................... 163 77 38
---------- ------- --------
$ 1,342 $ 1,096 $ 1,097
========== ======= ========
Capital expenditures:
Aircraft Maintenance .......................... $ 3,679 $ 3,395 $ 1,441
Electronics ................................... -- 100 46
Ocean Systems ................................. -- 5 181
Corporate ..................................... 60 938 --
---------- ------- --------
$ 3,739 $ 4,438 $ 1,668
========== ======= ========
</TABLE>
F-66
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE N--INDUSTRY SEGMENTS AND MAJOR CUSTOMERS--(CONTINUED)
The Company has three customers in the Aircraft Maintenance segment that
account for 23%, 16%, and 10% of 1997 consolidated net sales. The Company has
three customers in the Aircraft Maintenance segment that account for 26%, 15%,
and 14% of 1996 consolidated net sales. The Company has two customers in the
Aircraft Maintenance segment that accounted for 30% and 21% of 1995
consolidated net sales. The United States government accounted for
approximately 5% of consolidated net sales in 1997, and 2% of consolidated net
sales in 1995. The Company made no sales to the United States government in
1996.
NOTE O--COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL MATTERS
The Company's operations, like those of other companies engaged in similar
businesses, are subject to extensive and evolving federal, state, and local
environmental laws and regulations. The measurement of environmental
liabilities is based on an evaluation of currently available facts with respect
to each individual site and considers factors such as existing technology,
presently enacted laws and regulations, and prior experience in remediation of
contaminated sites. As assessments and remediation progress at individual
sites, these liabilities are reviewed and adjusted to reflect the additional
technical and legal information as it becomes available. In order to comply
with present federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or
otherwise relating to the protection of the environment, the Company will be
required to fund remediation efforts, which could result in potentially
substantial operating costs and capital expenditures.
The Company is taking remedial action pursuant to Environmental Protection
Agency ("EPA") and Florida Department of Environmental Protection ("FDEP")
regulations at the Lake City, Florida facility. Ongoing testing is being
performed and new information is being gathered to continually assess the
impact and magnitude of the required remediation efforts on the Company. Based
upon the most recent cost estimates provided by environmental consultants, the
Company believes that the total remaining testing, remediation and compliance
costs for this facility will be approximately $2.4 million, which has been
accrued at December 31, 1997. Testing and evaluation for all known sites on the
Company's Lake City, Florida property is substantially complete and Whitehall
has commenced a remediation program. Whitehall is currently monitoring the
remediation, which will extend into the future. During 1997, Whitehall's
accruals were increased because of this monitoring which indicated a need for
new equipment and additional monitoring. Based on current testing, technology,
environmental law and clean-up experience to date, Whitehall believes that it
has established an accrual for a reasonable estimate of the costs associated
with its current remediation strategies.
Additionally, there are other areas adjacent to Whitehall's Lake City
property that could also require remediation. The Company believes it is not
responsible for these areas; however, it may be asserted that Whitehall and
other parties are jointly and severally liable and are responsible for the
remediation of these properties. No estimate of any such costs to the Company is
available at this time.
In connection with the sale of Crystek (see Note L), Whitehall was
required to perform, at its own expense, an environmental site assessment at
the Crystek facility. The Company is also required to remedy all recognized
environmental conditions identified in the assessment to bring the Crystek
facility into compliance with all applicable Federal, State, and local
environmental laws. If the facility is not
F-67
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE O--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
brought into compliance with environmental laws by December 31, 1998, the
Crystek buyer, subject to the terms and conditions set forth in the Crystek
agreement, will have the option of requiring the Company to repurchase the
property for $300,000. The Company has engaged environmental consultants to
review potential environmental liabilities at the Crystek facility. Such
investigation and testing resulted in the identification of likely environmental
remedial actions. Whitehall has completed the preliminary testing for the
environmental evaluation of the Crystek property. Based on current testing,
technology and environmental law, Whitehall believes that the likely remediation
and compliance costs will be approximately $1 million, which amount was recorded
at December 31, 1997. Whitehall is in the process of additional testing on this
site, which may cause such estimate to increase in the future, depending on the
results of such studies. While the possibility exists that such amount will
change due to a change in technology or additional information, management does
not believe that the compliance and remediation costs with respect to the site
will exceed $1 million by an amount material to the Company's financial position
or results of operations.
Future information and developments will require the Company to
continually reassess the expected impact of the environmental matters discussed
above. Actual costs to be incurred in future periods may vary from the
estimate, given the inherent uncertainties in evaluating environmental
exposures. These uncertainties included the extent of required remediation
based on testing and evaluation not yet completed and the varying costs and
effectiveness of remediation methods.
To comply with the financial assurances required by the Florida Department
of Environmental Protection (FDEP), the Company requested and a bank issued a
$1,700,000 standby letter of credit in favor of the FDEP. This letter of credit
meets all conditions required by the FDEP.
LEGAL MATTERS
On May 10, 1991, an action was filed in the District Court of Dallas
County, Texas, by Lee D. Webster, former Chairman, Chief Executive Officer and
President of Whitehall, against the Company, each of its directors (other than
Mr. Webster) and Cambridge Capital Fund, L.P., alleging, among other things,
that (i) the defendants' actions, both individually and in concert, constituted
willful interference with Mr. Webster's employment relationship with the
Company and was the direct cause of Mr. Webster's termination as its President
and Chairman of the Board, and (ii) the defendants' actions forced Mr. Webster
into retirement without providing Mr. Webster with retirement benefits which
Mr. Webster was purportedly promised. On August 17, 1994, the defendants were
granted a partial summary judgment. On October 24, 1994, Mr. Webster filed a
third amended petition and alleged the following causes of action: tortuous
interference with contractual relations against Cambridge Capital Fund, L.P.,
and directors George F. Baker and John J. McAtee; intentional infliction of
emotional distress and breach of oral contracts. The third amended petition
sought compensatory and punitive damages in excess of $35 million. On January
12, 1995, the Court entered an abatement on one of the breach of oral contract
claims against the Company and entered a summary judgment in the defendants'
favor on all remaining claims alleged by Mr. Webster. On February 26, 1996, the
Court granted a summary judgment in favor of the defendants on Mr. Webster's
remaining claims and entered a take nothing final judgment which dismissed all
of Mr. Webster's claims with prejudice to refiling. On March 26, 1996, Mr.
Webster appealed the final judgment to the Dallas, Texas Court of Appeals. Oral
argument was held on November 13, 1997. To date, no decision has been reached
by the court. Management intends to vigorously defend this appeal.
The Company is also involved in certain legal proceedings in the normal
course of its business. After consultation with counsel, management is of the
opinion that the outcome of the above-mentioned proceedings will not have a
material effect on the financial position or results of operations of the
Company.
F-68
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE P--PRO FORMA INFORMATION
The unaudited pro forma financial information presented below is for the
years ended December 31, 1997 and 1996. The unaudited pro forma financial
information gives effect to the sale of the Ocean Systems and Electronics
segments and the purchase of the Macon facility as if such transactions had
occurred as of January 1, 1996:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Net sales ..................... $ 76,153,000 $ 81,719,000
Net income (loss) ............. (12,841,000) 3,506,000
Net income per share .......... (2.33) 0.64
</TABLE>
The pro forma financial information does not purport to represent what the
results of operations of the Company would have actually been if the
aforementioned transactions had occurred on January 1, 1996, nor does it
project the results of operations for any future periods.
NOTE Q--RELATED PARTY TRANSACTIONS
As of December 31, 1997, two former officers of the Company were indebted
to the Company in the aggregate amount of approximately $363,000. This amount
is classified as accounts receivable and is fully reserved. These receivables
will be written off in 1998.
NOTE R--SUBSEQUENT EVENT
In March 1998, the Company entered into a definitive agreement with
Aviation Sales Company (AVS). Under the terms of the agreement, the Company
will exchange its common stock for common stock of AVS. This transaction is
expected to be accounted for as a pooling of interests.
NOTE S--SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 TOTAL
------------ ------------ ----------- ----------- ------------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1997:
Net sales ......................... $ 13,551 $ 19,035 $14,256 $18,949 $ 65,791
Gross profit (loss) ............... 2,560 3,524 (6,955) 2,465 1,594
Net income (loss) ................. 1,135 1,329 (8,231) (6,170) (11,937)
Net income (loss) per common share:
Basic ............................ $ 0.21 $ 0.24 $ 1.49) $ 1.12) $ (2.16)
Diluted .......................... $ 0.20 $ 0.23 $ 1.49) $ 1.12) $ (2.16)
1996:
Net sales ......................... $ 20,187 $ 20,221 $16,318 $13,444 $ 70,170
Gross profit ...................... 3,092 2,879 2,197 2,193 10,361
Net income ........................ 1,063 1,129 1,187 938 4,317
Net income per common share:*
Basic ............................ $ 0.19 $ 0.21 $ 0.22 $ 0.17 $ 0.79
Diluted .......................... $ 0.19 $ 0.20 $ 0.21 $ 0.16 $ 0.75
</TABLE>
- ----------------
* Restated to give effect to 100% stock dividend to stockholders' of record at
the close of business on March 25, 1997.
The fourth quarter of 1997 net loss and loss per share reflect
approximately $6.5 million of adjustments to accrue additional environmental
reserves, increase the allowance for bad debts, and increase the allowance for
obsolete inventory.
F-69
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS--(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 1,140,000 $ 1,251,000
Accounts receivable, net ......................................... 17,057,000 16,234,000
Income taxes receivable .......................................... 2,590,000 2,590,000
Inventories ...................................................... 6,342,000 6,029,000
Prepaid expenses and other ....................................... 576,000 636,000
Current deferred income tax ...................................... 1,053,000 1,053,000
Notes receivable ................................................. 549,000 516,000
------------- -------------
TOTAL CURRENT ASSETS ............................................ 29,307,000 28,309,000
INVESTMENTS ....................................................... 560,000 --
PROPERTY, PLANT AND EQUIPMENT ..................................... 30,105,000 29,767,000
Less allowances for depreciation and amortization ................. (12,669,000) (12,200,000)
------------- -------------
17,436,000 17,567,000
NOTES RECEIVABLE .................................................. 2,723,000 2,723,000
------------- -------------
TOTAL ASSETS .................................................... $ 50,026,000 $ 48,599,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ......................... $ 6,233,000 $ 6,618,000
Notes payable to bank ............................................ 11,600,000 9,713,000
Current portion of Long term debt ................................ 283,000 283,000
Current portion of obligations under capital lease ............... 84,000 84,000
Accrued environmental costs ...................................... 3,954,000 3,954,000
------------- -------------
TOTAL CURRENT LIABILITIES ....................................... 22,154,000 20,652,000
NON-CURRENT LIABILITIES ........................................... 4,645,000 4,645,000
LONG TERM DEBT .................................................... 192,000 263,000
SHAREHOLDERS' EQUITY:
Common stock, $.10 par value: Authorized shares--20,000,000 Issued
shares (1998--7,691,312; 1997--7,691,312) ...................... 770,000 770,000
Additional paid-in capital ....................................... 1,914,000 1,914,000
Retained earnings ................................................ 36,496,000 36,500,000
------------- -------------
39,180,000 39,184,000
Less treasury shares at cost (1998 and 1997--2,161,312) ........... (16,145,000) (16,145,000)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY ...................................... 23,035,000 23,039,000
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 50,026,000 $ 48,599,000
============= =============
</TABLE>
See notes to condensed consolidated financial statements.
F-70
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME--(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
1998 1997
-------------- ----------------
<S> <C> <C>
Net Sales:
Services ...................................... $19,766,000 $ 12,879,000
Products ....................................... -- 672,000
----------- ------------
19,766,000 13,551,000
Cost of Sales:
Services ...................................... 19,088,000 10,580,000
Products ....................................... -- 411,000
----------- ------------
19,088,000 10,991,000
GROSS PROFIT .................................... 678,000 2,560,000
Selling, general and administrative ............. 934,000 1,499,000
----------- ------------
INCOME/(LOSS) FROM OPERATIONS ................... (256,000) 1,061,000
Other income, net ............................... 249,000 830,000
----------- ------------
INCOME/(LOSS) BEFORE INCOME TAXES ............... (7,000) 1,891,000
Provision for (benefit from) income tax ......... (3,000) 756,000
----------- ------------
NET INCOME/(LOSS) ............................... $ (4,000) $ 1,135,000
=========== ============
NET INCOME/(LOSS) PER SHARE
Basic .......................................... $ (0.00) $ 0.21
=========== ============
Diluted ........................................ $ (0.00) $ 0.20
=========== ============
WEIGHTED AVERAGE SHARES OUTSTANDING .............
Basic .......................................... 5,530,000 5,508,400
Diluted ........................................ 5,530,000 5,735,307
</TABLE>
See notes to condensed consolidated financial statements.
F-71
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income(Loss) .................................................... $ (4,000) $ 1,135,000
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization ...................................... 469,000 292,000
Gain on sale of Electronics segment ................................ -- (710,000)
Equity in earnings of equity investment ............................ (560,000) (134,000)
Changes in assets and liabilities net of sale of Electronics segment:
Accounts receivable, net ........................................... (823,000) (4,636,000)
Income taxes receivable ............................................ -- 458,000
Inventories ........................................................ (313,000) (604,000)
Prepaid expenses and other ......................................... 60,000 139,000
Accounts payable and other accrued liabilities ..................... (385,000) 1,242,000
Accrued environmental costs ........................................ -- (75,000)
Other assets and liabilities ....................................... (33,000) 277,000
------------ ------------
Net cash used in operating activities ............................... (1,589,000) (2,616,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................ (338,000) (1,082,000)
Notes receivable .................................................... -- (846,000)
Proceeds from sale of Electronics segment ........................... -- 2,566,000
------------ ------------
Net cash used in investing activities ............................... (338,000) 638,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in bank line of credit loan, net of repayments ............. 1,887,000 2,450,000
Payments on long-term debt .......................................... (71,000) (70,000)
------------ ------------
Net proceeds from the exercise of stock options ..................... -- 18,000
------------ ------------
Net cash provided by financing activities ........................... 1,816,000 2,398,000
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ....................................................... (111,000) 420,000
------------ ------------
CASH AND CASH EQUIVALENTS, beginning of period ...................... 1,251,000 2,656,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ............................ $ 1,140,000 $ 3,076,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-72
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
include the accounts of Whitehall Corporation and those of all of its
majority-owned subsidiaries ("Whitehall" or the "Company") and have been
prepared in accordance with Form 10-Q instructions and thus do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for the three month period ending March 31, 1998, are
not necessarily indicative of the results that may be expected for the entire
year.
During February of 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings per Share, which became effective for all financial
statements issued for periods ending after December 15, 1997, including interim
periods. SFAS No. 128 provides for the presentation of basic and diluted
earnings per share on the face of the financial statements and supersedes
Accounting Principles Board (APB) Opinion No. 15, Earnings per Share. SFAS No.
128 requires the restatement of earnings per share for prior periods presented
after its effective date. Earnings per share for the three month periods ended
March 31, 1998 and 1997 have been computed under SFAS No. 128.
SFAS No. 130 "Reporting Comprehensive Income" is effective for fiscal
years beginning after December 15, 1997. However, the Company has no elements
of comprehensive income; therefore, net income equals comprehensive income.
For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
2. JOINT VENTURE:
During 1994, the Company obtained a 40% ownership in AvAero Noise
Reduction Joint Venture ("AvAero"), a joint venture involved in the development
of aircraft-related technology for an initial investment of $1,000. The Company
accounts for its investment in AvAero under the equity method. In 1994, the
Company obtained a promissory note for an advance of $2,000,000 to the joint
venture. The principal balance of the promissory note accrues interest at a
maximum rate of 5%, and the principal balance together with accrued interest
are due January 5, 1999. The note is secured by certain assets of AvAero.
During 1997, 1996 and 1995 the Company advanced an additional $476,000, $75,000
and $1,020,000 to AvAero, net of repayments. The Company has made no further
advances since 1997. These advances are included in accounts receivable.
3. COMMITMENTS AND CONTINGENCIES:
On May 10, 1991, an action was filed in the District Court of Dallas
County, Texas, by Lee D. Webster, former Chairman, Chief Executive Officer and
President of Whitehall, against the Company, each of its directors (other than
Mr. Webster) and Cambridge Capital Fund, L.P., alleging, among other things,
that (i) the defendants' actions, both individually and in concert, constituted
willful interference with Mr. Webster's employment relationship with the
Company and were the direct cause of Mr.
F-73
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
MARCH 31, 1998
3. COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
Webster's termination as its President and Chairman of the Board, and (ii) the
defendants' actions forced Mr. Webster into retirement without providing Mr.
Webster with retirement benefits which Mr. Webster was purportedly promised. On
August 17, 1994, the defendants were granted a partial summary judgment. On
October 24, 1994, Mr. Webster filed a third amended petition and alleged the
following causes of action: tortious interference with contractual relations
against Cambridge Capital Fund, L.P., and directors George F. Baker and John J.
McAtee; intentional infliction of emotional distress; and breach of oral
contracts. The third amended petition sought compensatory and punitive damages
in excess of $35 million. On January 12, 1995, the Court entered an abatement
on one of the breach of oral contract claims against the Company and entered a
summary judgment in the defendants' favor on all remaining claims alleged by
Mr. Webster. On February 26, 1996, the Court granted a summary judgment in
favor of the defendants on Mr. Webster's remaining claim and entered a take
nothing final judgment which dismissed all of Mr. Webster's claims with
prejudice to refiling. On March 26, 1996, Mr. Webster appealed the final
judgment to the Dallas, Texas Court of Appeals. On April 10, 1998 the Texas
Court of Appeals affirmed the trial court's summary judgement ruling in favor
of the defendants on each of Mr. Webster's claims.
A subsidiary of the Company, Aero Corporation ("Aero"), is taking remedial
action pursuant to Environmental Protection Agency ("EPA") regulations at the
Lake City, Florida facility. In addition, the Company was required to perform
an environmental site assessment at the facility of a subsidiary in connection
with the sale of the facility during the first quarter of 1997. The Company
does not anticipate any material direct effects upon the capital expenditures,
earnings and competitive position of the Company from compliance with present
Federal, State and local provisions which have been enacted or adopted
regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment in excess of the Company's
reserves.
The Company does expect, however, that compliance with such regulations
will require, from time to time, both increased operating costs and capital
expenditures which may be substantial. As of March 31, 1998 and December 31,
1997, the Company had reserved, in the aggregate, approximately $3.95 million
for anticipated environmental remediation costs. Included among the remaining
costs to be incurred are anticipated expenditures for testing and monitoring to
be performed over a 20 to 30 year period. Actual costs to be incurred in future
periods may vary from the estimate, given the inherent uncertainties in
evaluating environmental exposures. These uncertainties include the extent of
required remediation based on testing and evaluation not yet completed and the
varying costs and effectiveness of remediation methods.
The Company is also involved in certain legal proceedings in the normal
course of its business. After consultation with counsel, management is of the
opinion that the outcome of the above-mentioned proceedings will not have a
material effect on the financial position or results of operations of the
Company beyond the amounts currently reserved.
4. ACQUISITIONS AND MERGERS:
In March of 1998, the Company entered into a definitive merger agreement
(the "Merger Agreement") with Aviation Sales Company ("AVS") pursuant to which
a wholly-owned subsidiary of
F-74
<PAGE>
WHITEHALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
MARCH 31, 1998
4. ACQUISITIONS AND MERGERS:--(CONTINUED)
AVS will merge (the "Merger") with and into the Company. As a result of the
Merger, the Company will become a wholly owned subsidiary of AVS. The Merger is
expected to be accounted for as a pooling of interests. Under the terms of the
Merger Agreement, each share of the Company's common stock outstanding at the
effective time of the Merger will be converted into the right to receive .5143
shares of common stock of AVS. Consummation of the Merger, which is expected to
occur at the end of the second quarter of 1998, is subject to customary closing
conditions, including, without limitation, approval of the Company's and AVS's
stockholders. No assurance can be given that the Merger will ultimately be
consummated or that it will be consummated on the terms set forth in the Merger
Agreement.
In July 1997, Whitehall purchased from Zantop International Airlines, Inc.
("Zantop") certain assets (the "Acquired Assets") used in connection with the
operation of Zantop's third party aircraft maintenance business located in
Macon, Georgia. Among the Acquired Assets were all of Zantop's leasehold
interest in the properties located at its Macon facility (the "Leased
Facilities"). The purchase price for the Acquired Assets was $1.5 million in
cash plus assumption of certain liabilities, including approximately $4.3
million in future lease obligations relating to the Leased Facilities.
F-75
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements are based on the historical financial statements of the Company and
the historical financial statements of entities acquired by the Company (Kratz)
during the periods presented and entities whose future acquisition is
considered probable by management of the Company (Whitehall), adjusted to give
effect to the offering of the Notes. Specifically, the following unaudited pro
forma condensed combined financial statements present: (i) the pro forma
financial position of the Company at March 31, 1998 as if the proposed merger
with Whitehall had been consummated on that date, and (ii) the pro forma
results of operations of the Company for the three months ended March 31, 1998
as if the Offering had been consummated as of January 1, 1998, and for the year
ended December 31, 1997, as if the acquisition of Kratz and the Offering had
been consummated as of January 1, 1997. The pro forma, as adjusted results of
operations for the three months ended March 31, 1998 and the year ended
December 31, 1997 are further adjusted as if the Merger had occurred on January
1, 1998 and January 1, 1997, respectively. Additionally as the Merger is
expected to be accounted for as a pooling of interests, pro forma results of
operations for 1995 and 1996 including Whitehall have been included. The
information presented is derived from, should be read in conjunction with, and
is qualified in its entirety by reference to, the separate historical financial
statements and the notes thereto appearing elsewhere in this Prospectus or
incorporated elsewhere in this Prospectus by reference. The unaudited pro forma
condensed combined financial data have been included for comparative purposes
only and do not purport to be indicative of the results of operations or
financial position which actually would have been obtained if the Merger, the
offering of the Notes and the Kratz acquisition had been effected at the
beginning of the periods or as of the date indicated or of the financial
position or results of operations which may be obtained in the future.
The following unaudited pro forma condensed consolidated financial
statements are based on the historical financial statements of the Company and
the historical financial statements of entities acquired by the Company during
and subsequent to the periods presented, adjusted as described below for the
following acquisitions:
<TABLE>
<CAPTION>
COMPANY ACQUISITION DATE METHOD OF ACCOUNTING
- -------------------------------------------- -------------------- ---------------------
<S> <C> <C>
Dixie Bearings Incorporated ("Dixie") August 9, 1996 Purchase
AvEng Trading Partners ("AvEng") December 10, 1996 Pooling of Interests
Aerocell Structures, Inc. ("Aerocell") September 30, 1997 Pooling of Interests
Kratz-Wilde Machine Company ("Kratz") October 17, 1997 Purchase
Apex Manufacturing, Inc. ("Apex") December 31, 1997 Pooling of Interests
Caribe Aviation, Inc. and Aircraft Interior
Design, Inc. ("Caribe") March 6, 1998 Purchase
</TABLE>
The post acquisition results of operations of Caribe have been included in
the historical operations of the Company. Pro forma adjustments to record the
pre-acquisition results of operations of Caribe have not been made due to the
immateriality of the amounts.
The post acquisition results of operations of Dixie have been included in
the historical operations of the Company. Pro forma adjustments to record the
pre-acquisition results of operations of Dixie have not been made due to the
immateriality of the amounts.
The results of operations of AvEng are included in the historical
operations of the Company for 1996, 1997 and the three months ended March 31,
1998. The results of operations of AvEng for the year ended December 31, 1995
have not been restated to give retroactive effect to the AvEng acquisition due
to the immateriality of the restated amounts.
The results of operations of Aerocell and Apex are included in the
historical operations of the Company for the year ended December 31, 1997 and
the three months ended March 31, 1998. The Company's historical results of
operations for the years ended December 31, 1995 and 1996 have not been
restated to give retroactive effect to the Aerocell and Apex acquisitions due
to the immateriality of the restated amounts.
The post acquisition results of operations of Kratz have been included in
the historical operations of the Company. Pro forma adjustments to record the
pre-acquisition results of operations of Kratz are included in the accompanying
1997 pro forma financial information.
P-1
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET
AS OF MARCH 31, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THE COMPANY WHITEHALL ADJUSTMENTS BALANCE
----------------- ---------------- ---------------------- -------------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............... $ 5,074,019 $ 1,140,000 $ -- $ 6,214,019
Accounts receivable, net ................ 76,209,381 17,057,000 -- 93,266,381
Inventories ............................. 179,850,077 6,342,000 -- 186,192,077
Other current assets .................... 5,873,061 4,768,000 -- 10,641,061
------------- ------------- -------------- -------------
Total current assets ................... 267,006,538 29,307,000 296,313,538
------------- ------------- -------------
EQUIPMENT ON LEASE, net .................. 16,823,403 -- -- 16,823,403
------------- ------------- -------------- -------------
FIXED ASSETS, net ........................ 27,465,209 17,436,000 -- 44,901,209
------------- ------------- -------------- -------------
AMOUNTS DUE FROM
RELATED PARTIES ........................ 2,354,153 2,723,000 -- 5,077,153
------------- ------------- -------------- -------------
INVESTMENTS .............................. -- 560,000 -- 560,000
------------- ------------- -------------- -------------
OTHER ASSETS .............................
Goodwill ................................ 27,051,995 -- -- 27,051,995
Other ................................... 8,838,089 -- -- 8,838,089
------------- ------------- -------------- -------------
Total other assets ..................... 35,890,084 -- -- 35,890,084
------------- ------------- -------------- -------------
Total assets ........................... $ 349,539,387 $ 50,026,000 $ -- $ 399,565,387
============= ============= ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and
accrued expenses ...................... $ 36,983,945 $ 6,233,000 $ -- $ 43,216,945
Accrued environmental costs ............. -- 3,954,000 -- 3,954,000
Notes payable, current maturities-- ..... 25,793,820 11,967,000 -- 37,760,820
Other notes payable ..................... 3,500,000 -- -- 3,500,000
------------- ------------- -------------- -------------
Total current liabilities .............. 66,277,765 22,154,000 -- 88,431,765
------------- ------------- -------------- -------------
LONG-TERM LIABILITIES
Deferred income and other ............... 1,240,147 471,000 -- 1,711,147
Notes payable ........................... 10,040,795 4,366,000 -- 14,406,795
Senior Subordinated Notes, net .......... 164,014,228 -- -- 164,014,228
------------- ------------- -------------- -------------
Total long-term liabilities ............ 175,295,170 4,837,000 -- 180,132,170
------------- ------------- -------------- -------------
STOCKHOLDERS' EQUITY
Preferred stock ......................... -- -- -- --
Common stock ............................ 9,594 770,000 (767,156)(B) 12,438
Additional paid-in capital .............. 76,635,371 1,914,000 (15,377,844)(B) 63,171,527
Retained earnings ....................... 31,321,487 36,496,000 -- 67,817,487
Less--Treasury stock .................... -- (16,145,000) 16,145,000 (B) --
------------- ------------- -------------- -------------
Total stockholders' equity ............. 107,966,452 23,035,000 -- 131,001,452
------------- ------------- -------------- -------------
Total liabilities and
stockholders' equity ................. $ 349,539,387 $ 50,026,000 $ -- $ 399,565,387
============= ============= ============== =============
Outstanding shares of
common stock ......................... 9,593,560 12,437,639(A)
============= =============
Book value per common share ............ $ 11.25 $ 10.53(A)
============= =============
</TABLE>
The accompanying notes are an integral part
of this unaudited pro forma condensed combined balance sheet.
P-2
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
OFFERING PRO FORMA
THE COMPANY ADJUSTMENTS FOR OFFERING
---------------- ------------------ ----------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of aircraft parts, net ..... $ 80,329,623 $ -- $ 80,329,623
Services ......................... -- -- --
Rentals from leases
and other ....................... 2,126,480 -- 2,126,480
------------ ------------ ------------
82,456,103 -- 82,456,103
COST OF SALES ..................... 57,860,554 -- 57,860,554
------------ ------------ ------------
GROSS PROFIT ...................... 24,595,549 -- 24,595,549
OPERATING EXPENSES ................ 13,903,781 -- 13,903,781
------------ ------------ ------------
INCOME FROM OPERATIONS ............ 10,691,768 -- 10,691,768
OTHER (INCOME) EXPENSES ........... 3,630,049 158,072 (K) 3,788,121
------------ ------------ ------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES .............. 7,061,719 (158,072)(K) 6,903,647
INCOME TAX (BENEFIT) EXPENSE....... 2,712,351 (61,648)(K) 2,650,703
------------ ------------ ------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS .............. $ 4,349,368 $ (96,424) $ 4,252,944
============ ============ ============
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS
PER SHARE:
Basic ............................ $ 0.46 $ 0.45
============ ============
Diluted .......................... $ 0.45 $ 0.44
============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING:
Diluted .......................... 9,592,820 9,592,820
============ ============
<CAPTION>
MERGER PRO FORMA
WHITEHALL ADJUSTMENTS AS ADJUSTED
-------------- ------------------- -------------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of aircraft parts, net ..... $ -- $ (65,693)(E) $ 80,263,930
Services ......................... 19,766,000 -- 19,766,000
Rentals from leases
and other ....................... -- -- 2,126,480
------------ ---------- --------------
19,766,000 (65,693) 102,156,410
COST OF SALES ..................... 19,088,000 (32,847)(E) 76,915,707
------------ ---------- --------------
GROSS PROFIT ...................... 678,000 (32,846) 25,240,703
OPERATING EXPENSES ................ 934,000 -- 14,837,781
------------ ---------- --------------
INCOME FROM OPERATIONS ............ (256,000) (32,846) 10,402,922
OTHER (INCOME) EXPENSES ........... (249,000) -- 3,539,121
------------ ---------- --------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES .............. (7,000) (32,846) 6,863,801
INCOME TAX (BENEFIT) EXPENSE....... (3,000) (12,810)(E) 2,634,893
------------ ---------- --------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS .............. $ (4,000) $ (20,036) $ 4,228,908
============ ========== ==============
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS
PER SHARE:
Basic ............................ $ 0.34(C)
==============
Diluted .......................... $ 0.34(C)
==============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING:
Diluted .......................... 12,436,899(C)
==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
P-3
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ACQUISITION
AND
OFFERING
THE COMPANY KRATZ ADJUSTMENTS
----------------- -------------- --------------------------
<S> <C> <C> <C>
OPERATING REVENUES
Sales of aircraft parts, net .......... $ 243,819,616 $28,711,522 $ --
Services .............................. -- -- --
Rentals from leases and other ......... 13,079,138 -- --
------------- ----------- ---------------
256,898,754 28,711,522 --
COST OF SALES .......................... 180,712,495 18,499,320 754,470 (G)
------------- ----------- ---------------
GROSS PROFIT ........................... 76,186,259 10,212,202 (754,470)
OPERATING EXPENSES ..................... 41,192,054 1,879,018 1,128,814 (G)(H)
------------- ----------- ---------------
INCOME (LOSS) FROM
OPERATIONS ............................ 34,994,205 8,333,184 (1,883,284)
OTHER (INCOME) EXPENSES ................ 7,431,916 (87,675) 7,186,833 (I)(L)
------------- ----------- ---------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES ................... 27,562,289 8,420,859 (9,070,117)
INCOME TAX (BENEFIT)
EXPENSE ............................... 10,781,519 -- (253,210)(J)(L)
------------- ----------- ---------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS ................... $ 16,780,770 $ 8,420,859 $ (8,816,907)
============= =========== ===============
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS
PER SHARE:
Basic ................................. $ 1.78
=============
Diluted ............................... $ 1.77
=============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING:
Diluted ............................... 9,484,097
=============
<CAPTION>
PRO FORMA
FOR THE KRATZ
ACQUISITION
AND THE MERGER PRO FORMA,
OFFERING WHITEHALL ADJUSTMENTS AS ADJUSTED
----------------- ----------------- -------------------- -------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales of aircraft parts, net .......... $ 272,531,138 $ 672,000 $ (151,430)(E) $ 273,051,708
Services .............................. -- 65,119,000 -- 65,119,000
Rentals from leases and other ......... 13,079,138 -- -- 13,079,138
------------- ------------- ----------- --------------
285,610,276 65,791,000 (151,430) 351,249,846
COST OF SALES .......................... 199,966,285 64,197,000 (80,039)(E) 264,083,246
------------- ------------- ----------- --------------
GROSS PROFIT ........................... 85,643,991 1,594,000 (71,391) 87,166,600
OPERATING EXPENSES ..................... 44,199,886 11,590,000 -- 55,789,886
------------- ------------- ----------- --------------
INCOME (LOSS) FROM
OPERATIONS ............................ 41,444,105 (9,996,000) (71,391) 31,376,714
OTHER (INCOME) EXPENSES ................ 14,531,074 5,551,000 -- 20,082,074
------------- ------------- ----------- --------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES ................... 26,913,031 (15,547,000) (71,391) 11,294,640
INCOME TAX (BENEFIT)
EXPENSE ............................... 10,528,309 (3,610,000) (27,842) (E) 6,890,467
------------- ------------- ----------- --------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS ................... $ 16,384,722 $ (11,937,000) $ (43,549) $ 4,404,173
============= ============= =========== ==============
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS
PER SHARE:
Basic ................................. $ 1.74 $ 0.36
============= ==============
Diluted ............................... $ 1.73 $ 0.36(C)
============= ==============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING:
Diluted ............................... 9,484,097 12,322,004(C)
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
P-4
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
MERGER
THE COMPANY WHITEHALL ADJUSTMENTS PRO FORMA
------------------ ------------- -------------------- -------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales of aircraft parts, net .......... $151,407,093 $ 4,830,000 $ (380,252)(E) $ 155,856,841
Services .............................. -- 65,340,000 -- 65,340,000
Rentals from leases and other ......... 10,536,776 -- -- 10,536,776
------------ ----------- ------------ -------------
161,943,869 70,170,000 (380,252) 231,733,617
COST OF SALES .......................... 110,358,502 59,809,000 (163,098) (E) 170,004,404
------------ ----------- ------------ -------------
GROSS PROFIT ........................... 51,585,367 10,361,000 (217,154) 61,729,213
OPERATING EXPENSES ..................... 29,301,532 4,656,000 -- 33,957,532
------------ ----------- ------------ -------------
INCOME FROM OPERATIONS ................. 22,283,835 5,705,000 (217,154) 27,771,681
OTHER (INCOME) EXPENSES ................ 5,350,020 (818,000) -- 4,532,020
------------ ----------- ------------ -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES ................................ 16,933,815 6,523,000 (217,154) 23,239,661
INCOME TAX (BENEFIT) EXPENSE ........... 6,604,188(D) 2,206,000 (84,690)(E) 8,725,498
------------ ----------- ------------ -------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS .................. $ 10,329,627 $ 4,317,000 $ (132,464) $ 14,514,163
============ =========== ============ =============
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS
PER SHARE:
Basic(F) .............................. $ 1.32 $ 1.37
============ =============
Diluted(F) ............................ $ 1.32 $ 1.35(C)
============ =============
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING:
Diluted ............................... 7,819,837 10,769,348(C)
============ =============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
P-5
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
MERGER
THE COMPANY WHITEHALL ADJUSTMENTS PRO FORMA
------------------ -------------- -------------------- -------------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales of aircraft parts, net .......... $108,434,709 $13,588,000 $ (261,333)(E) $ 121,761,376
Services .............................. -- 42,641,000 -- 42,641,000
Rentals from leases and other ......... 5,368,174 -- -- 5,368,174
------------ ----------- ----------- -------------
113,802,883 56,229,000 (261,333) 169,770,550
COST OF SALES .......................... 71,314,263 48,385,000 (127,266)(E) 119,571,997
------------ ----------- ----------- -------------
GROSS PROFIT ........................... 42,488,620 7,844,000 (134,067) 50,198,553
OPERATING EXPENSES ..................... 23,915,313 4,969,000 -- 28,884,313
------------ ----------- ----------- -------------
INCOME FROM OPERATIONS ................. 18,573,307 2,875,000 (134,067) 21,314,240
OTHER (INCOME) EXPENSES ................ 8,287,584 (963,000) -- 7,324,584
------------ ----------- ----------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES ................................ 10,285,723 3,838,000 (134,067) 13,989,656
INCOME TAX (BENEFIT) EXPENSE ........... 4,011,432(D) 889,000 (52,286)(E) 4,848,146
------------ ----------- ----------- -------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS .................. $ 6,274,291 $ 2,949,000 $ (81,781) $ 9,141,510
============ =========== =========== =============
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEMS
PER SHARE:
Basic(F) .............................. $ 1.00 $ 1.01
============ =============
Diluted(F) ............................ $ 1.00 $ 1.00(C)
============ =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES
OUTSTANDING:
Diluted ............................... 6,259,542 9,161,223(C)
============ =============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
P-6
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(1) The unaudited pro forma information for the three months ended March 31,
1998 has been prepared assuming the Merger and the offering of the Notes
occurred as of January 1, 1998 for statement of operations data. Caribe
was acquired on March 6, 1998, in a transaction accounted for as a
purchase. The historical operations of Caribe are included in the
Company's historical results of operations since the acquisition date. The
unaudited pro forma information does not give effect to the acquisition of
Caribe due to the immateriality of the amounts.
(2) The unaudited pro forma information for the year ended December 31, 1997
has been prepared assuming the Merger, the offering of the Notes and the
acquisition of Kratz occurred as of January 1, 1997 for statement of
operations data. Kratz was acquired on October 17, 1997, in a transaction
accounted for as a purchase. The historical operations of Kratz are
included in the Company's historical results of operations since the
acquisition date. The purchase price paid for Kratz and its allocation to
the net assets acquired is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
---------------
<S> <C>
Cash and cash eqivalents ................................ $ 2,970,714
Accounts receivable ..................................... 5,190,226
Inventories ............................................. 6,580,130
Prepaid expenses ........................................ 9,304
Deposits and other ...................................... 614,496
Fixed assets ............................................ 11,481,645
Goodwill ................................................ 17,901,747
Accounts payable ........................................ (764,971)
Accrued expenses ........................................ (1,407,326)
------------
42,575,965
Less cash acquired ...................................... (2,970,714)
------------
Cash used in acquisitions, net of cash acquired ......... $ 39,605,251
============
</TABLE>
The excess of the purchase price over the fair values of the net assets
acquired from Kratz has been recorded as goodwill, which is being amortized
on a straight-line basis over 20 years.
(3) The March 31, 1998 unaudited pro forma condensed combined balance sheet has
been prepared assuming the Merger occurred on March 31, 1998.
(4) The 1995 and 1996 unaudited pro forma information is presented to show the
effect of the Merger under the pooling of interests method of accounting.
Dixie was acquired on August 9, 1996, in a transaction accounted for as a
purchase and accordingly its results of operations are included since that
date. Pro forma adjustments to record the pre-acquisition results of
operations of Dixie in 1996 have not been made due to the immateriality of
the amounts. The 1995 and 1996 results of operations do not include Apex
and Aerocell due to the immateriality of the amounts. The 1995 results of
operations do not include AvEng due to the immateriality of the amounts.
(5) The following adjustments have been made to give pro forma effect to the
Merger:
(A) This calculation assumes the issuance of approximately 2,844,079 shares
of the Company common stock in the Merger, which is calculated based
on an exchange ratio of .5143 shares of the Company common stock for
each share of Whitehall common stock outstanding at March 31, 1998.
Pro forma book value per share common was computed by adding the
2,844,079 shares of the Company common stock to be issued in the
Merger to the actual number of shares of the Company common stock
outstanding at March 31, 1998.
P-7
<PAGE>
(B) To record the Merger under the pooling of interest method of accounting
and reflect the Company's common stock to be issued in connection with
the Merger including the retirement of the Whitehall treasury stock.
(C) This calculation assumes the conversion of Whitehall's weighted average
number of shares into the weighted average number of shares of the
Company common stock, using an exchange ratio of .5143, for each
respective period.
(D) Periods presented prior to 1997 include pro forma adjustments to record
income taxes of $4,011,432 and $6,604,188 for 1995 and 1996,
respectively, as the Company conducted its business as a partnership
prior to June 26, 1996.
(E) To eliminate intercompany sales from the Company to Whitehall, net of
income tax effect of $52,286, $84,690, $27,842 and $12,810 for the
years ended December 31, 1995, 1996, 1997 and the three months ended
March 31, 1998, respectively.
(F) The 1995 and 1996 the Company earnings per share assumes that the
4,425,000 common shares issued to the partners of AJT Capital Partners
(the predecessor business of the Company) and the 575,000 shares of
common stock, the net proceeds in respect of which were paid to J/T
Aviation Partners, were outstanding for periods prior to the closing of
the Company's initial public offering.
(G) Represents adjustments to record increased depreciation and
amortization expense associated with the Kratz acquisition ($754,470
in cost of sales and $716,314 in operating expenses).
(H) Represents a $412,500 adjustment to record certain Kratz salaries at
levels set forth in the purchase agreement.
(I) Represents a $2,225,769 adjustment to record the incremental increase
in interest expense from borrowings made to finance the Kratz
acquisition.
(J) Includes an adjustment of $1,681,605 to record tax provision for the
pre-acquisition operations of Kratz as if it had been taxed as a C
Corporation.
(K) Represents adjustment for the three months ended March 31, 1998: (i) of
$1,635,722 to eliminate the historical interest expense and
amortization of deferred financing fees due to the repayment of amounts
due under the Credit Facility, (ii) of $1,793,794 to record interest
expense on the Notes and amortization of deferred financing fees and
(iii) of $61,648 to record related income tax effect, assuming the
Offering and the application of the proceeds therefrom had occurred at
the beginning of the period presented rather than as of February 11,
1998.
(L) Represents adjustment for the year ended December 31, 1997: (i) of
$9,057,503 to eliminate the historical interest expense and
amortization of deferred financing fees due to the repayment of amounts
due under the Credit Facility, including borrowings to finance the
Kratz acquisition, (ii) of $14,018,567 to record interest expense on
the Notes and amortization of deferred financing fees and (iii) of
$1,934,815 to record related income tax effect, assuming the Offering
and the application of the proceeds therefrom had occurred at the
beginning of the period presented.
P-8
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THIS PROSPECTUS NOR THE
ACCOMPANYING LETTER OF TRANSMITTAL CONSTITUTES AN OFFER TO SELL OR A
SOLICITATIONOF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL NOR ANY SALE MADE HEREIN SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
------
Available Information ...................... 3
Incorporation of Certain Documents
by Reference ............................ 4
Summary .................................... 5
Risk Factors ............................... 15
The Exchange Offer ......................... 21
Use of Proceeds ............................ 29
Capitalization ............................. 29
Selected Consolidated Financial
Information of the Company .............. 30
Management's Discussion and Analysis
of Financial Condition and
Results of Operations ................... 32
Business ................................... 39
Proposed Merger with Whitehall ............. 49
Management ................................. 50
Principal Stockholders ..................... 57
Certain Relationships and Related
Transactions ............................ 58
Description of Other Indebtedness .......... 60
Description of Notes ....................... 61
Federal Income Tax Considerations .......... 87
Plan of Distribution ....................... 90
Legal Matters .............................. 91
Experts .................................... 91
Index to Financial Statements .............. F-1
Unaudited Pro Forma Condensed
Combined Financial Statements ........... P-1
</TABLE>
================================================================================
================================================================================
AVIATION SALES COMPANY
$165,000,000
8 1/8% SENIOR
SUBORDINATED NOTES
DUE 2008
-------------------------------------
P R O S P E C T U S
-------------------------------------
, 1998
================================================================================
<PAGE>
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the provisions of Section 145(a) of the Delaware General
Corporation Law, the Company has the power to indemnify anyone made or
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(other than an action by or in the right of the Company) because such person is
or was a director or officer of the Company against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred in the defense or settlement of such action, suit, or
proceeding, provided that (i) such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the Company's best interest
and (ii) in the case of a criminal proceeding such person had no reasonable
cause to believe his conduct was unlawful.
With respect to an action or suit by or in the right of the Company to
procure a judgment in its favor, Section 145(b) of the Delaware General
Corporation Law provides that the Company shall have the power to indemnify
anyone who was, is, or is threatened to be made a party to a threatened,
pending, or completed action or suit brought by or in the right of the Company
to procure a judgment in its favor because such person is or was a director or
officer of the Company against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit, provided that such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the Company's best
interests, except that no indemnification shall be made in a case in which such
person shall have been adjudged to be liable to the Company unless and only to
the extent that the Court of Chancery or the court in which such action or suit
was brought shall have determined upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnify for such expenses.
Indemnification as described above shall only be granted in a specific
case upon a determination that indemnification is proper under the
circumstances using the applicable standard of conduct which is made by (a) a
majority of a quorum of directors who were not parties to such proceeding, (b)
independent legal counsel in a written opinion if such quorum cannot be
obtained or if a quorum of disinterested directors so directs, or (c) the
shareholders of the Company.
Section 145(g) of the Delaware General Corporation Law permits the
purchase and maintenance of insurance to indemnify directors and officers
against any liability asserted against or incurred by them in any such
capacity, whether or not the Company itself would have the power to indemnify
any such director or officer against such liability. The Company intends to
obtain such insurance and premiums will be paid by the Company.
The Certificate of Incorporation of the Company provides for the
indemnification of directors and officers of the Company to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, as the same
may be amended or supplemented. The Certificate of Incorporation further
provides that the indemnification provided for therein shall not be exclusive
of any rights to which those indemnified may be entitled under any bylaw,
agreement, vote of shareholders or disinterested directors, or otherwise.
The Certificate of Incorporation also contains a provision that eliminates
the personal liability of the Company's directors to the Company or its
shareholders for monetary damages for breach of fiduciary duty as a director.
The provision does not limit a director's liability for (i) breaches of duty of
loyalty to the Company or its shareholders, (ii) acts or omissions not in good
faith, involving intentional misconduct or involving knowing violations of law,
(iii) the payment of unlawful dividends or unlawful stock repurchases or
redemptions under Section 174 of the Delaware General Corporation Law, or (iv)
transactions in which the director received an improper personal benefit.
Depending on judicial interpretation, the provision may not affect liability
for violations of the federal securities laws.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------- ---------------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of the Company and amendment thereto(1)
3.2 Second Amendment to Certificate of Incorporation(2)
3.3 Bylaws of the Company(1)
4.1 Form of Registration Rights Agreement(1)
4.2 Indenture, dated as of February 17, 1998, among Aviation Sales Company, certain of its
subsidiaries, and SunTrust Bank Central Florida, National Association, Trustee(11)
4.3 Registration Rights Agreement, dated as of February 17, 1998, among Aviation Sales
Company, certain of its subsidiaries and Salomon Brothers, Inc., BT Alex. Brown Incorporated
and Citicorp Securities(11)
4.4 Purchase Agreement, dated as of February 11, 1998, by and among Aviation Sales Company,
certain of its subsidiaries, Salomon Brothers, Inc., BT Alex Brown Incorporated and Citicorp
Securities, Inc.(11)
**5.1 Opinion of Akerman, Senterfitt & Eidson, P.A.
10.1 Third Amended and Restated Credit Agreement, dated as of October 17, 1997, by and among
the Company, certain of its subsidiaries and Citicorp USA, Inc., as agent(2)
10.2 Lease, dated as of December 2, 1994, by and between Aviation Properties and the
Partnership(1)
10.3 Lease, dated as of December 2, 1994, by and between Aviation Properties of Texas(1)
+10.4 Amended Employment Agreement, effective as of December 2, 1994, by and between Dale S.
Baker and the Company(3)
+10.5 Amended Employment Agreement, effective as of December 2, 1994, by and between Harold
Woody and the Company(3)
+10.6 Amended Employment Agreement, effective as of December 2, 1994, by and between Joseph
E. Civiletto and the Company(3)
+10.7 Amended Employment Agreement, effective as of June 1, 1996, by and between James D.
Innella and the Company(3)
+10.8 Amended Employment Agreement, effective as of June 1, 1996, by and between Michael A.
Saso and the Company(3)
+10.9 1996 Director Stock Option Plan(3)
+10.10 1996 Stock Option Plan(3)
+10.11 1997 EBITDA Incentive Compensation Plan(4)
10.12 Asset Purchase Agreement dated as of August 9, 1996 by and between Dixie Bearings
Incorporated and Aviation Sales Bearing Company(5)
10.13 Asset Purchase Agreement dated as of November 30, 1996 by and between AvEng Trading
Partners, Inc. and the Company(4)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------------------ --------------------------------------------------------------------------------------------------
<S> <C>
10.14 Merger Agreement by and among Aviation Sales Company, AVS/ASI Merger Corp., Aerocell
Structures, Inc. and the shareholders of Aerocell Structures, Inc., dated as of September 30,
1997(6)
10.15 Asset Purchase Agreement by and between Aviation Sales Company and Kratz-Wilde
Machine Company, dated as of September 30, 1997(7)
10.16 Stock for Asset Purchase Agreement by and between Aviation Sales Company, AVS/AMI
Merger Corp., Apex Manufacturing, Inc. and the shareholders of Apex Manufacturing, Inc.,
dated as of December 31, 1997(8)
10.17 Merger Agreement by and among Aviation Sales Company, AVS/CAI Merger Corp., Caribe
Aviation, Inc., Aircraft Interior Design, Inc. and Benito Quevedo(9)
10.18 Agreement and Plan of Merger among Aviation Sales Company, WHC Acquisition Corp. and
Whitehall Corporation, dated March 26, 1998(10)
10.19 Form of Registration Rights Agreement between Aviation Sales Company and certain
stockholders of Whitehall(10)
21.1 List of Subsidiaries of Registrant(10)
**23.1 Consent of Arthur Andersen LLP (Dallas)
**23.2 Consent of Arthur Andersen LLP (Miami)
**23.3 Consent of Clark, Schaefer, Hackett & Co.
23.4 Consent of Akerman, Senterfitt & Eidson, P.A. (included in Exhibit 5.1 above).
*24.1 Power of Attorney for Aviation Sales Company (included on Signature Page)
*24.2 Power of Attorney for Aviation Sales Operating Company (included on Signature Page)
*24.3 Power of Attorney for Aviation Sales Manufacturing & Repair Company (included on
Signature Page)
*24.4 Power of Attorney for Aviation Sales Finance Company (included on Signature Page)
*24.5 Power of Attorney for Aviation Sales Leasing Company (included on Signature Page)
*24.6 Power of Attorney for AVS/Kratz-Wilde Machine Company (included on Signature Page)
*24.7 Power of Attorney for Aviation Sales Bearings Company (included on Signature Page)
*24.8 Power of Attorney for Aviation Sales SPS I, Inc. (included on Signature Page)
*25.1 Form T-1 Statement of Eligibility of Trustee.
*99.1 Form of Letter of Transmittal and Notice of Guaranteed Delivery of Notes.
**99.2 Consent of George F. Baker.
**99.3 Consent of Jeffrey N. Greenblatt.
</TABLE>
- ----------------
<TABLE>
<S> <C>
* Previously filed
** Filed herewith
*** To be filed by amendment
+ Compensation plan or agreement
(1) Incorporated by reference to Company's Registration Statement on Form S-1 dated April 15, 1996 (File No. 333-3650)
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter and nine months ended
September 30, 1997
(3) Incorporated by reference to Amendment No. 1 to Company's Registration Statement on Form S-1 dated June 6, 1996
(File No. 333-3650)
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1996
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996
(6) Incorporated by reference to the Company's Current Report on Form 8-K dated September 30, 1997
(7) Incorporated by reference to the Company's Current Report on Form 8-K dated October 17, 1997
(8) Incorporated by reference to the Company's Current Report on Form 8-K dated December 31, 1997
(9) Incorporated by reference to the Company's Current Report on Form 8-K dated March 18, 1998
(10) Incorporated by reference to the Company's Registration Statement on Form S-4, dated April 30, 1998 (File
No. 51479)
(11) Previously filed
</TABLE>
B. FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts for the three years ended
December 31, 1997
S-1 Aviation Sales Company and Subsidiaries
S-2 Whitehall Corporation and Subsidiaries
II-3
<PAGE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
the securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at the time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment,
any of the securities being registered which remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person thereof in the successful defense of any action, suit or proceeding) is
asserted by a director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Miami,
State of Florida, on the 22nd day of June, 1998.
AVIATION SALES COMPANY
(Registrant)
By: /s/ DALE S. BAKER
Dale S. Baker
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive and
Financial Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------- ------------------------------------ --------------
<S> <C> <C>
/s/ DALE S. BAKER President, Chief Executive Officer June 22, 1998
Dale S. Baker and Chairman of the Board
(Principal Executive Officer)
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer)
/s/ *HAROLD M. WOODY Executive Vice President June 22, 1998
Harold M. Woody and Director
/s/ *ROBERT ALPERT Director June 22, 1998
Robert Alpert
/s/ *SAM HUMPHREYS Director June 22, 1998
Sam Humphreys
/s/ *KAZUTAMI OKUI Director June 22, 1998
Kazutami Okui
/s/ PHILIP B. SCHWARTZ Director June 22, 1998
Philip B. Schwartz
</TABLE>
- ----------------
*By: /s/ DALE S. BAKER
Dale S. Baker, under power of attorney
dated March 25, 1998
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
AVIATION SALES OPERATING COMPANY
By: /s/ DALE S. BAKER
Dale S. Baker
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ------------------------------------ --------------
<S> <C> <C>
/s/ DALE S. BAKER President, Chief Executive Officer June 22, 1998
Dale S. Baker and Chairman of the Board
(Principal Executive Officer)
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer)
/s/ *HAROLD M. WOODY Director June 22, 1998
Harold M. Woody
/s/ *ROBERT ALPERT Director June 22, 1998
Robert Alpert
/s/ *SAM HUMPHREYS Director June 22, 1998
Sam Humphreys
/s/ *KAZUTAMI OKUI Director June 22, 1998
Kazutami Okui
* By: /s/ DALE S. BAKER
Dale S. Baker, under power of
attorney dated June 11, 1998
</TABLE>
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
AVIATION SALES MANUFACTURING
& REPAIR COMPANY
By: /s/ DALE S. BAKER
Dale S. Baker
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ----------------------------------- --------------
<S> <C> <C>
/s/ DALE S. BAKER President June 22, 1998
Dale S. Baker (Principal Executive Officer)
and Director
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer) and Director
/s/ JAMES D. INNELLA Director June 22, 1998
James D. Innella
</TABLE>
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
AVIATION SALES FINANCE COMPANY
By: /s/ JOSEPH E. CIVILETTO
Joseph E. Civiletto
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------------- --------------------------------- --------------
<S> <C> <C>
/s/ JOSEPH E. CIVILETTO President June 22, 1998
Joseph E. Civiletto (Principal Executive Officer)
and Director
/s/ *VICTORIA GARRETT Assistant Treasurer June 22, 1998
Victoria Garrett (Principal Financial and
Accounting Officer) and Director
* By: /s/ JOSEPH E. CIVILETTO
Joseph E. Civiletto, under power of
attorney dated June 11, 1998
</TABLE>
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
AVIATION SALES LEASING COMPANY
By: /s/ HAROLD M. WOODY
Harold M. Woody
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------- --------------------------------------- --------------
<S> <C> <C>
/s/ HAROLD M. WOODY President and Chief Executive Officer June 22, 1998
Harold M. Woody (Principal Executive Officer)
and Director
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer) and Director
/s/ DALE S. BAKER Director June 22, 1998
Dale S. Baker
</TABLE>
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
AVS/KRATZ-WILDE MACHINE COMPANY
By: /s/ DALE S. BAKER
Dale S. Baker
President and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- ------------------------------------- ------------------------------------- --------------
<S> <C> <C>
/s/ DALE S. BAKER President and Chairman of the Board June 22, 1998
Dale S. Baker (Principal Executive Officer)
and Director
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer) and Director
/s/ JAMES D. INNELLA Director June 22, 1998
James D. Innella
</TABLE>
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
AEROCELL STRUCTURES, INC.
By: /s/ DALE S. BAKER
Dale S. Baker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------- --------------------------------------- --------------
<S> <C> <C>
/s/ DALE S. BAKER President and Chief Executive Officer June 22, 1998
Dale S. Baker (Principal Executive Officer)
and Director
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
CARIBE AVIATION, INC.
By: /s/ DALE S. BAKER
Dale S. Baker
Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------- ----------------------------------- --------------
<S> <C> <C>
/s/ DALE S. BAKER Chief Executive Officer June 22, 1998
Dale S. Baker and Chairman of the Board
(Principal Executive Officer)
and Director
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
APEX MANUFACTURING, INC.
By: /s/ DALE S. BAKER
Dale S. Baker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------- --------------------------------------- --------------
<S> <C> <C>
/s/ DALE S. BAKER President and Chief Executive Officer June 22, 1998
Dale S. Baker (Principal Executive Officer)
and Director
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
AIRCRAFT INTERIOR DESIGN, INC.
By: /s/ DALE S. BAKER
Dale S. Baker
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------- ------------------------------------ --------------
<S> <C> <C>
/s/ DALE S. BAKER President, Chief Executive Officer June 22, 1998
Dale S. Baker and Chairman of the Board
(Principal Executive Officer)
and Director
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
AVIATION SALES BEARINGS COMPANY
By: /s/ JAMES D. INNELLA
James D. Innella
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------- ----------------------------------- --------------
<S> <C> <C>
/s/ JAMES D. INNELLA President (Principal Executive June 22, 1998
James D. Innella Officer) and Director
/s/ DALE S. BAKER Director June 22, 1998
Dale S. Baker
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer) and Director
</TABLE>
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Miami, State of Florida, on the 22nd day of June, 1998.
AVIATION SALES SPS I, INC.
By: /s/ HAROLD M. WOODY
Harold M. Woody
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been duly signed by the following
person in the capacities and on the date indicated indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- -------------------------------- --------------------------------------- --------------
<S> <C> <C>
/s/ HAROLD M. WOODY President and Chief Executive Officer June 22, 1998
Harold M. Woody (Principal Executive Officer)
and Director
/s/ JOSEPH E. CIVILETTO Vice President, Finance and Chief June 22, 1998
Joseph E. Civiletto Financial Officer
(Principal Financial and
Accounting Officer) and Director
/s/ DALE S. BAKER Director June 22, 1998
Dale S. Baker
</TABLE>
II-16
<PAGE>
SCHEDULE II
AVIATION SALES COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COST AND (A) BALANCE AT
DESCRIPTION OF YEAR EXPENSES OTHER DEDUCTIONS END OF YEAR
- ------------------------ ------------ ------------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Allowances for Doubtful
Accounts Receivable:
Year Ended December 31-
1995 ................. $2,625,809 $ 360,000 $ -- $1,034,414 $1,951,395
========== ========== ==== ========== ==========
1996 ................. $1,951,395 $1,954,000 $ -- $ 125,815 $3,779,580
========== ========== ==== ========== ==========
1997 ................. $3,779,580 $3,081,063 $ -- $3,386,111 $3,474,532
========== ========== ==== ========== ==========
</TABLE>
- ----------------
(A) Represents accounts receivable written-off.
S-1
<PAGE>
SCHEDULE II
WHITEHALL CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES (DESCRIBE) (DESCRIBE) PERIOD
- ---------------------------------- ------------ ------------ ---------------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997:
Reserves and allowances
deducted from asset accounts-
Allowance for uncollectible
accounts ...................... $ 518,000 $5,076,000 $ -- $ 1,747,000 $3,847,000
Allowance for obsolete
inventory ..................... -- 1,220,000 -- --(4) 1,220,000
---------- ---------- ---------- -------------- ----------
Totals ........................ $ 518,000 $6,296,000 $ -- $ 1,747,000(1) $5,067,000
========== ========== ========== ============== ==========
Accrued environmental cost ....... $ 379,000 $3,400,000 $ 400,000(3) $ 225,000(2) $3,954,000
========== ========== ============ ============== ==========
YEAR ENDED
DECEMBER 31, 1996:
Reserves and allowances
deducted from asset accounts-
Allowance for uncollectible
accounts ...................... $ 732,000 $ -- $ -- $ 214,000(1) $ 518,000
Allowance for obsolete
inventory ..................... 300,000 -- -- $ 300,000(4) --
---------- ---------- ------------ -------------- ----------
Totals ........................ $1,032,000 $ -- $ -- $ 514,000 $ 518,000
========== ========== ============ ============== ==========
Accrued environmental cost ....... $ 625,000 $ -- $ -- $ 246,000(2) $ 379,000
========== ========== ============ ============== ==========
YEAR ENDED
DECEMBER 31, 1995:
Reserves and allowances
deducted from asset accounts-
Allowance for uncollectible
accounts ...................... $ 858,000 $ 748,000 $ -- $ 874,000(1) $ 732,000
Allowance for obsolete
inventory ..................... -- 300,000 -- -- 300,000
---------- ---------- ------------ -------------- ----------
Totals ........................ $ 858,000 $1,048,000 $ -- $ 874,000 $1,032,000
========== ========== ============ ============== ==========
Accrued environmental cost ....... $ 736,000 $ 416,000 $ -- $ 527,000(2) $ 625,000
========== ========== ============ ============== ==========
</TABLE>
- ----------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Environmental clean up costs incurred.
(3) Purchase accounting.
(4) Reserve adjustment.
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
- --------- ---------------------------------------------- -------------
<S> <C> <C>
5.1 Opinion of Akerman, Senterfitt & Eidson, P.A.
23.1 Consent of Arthur Andersen LLP (Dallas)
23.2 Consent of Arthur Andersen LLP (Miami)
23.3 Consent of Clark, Schaefer, Hackett & Co.
99.2 Consent of George F. Baker
99.3 Consent of Jeffrey N. Greenblatt
</TABLE>
EXHIBIT 5.1
Akerman, Senterfitt & Eidson, P.A.
SunTrust International Center
28th Floor
One S.E. 3rd Avenue
Miami, Florida 33131-1714
June 22, 1998
Aviation Sales Company
6905 NW 25th Street
Miami, Florida 33122
RE: REGISTRATION STATEMENT ON FORM S-4
Gentlemen:
We have acted as counsel to Aviation Sales Company, a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company with the Securities and Exchange Commission of a Registration
Statement on Form S-4 (the "Registration Statement") for the proposed exchange
(the "Exchange") by the Company of 8 1/8% Senior Subordinated Notes Due 2008
("New Notes") for an equal principal amount of its outstanding 8 1/8% Senior
Subordinated Notes Due 2008 ("Old Notes").
In connection with the proposed Exchange, we have examined the
Company's Certificate of Incorporation and By-laws, as presently in effect, the
Company's relevant corporate proceedings, the draft Registration Statement on
Form S-4 covering the proposed Exchange, including Amendment No. 1 (the
"Registration Statement"), including the Prospectus filed as a part of the
Registration Statement, the Indenture dated February 17, 1998, in respect of the
Old Notes and the New Notes (the "Indenture"), and such other documents,
records, certificates of public officials, statutes and decisions as we
considered necessary to express the opinions contained herein. In the
examination of such documents, we have assumed the genuineness of all signatures
and the authenticity of all documents submitted to us as originals and the
conformity to the original documents of all documents submitted to us as
certified or photostatic copies.
We understand that the New Notes are to be issued to the holders of the
Old Notes in the Exchange and are to be available for resale by such holders,
all in the manner described in the Prospectus, which is a part of the
Registration Statement, and in the Indenture.
Based on the foregoing and upon the representations made to us by the
officers and directors of the Company, we are of the opinion that:
<PAGE>
Aviation Sales Company
June 2, 1998
Page 2
1. The issuance of the New Notes to the holders of the Old Notes pursuant
to the terms of the Exchange and the Indenture have been duly
authorized by all necessary corporate action of the Company.
2. When the Registration Statement shall have been declared effective by
order of the Securities and Exchange Commission and the New Notes have
been duly issued to and exchanged for the Old Notes, all in accordance
with the terms of the Exchange, the Indenture and the Registration
Statement, such New Notes will be validly issued and will constitute
binding obligations of the Company, subject, as to enforcement (i) to
any applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws relating to or affecting
creditors' rights and remedies generally and (ii) to general principles
of judicial discretion and equity, including principles of commercial
reasonableness, good faith and fair dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity or in a
bankruptcy proceeding and except that (i) rights to contribution or
indemnification may be limited by the laws, rules or regulations of any
governmental authority or agency thereof or by public policy and (ii)
waivers as to usury, stay or extension laws may be unenforceable).
This firm consents to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to the firm under the caption "Legal
Matters" in the Prospectus which is part of the Registration Statement regarding
the validity of the New Notes. In giving such consent, we do not thereby admit
that we are included within the category of persons whose consent is required
under Section 7 of the Securities Act and the rules and regulations promulgated
thereunder.
Sincerely,
/S/ AKERMAN, SENTERFITT & EIDSON PA
-----------------------------------
AKERMAN, SENTERFITT & EIDSON, P.A.
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our report and to all references to our Firm included in or made a part of
this registration statement.
ARTHUR ANDERSEN LLP
Dallas, Texas,
June 22, 1998.
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use
of our report and to all references to our Firm included in or made a part of
this registration statement.
ARTHUR ANDERSEN LLP
Miami, Florida,
June 22, 1998.
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
use of our report and to all references to our Firm included in or made a part
of this registration statement.
CLARK, SCHAEFER, HACKETT & CO.
Cincinnatti, Ohio,
June 17, 1998.
EXHIBIT 99.2
June 22, 1998
Aviation Sales Company
6905 N.W. 25th Street
Miami, Florida 33122
Ladies and Gentlemen:
Reference is made to that Registration Statement on Form S-4, Registration
No. 333-48699 (the "Registration Statement") of Aviation Sales Company (the
"Company"), which is being filed with the Securities and Exchange Commission in
order to register under the Securities Act of 1933, as amended (the "Securities
Act"), $165 million in principal amount of a new issue of the Company's 8 1/8%
senior subordinated notes due 2008 to be exchanged for substantially identical
notes previously issued by the Company in a transaction exempt from
registration under the Securities Act.
Pursuant to Rule 438 under the Securities Act, the undersigned hereby
consents to being named in the Prospectus included in the Registration
Statement as a person about to become a director of the Company and to the
filing of this consent as an exhibit to the Registration Statement.
Very truly yours,
/s/ GEORGE F. BAKER
George F. Baker
EXHIBIT 99.3
June 22, 1998
Aviation Sales Company
6905 N.W. 25th Street
Miami, Florida 33122
Ladies and Gentlemen:
Reference is made to that Registration Statement of Form S-4, Registration
No. 333-48699 (the "Registration Statement") of Aviation Sales Company (the
"Company"), which is being filed with the Securities and Exchange Commission in
order to register under the Securities Act of 1933, as amended (the "Securities
Act"), $165 million in principal amount of a new issue of the Company's 8 1/8%
senior subordinated notes due 2008 to be exchanged for substantially identical
notes previously issued by the Company in a transaction exempt from
registration under the Securities Act.
Pursuant to Rule 438 under the Securities Act, the undersigned hereby
consents to being named in the Prospectus included in the Registration
Statement as a person about to become a director of the Company and to the
filing of this consent as an exhibit to the Registration Statement.
Very truly yours,
/s/ JEFFREY N. GREENBLATT
Jeffrey N. Greenblatt
