================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
NOVEMBER 24, 1998
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED)
COMMISSION FILE NUMBER 1-11775
AVIATION SALES COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0665658
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
6905 NW 25TH STREET
MIAMI, FLORIDA 33122
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(305) 592-4055
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N.A.
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
================================================================================
<PAGE>
ITEM 5. OTHER EVENTS.
AMENDMENT TO CREDIT FACILITY AGREEMENT
On November 24, 1998, the Company entered into an agreement with several
financial institutions amending its existing credit facility pursuant to the
terms of an Amendment No.3 to Third Amendment and Restated Credit Facility dated
as of October 17, 1997 (the "Amendment to Credit Facility Agreement"). Under the
terms of the Amendment to Credit Facility Agreement, the Company's existing
credit facility was amended to increase the amount of the revolving loan and
letter of credit facility from $200.0 million to $250.0 million
The foregoing is a summary of certain information contained in the
Amendment to the Credit Facility Agreement. Reference is made to the more
detailed information contained in such document, which is attached hereto as
Exhibit 10.1.
FINANCIAL STATEMENTS
As previously reported, on July 31, 1998 Aviation Sales Company (the
"Company") completed a merger between a wholly-owned subsidiary of the Company
and Whitehall Corporation ("Whitehall"). The Company's acquisition of Whitehall
was accounted for as a pooling of interests. The Company is filing the following
financial statements, which give retroactive effect to the Company's acquisition
of Whitehall:
(i) The Company's "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations" relating to the
financial statements for each of the periods presented; and
(ii) Consolidated financial statements (restated) of the Company for the
three years ended December 31, 1997.
The index to the financial statements presented is contained at page F-1.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Operating revenues consist primarily of gross sales of products and
service revenues, net of allowances for returns. Cost of sales and services
consists primarily of product costs, labor, freight charges, commissions to
outside sales representatives and an inventory provision for damaged and
obsolete products. Product costs consist of the acquisition cost of the
products and any costs associated with repairs, overhaul or certification.
Operating revenues and gross profit depend in large measure on the volume
and timing of sales orders received during the period 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, the number of airline customers seeking repair services at any time,
the Company's ability to fully utilize its available hangar space from period to
period, the timeliness of customer aircraft in arriving for scheduled
maintenance 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.
On July 31, 1998, the Company acquired Whitehall Corporation ("Whitehall"),
in a transaction accounted for as a pooling of interests, for consideration of
2,844,079 shares of the Company's common stock. This "Management's Discussion
and Analysis of Financial Condition and Results of Operations" gives retroactive
effect to the Company's acquisition of Whitehall and reference is made to the
Company's financial statements which are being filed as part of this Form 8-K.
For information regarding the Company's financial statements and results of
operations without Whitehall, see the Company's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1997 and the Company's Quarterly Report
on Form 10-Q for the quarter and six months ended June 30, 1998.
3
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following tables set 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:
Sales of products, net ................................... $155,857 67.3% $244,340 75.8%
Services and other ....................................... 75,877 32.7% 78,198 24.2%
-------- ----- -------- -----
231,734 100.0% 322,538 100.0%
Cost of sales and services ................................ 169,787 73.3% 244,758 75.9%
-------- ----- -------- -----
Gross profit .............................................. 61,947 26.7% 77,780 24.1%
Operating expenses ........................................ 33,958 14.6% 52,782 16.4%
-------- ----- -------- -----
Income from operations .................................... 27,989 12.1% 24,998 7.7%
Interest expense .......................................... 5,411 2.4% 8,059 2.5%
Other (income) expense .................................... (879) ( 0.4%) 4,924 1.5%
-------- ----- -------- -----
Income before income taxes and extraordinary item ......... 23,457 10.1% 12,015 3.7%
Income tax expense ........................................ 1,780 0.7% 7,171 2.2%
-------- ----- -------- -----
Income before extraordinary item .......................... 21,677 9.4% 4,844 1.5%
Extraordinary item, net of income taxes ................... 1,862 0.8% -- --
-------- ----- -------- -----
Net income ................................................ $ 19,815 8.6% $ 4,844 1.5%
======== ===== ======== =====
</TABLE>
Operating revenues for the year ended December 31, 1997 increased 39.2% to
$322.5 million from $231.7 million for the year ended December 31, 1996. Of
this amount, approximately $44.8 million was derived from the operations
associated with Aero Corp-Macon, Aerocell Structures, Inc. ("Aerocell"),
Kratz-Wilde and Apex Manufacturing, Inc. ("Apex"), all of which were acquired
during 1997. The increase in service revenue resulting from the Aero Corp-Macon
acquisition was largely offset by revenues lost due to unutilized hangar space
that was reserved in anticipation of services to be rendered under a U.S. Air
Force C-130 maintenance contract awarded to Aero Corp-Lake City in April 1997.
As described above, the C-130 contract was subsequently canceled at the
convenience of the government in June 1997. Operating revenues also increased
due to the inclusion of a full year of sales from Dixie Bearings, Inc.
("Dixie"), which was acquired in August 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 49.3% from $164.4 million to $245.5 million and international sales
increased 14.4%, from $67.3 million to $77.0 million.
Gross profit increased 25.6% from $61.9 million to $77.8 million for the
years ended December 31, 1996 and 1997, respectively. Gross profit margin in
1997 decreased to 24.1% from 26.7% in 1996. The decrease in gross profit margin
compared to 1996 was due largely to the impact of the loss of the above
described C-130 contract on 1997 results. In addition to the fixed costs
associated with the idle hangar space, Aero Corp-Lake City incurred incremental
costs associated with hiring and training in anticipation of providing services
under the C-130 contract services. A slight decline in margin on sales of
products 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 operating expenses increased $18.8 million from $34.0
million for the year ended December 31, 1996 to $52.8 million for the year
ended December 31, 1997. Of this increase, approximately $9.8 million related
to accounts receivable, inventory and environmental reserves
4
<PAGE>
recorded at Aero Corp-Lake City. Of the remaining increase, approximately $4.9
million is attributable to the operating expenses of Aero Corp-Macon, Aerocell,
Kratz-Wilde and Apex with the balance attributable to higher sales levels
resulting in higher selling and operating expenses. Excluding the above
described Aero Corp-Lake City reserves, operating expenses as a percentage of
operating revenue decreased from 14.6% in 1996 to 13.3% in 1997, primarily due
to economies of scale and improved operating efficiencies.
Interest expense increased $2.6 million, or 48.9% from 1996 to 1997
primarily due to the increase in borrowings necessary to fund the Company's
growth.
Other income and expense in 1997 included the $4.5 million writedown of
Whitehall's investment in the preferred stock of the purchaser of its ocean
systems subsidiary. Other income and expense in 1996 included interest income
of $307,000 and investment income of $440,000.
As a result of the above factors, income before income taxes and
extraordinary item decreased $11.4 million, or 48.8%, from 1996 to 1997.
Prior to June 26, 1996, the operations of the Company were conducted by a
partnership and, therefore, the results of operations 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. Additionally, 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 Consolidated Financial Statements. No such tax benefit was realized
in 1997.
In connection with its 1996 public offering, the Company repaid certain
term and revolving indebtedness. 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 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: .......................................
Sales of products, net ................................... $121,761 71.7% $155,857 67.3%
Services and other ....................................... 48,009 28.3% 75,877 32.7%
-------- ----- -------- -----
169,770 100.0% 231,734 100.0%
Cost of sales and services ................................ 119,438 70.4% 169,787 73.3%
-------- ----- -------- -----
Gross profit .............................................. 50,332 29.6% 61,947 26.7%
Operating expenses ........................................ 28,884 17.0% 33,958 14.6%
-------- ----- -------- -----
Income from operations .................................... 21,448 12.6% 27,989 12.1%
Interest expense .......................................... 8,287 4.9% 5,411 2.4%
Other income .............................................. (963) ( 0.6%) (879) ( 0.4%)
-------- ----- -------- -----
Income before income taxes and extraordinary item ......... 14,124 8.3% 23,457 10.1%
Income tax expense ........................................ 889 0.5% 1,780 0.7%
-------- ----- -------- -----
Income before extraordinary item .......................... 13,235 7.8% 21,677 9.4%
Extraordinary item, net of income taxes ................... -- -- 1,862 0.8%
-------- ----- -------- -----
Net income ................................................ $ 13,235 7.8% $ 19,815 8.6%
======== ===== ======== =====
</TABLE>
The Company's operating revenues increased by approximately $62.0 million,
or 36.5%, from 1995 to 1996. Of this amount, approximately $16.3 million was
derived from the operations associated with
5
<PAGE>
AvEng Trading Partners, Inc. ("AvEng") and Dixie, both of which were acquired
during 1996. The balance represents increased sales due to expansion of the
Company's customer base and increased sales to existing customers, which more
than offset a decrease in revenues of approximately $8.0 million related to
Whitehall's ocean systems subsidiary which was disposed of during 1996. During
1996, domestic sales increased 32.5% from $124.0 million to $164.4 million and
international sales increased 47.3%, from $45.8 million to $67.3 million.
The Company's gross profit increased 23.1%, from $50.3 million in 1995 to
$61.9 million in 1996. The increase in gross profit is primarily attributable
to the increase in sales. Gross margins decreased from 29.6% in 1995 to 26.7%
in 1996 due to a change in the mix of inventories sold. The Company's 1995
gross profit was favorably impacted by the bulk inventory acquired in
connection with the acquisition of the Aviation Sales Company business unit of
Aviall Services, Inc. in December 1994. No such acquisition of inventory
favorably benefited gross margins during 1996.
The Company's operating expenses for 1996 increased $5.1 million, or
17.6%, compared to 1995. Approximately $1.5 million of the increase was
attributable to the operating expenses of AvEng and Dixie during 1996 and the
balance was 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 17.0% in 1995 to 14.6% in
1996.
Interest expense decreased $2.9 million, or 34.7% from 1995 to 1996 as a
result of the repayment and restructuring of the Company's credit facility.
As a result of the above factors, income before income taxes and
extraordinary item increased $9.3 million, or 66.1%, from 1995 to 1996.
Prior to June 26, 1996, the operations of the Company were conducted by a
partnership and, therefore, the results of operations for the year ended
December 31, 1995 and 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. Additionally, 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 Consolidated
Financial Statements.
Based on all of the above factors, the Company's 1996 income before
extraordinary item was $21.7 million, an increase of $8.4 million, or 63.8%,
over 1995 income before extraordinary item of $13.2 million.
In connection with its 1996 public offering, the Company repaid certain
term and revolving indebtedness. 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 Consolidated Financial Statements.
6
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997:
Report of Independent Certified Public Accountants ................................... F-2
Consolidated Balance Sheets
at December 31, 1996 and 1997 (Restated) ........................................... F-3
Consolidated Statements of Income
for the three years ended December 31, 1997 (Restated) ............................. F-4
Consolidated Statements of Partners' Capital and Stockholders' Equity
for the three years ended December 31, 1997 (Restated).............................. F-5
Consolidated Statements of Cash Flows
for the three years ended December 31, 1997 (Restated).............................. F-6
Notes to Consolidated Financial Statements(Restated).................................. F-7
FINANCIAL STATEMENT SCHEDULE:
Schedule II-Valuation and Qualifying Accounts
for the three years ended December 31, 1997 (Restated).............................. F-33
</TABLE>
F-1
<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 (restated)
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 (restated) for each of
the years in the three-year period ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of 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 years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Miami, Florida,
July 31, 1998 (except with respect to the matters referred to
in Note 15 as to which the date is September 22, 1998).
F-2
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (RESTATED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1996 1997
ASSETS ---------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ......................................................... $ 3,918,149 $ 6,236,751
Accounts receivable, net of allowance for doubtful accounts of $4,297,580 and
$7,321,532 in 1996 and 1997, respectively ....................................... 55,547,899 82,779,155
Inventories ....................................................................... 79,414,397 145,342,722
Deferred income taxes ............................................................. 1,972,410 3,057,148
Other current assets .............................................................. 5,181,332 6,853,728
------------- -------------
Total current assets ............................................................ 146,034,187 244,269,504
------------- -------------
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, net ................................................................. 11,959,873 38,061,275
------------- -------------
AMOUNTS DUE FROM RELATED PARTIES .................................................. 2,914,615 2,891,343
------------- -------------
OTHER ASSETS:
Goodwill, net .................................................................... -- 17,712,145
Deferred income taxes ............................................................ 3,406,331 1,485,380
Deferred financing costs, net .................................................... 872,568 2,675,684
Other assets ..................................................................... 6,980,191 3,732,369
------------- -------------
Total other assets .............................................................. 11,259,090 25,605,578
------------- -------------
Total assets .................................................................... $ 190,118,548 $ 333,585,849
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................................. $ 21,139,288 $ 23,753,462
Accrued expenses .................................................................. 9,716,372 21,317,777
Current maturities of notes payable ............................................... 7,708,571 12,541,391
Current maturities of capital lease obligations ................................... -- 84,000
Bank line of credit ............................................................... 19,247,985 96,126,959
------------- -------------
Total current liabilities ....................................................... 57,812,216 153,823,589
------------- -------------
LONG-TERM LIABILITIES:
Deferred income ................................................................... 890,065 962,063
Notes payable, net of current portion ............................................. 15,403,143 52,875,550
Capital lease obligations, net of current portion ................................. -- 4,174,000
Other long-term liabilities ....................................................... 117,000 471,000
------------- -------------
Total long-term liabilities ..................................................... 16,410,208 58,482,613
------------- -------------
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, 13,372,026 and
13,362,568 shares outstanding in 1996 and 1997, respectively .................... 13,372 13,363
Additional paid-in capital ........................................................ 73,455,451 72,962,449
Retained earnings ................................................................. 58,572,301 64,448,835
------------- -------------
132,041,124 137,424,647
Less treasury stock (1,111,562 shares at December 31, 1996 and 1997), at cost ..... (16,145,000) (16,145,000)
------------- -------------
Total stockholders' equity ...................................................... 115,896,124 121,279,647
------------- -------------
Total liabilities and stockholders' equity ...................................... $ 190,118,548 $ 333,585,849
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
F-3
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (RESTATED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1995 1996 1997
--------------- ---------------- ------------------
<S> <C> <C> <C>
OPERATING REVENUES:
Sales of products, net ............................. $121,761,376 $ 155,856,841 $ 244,340,186
Services and other ................................. 48,009,174 75,876,776 78,198,138
------------ ------------- --------------
169,770,550 231,733,617 322,538,324
COST OF SALES AND SERVICES .......................... 119,437,930 169,787,250 244,758,065
------------ ------------- --------------
GROSS PROFIT ........................................ 50,332,620 61,946,367 77,780,259
OPERATING EXPENSES .................................. 28,884,313 33,957,532 52,782,054
------------ ------------- --------------
INCOME FROM OPERATIONS .............................. 21,448,307 27,988,835 24,998,205
INTEREST EXPENSE .................................... 8,287,584 5,411,020 8,058,916
OTHER (INCOME) EXPENSE .............................. (963,000) (879,000) 4,924,000
------------ ------------- --------------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM ................................ 14,123,723 23,456,815 12,015,289
INCOME TAX EXPENSE .................................. 889,000 1,779,967 7,171,519
------------ ------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM .................... 13,234,723 21,676,848 4,843,770
EXTRAORDINARY ITEM,
NET OF INCOME TAXES ............................... -- 1,862,140 --
------------ ------------- --------------
NET INCOME .......................................... $ 13,234,723 $ 19,814,708 $ 4,843,770
============ ============= ==============
BASIC EARNINGS PER SHARE:
Income before extraordinary item ................... $ 1.46 $ 2.04 $ 0.40
Extraordinary item, net of income taxes ............ -- 0.18 --
------------ ------------- --------------
Net income ......................................... $ 1.46 $ 1.86 $ 0.40
============ ============= ==============
DILUTED EARNINGS PER SHARE: .........................
Income before extraordinary item ................... $ 1.44 $ 2.01 $ 0.39
Extraordinary item, net of income taxes ............ -- 0.17 --
------------ ------------- --------------
Net income ......................................... $ 1.44 $ 1.84 $ 0.39
============ ============= ==============
PRO FORMA BASIC EARNINGS PER SHARE
(See Note 10):
Pro forma income before extraordinary item ......... $ 1.02 $ 1.38
Extraordinary item, net of income taxes ............ -- 0.18
------------ -------------
Pro forma net income ............................... $ 1.02 $ 1.20
============ =============
PRO FORMA DILUTED EARNINGS PER SHARE
(see Note 10):
Pro forma income before extraordinary item ......... $ 1.01 $ 1.36
Extraordinary item, net of income taxes ............ -- 0.17
------------ -------------
Pro forma net income ............................... $ 1.01 $ 1.19
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
AND STOCKHOLDERS' EQUITY (RESTATED)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------- ADDITIONAL
PAID-IN
SHARES AMOUNT CAPITAL
-------------- ---------- --------------
<S> <C> <C> <C>
BALANCE AS OF
DECEMBER 31, 1994 .............. 10,161,799 $10,162 $ 12,570,793
Impact of immaterial
pooling (Note 2) ............. -- -- --
Net income ..................... -- -- --
Stock options exercised ........ 13,989 14 160,986
Distribution to partners ....... -- -- --
---------- ------- ------------
BALANCE AS OF
DECEMBER 31, 1995 .............. 10,175,788 10,176 12,731,779
Net income ..................... -- -- --
Stock options exercised ........ 33,738 33 412,967
Distribution to partners
prior to public offering ..... -- -- --
Payments to J/T Aviation
Partners (Note 1) ............ (575,000) (575) (4,262,164)
Net proceeds from sale of
common stock ................. 3,737,500 3,738 64,572,869
---------- ------- ------------
BALANCE AS OF
DECEMBER 31, 1996 .............. 13,372,026 13,372 73,455,451
Impact of immaterial
poolings (Note 2) ............ -- -- 582,764
Net income ..................... -- -- --
Stock options exercised ........ 47,542 48 871,927
Gain on litigation
settlement with former
employee (Note 7) ............ (75,000) (75) (2,624,925)
Issuance of common stock
to employees (Note 6) ........ 18,000 18 677,232
---------- ------- ------------
BALANCE AS OF
DECEMBER 31, 1997 .............. 13,362,568 $13,363 $ 72,962,449
========== ======= ============
<CAPTION>
TREASURY STOCK
RETAINED --------------------------------- TOTAL
EARNINGS SHARES AMOUNT EQUITY
-------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
BALANCE AS OF
DECEMBER 31, 1994 .............. $ 37,627,743 (1,111,562) $ (16,145,000) $ 34,063,698
Impact of immaterial
pooling (Note 2) ............. 141,428 -- -- 141,428
Net income ..................... 13,234,723 -- -- 13,234,723
Stock options exercised ........ -- -- -- 161,000
Distribution to partners ....... (3,306,854) -- -- (3,306,854)
------------ ---------- ------------- -------------
BALANCE AS OF
DECEMBER 31, 1995 .............. 47,697,040 (1,111,562) (16,145,000) 44,293,995
Net income ..................... 19,814,708 -- -- 19,814,708
Stock options exercised ........ -- -- -- 413,000
Distribution to partners
prior to public offering ..... (3,041,936) -- -- (3,041,936)
Payments to J/T Aviation
Partners (Note 1) ............ (5,897,511) -- -- (10,160,250)
Net proceeds from sale of
common stock ................. -- -- -- 64,576,607
------------ ---------- ------------- -------------
BALANCE AS OF
DECEMBER 31, 1996 .............. 58,572,301 (1,111,562) (16,145,000) 115,896,124
Impact of immaterial
poolings (Note 2) ............ 1,032,764 -- -- 1,615,528
Net income ..................... 4,843,770 -- -- 4,843,770
Stock options exercised ........ -- -- -- 871,975
Gain on litigation
settlement with former
employee (Note 7) ............ -- -- -- (2,625,000)
Issuance of common stock
to employees (Note 6) ........ -- -- -- 677,250
------------ ---------- ------------- -------------
BALANCE AS OF
DECEMBER 31, 1997 .............. $ 64,448,835 (1,111,562) $ (16,145,000) $ 121,279,647
============ ========== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1995 1996 1997
--------------- --------------- ----------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income ........................................................... $ 13,234,723 $ 19,814,708 $ 4,843,770
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ....................................... 3,229,522 4,034,974 5,618,863
Proceeds from sale of equipment on lease, net of gain ............... -- -- 3,796,929
Gain on sale of fixed assets ........................................ (650,000) (11,000) --
Investment (income) loss ............................................ 329,000 (440,000) 111,000
Write-off of preferred stock ........................................ -- -- 4,500,000
Provision for doubtful accounts ..................................... 1,108,000 1,954,000 8,157,063
Deferred income taxes ............................................... (390,000) (5,378,741) 278,943
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 ................................ (18,918,803) (13,430,644) (28,782,342)
(Increase) decrease in inventories .................................. 3,497,960 (21,263,715) (58,522,421)
Increase in other current assets .................................... (144,095) (4,398,369) (1,169,924)
(Increase) decrease in other assets ................................. 394,574 503,273 (396,106)
Increase in accounts payable ........................................ 8,989,902 2,434,370 575,706
Increase in accrued expenses ........................................ 1,838,864 2,539,258 8,804,642
Increase in deferred income ......................................... 103,575 12,750 71,998
Increase (decrease) in other liabilities ............................ 57,000 (297,000) 322,000
------------- ------------- -------------
Net cash provided by (used in) operating activities ............... 12,680,222 (12,063,996) (53,737,629)
------------- ------------- -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash acquired ...................... (1,060,538) (8,953,820) (41,446,846)
Purchases of equipment ............................................... (2,565,544) (5,549,368) (8,133,433)
Proceeds from sale of electronics subsidiary ......................... -- -- 1,720,000
Proceeds from sale of fixed assets ................................... 735,000 11,000 --
Purchases of spare parts on lease .................................... (2,722,054) (7,829,797) (10,528,415)
Payments to/from related parties ..................................... (60,059) 116,583 23,272
------------- ------------- -------------
Net cash used in investing activities ............................. (5,673,195) (22,205,402) (58,365,422)
------------- ------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of senior debt ............................................. (5,000,000) (5,000,000) --
Net issuance (repayment) of senior revolving facility ................ (2,109,400) 15,763,592 --
Distribution to partners--ASC partnership ............................ (3,306,854) (3,041,936) --
Payment of public offering proceeds to original credit facility and
subordinated debt ................................................... -- (52,806,400) --
Payments to J/T Aviation Partners .................................... -- (10,160,250) --
Borrowings under new credit facility ................................. -- 16,697,985 66,270,148
Payments under new credit facility ................................... -- (2,857,143) (4,642,856)
Net borrowings under Whitehall line of credit ........................ -- 2,550,000 7,163,000
Issuance of senior debt under acquisition facility ................... -- 6,000,000 40,000,000
Payment 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 loans ........................................ -- 826,000 7,200,000
Payments on equipment loans .......................................... -- -- (451,916)
Proceeds from public offering ........................................ -- 64,576,607 --
Stock options exercised .............................................. 161,000 409,000 871,975
Payment of deferred financing costs .................................. (54,745) (1,548,072) (2,188,698)
------------- ------------- -------------
Net cash provided by (used in) financing activities ............... (10,309,999) 30,552,240 114,421,653
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. (3,302,972) (3,717,158) 2,318,602
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, beginning of period ........................ 10,938,279 7,635,307 3,918,149
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of period .............................. $ 7,635,307 $ 3,918,149 $ 6,236,751
============= ============= =============
SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Promissory notes received for sale of electronics subsidiary ......... $ -- $ -- $ 864,000
Disposition of Ocean Systems subsidiary assets in exchange for
preferred stock:
Inventory ........................................................... -- 3,943,000 --
Fixed assets, net ................................................... -- 557,000 --
Investment in preferred stock ....................................... -- (4,500,000) --
DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ........................................................ $ 7,717,005 $ 4,945,720 $ 6,655,262
============= ============= =============
Income taxes paid .................................................... $ -- $ 6,722,431 $ 6,661,025
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Aviation Sales Company ("ASC") is a Delaware corporation. The operations
of ASC were initially conducted by two predecessor partnerships, AJT Capital
Partners, which was formed in February of 1992 to acquire certain aircraft and
spare parts owned by Eastern Air Lines, Inc., and ASC Acquisition Partners,
L.P. (the "Partnership"), which was formed in November of 1994 to acquire the
Aviation Sales Company business unit from Aviall Services, Inc.
ASC 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 ASC in exchange for 2,924,000 shares of ASC'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 ASC in
exchange for 1,501,000 shares of ASC's common stock and an amount equal to the
proceeds to be received by ASC for 575,000 shares of common stock sold in the
offering, as more completely described below. For periods prior to the closing
of the public offering, 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, are presented as outstanding.
On June 26, 1996, ASC's registration statement on Form S-1 was declared
effective. In July 1996, ASC closed its public offering of 3,737,500 shares of
its common stock at $19 per share. 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.
CONSOLIDATED FINANCIAL STATEMENTS
On July 31, 1998, ASC acquired Whitehall Corporation ("Whitehall") for
consideration of 2,844,079 shares of ASC common stock. Under the terms of the
Merger Agreement, each share of Whitehall common stock was exchanged for .5143
shares of ASC common stock. The acquisition of Whitehall has been accounted for
under the pooling of interests method of accounting. All share amounts include
the conversion of the Whitehall common stock to ASC common stock in the merger
and a two for one stock split effected by Whitehall in March 1997. The
accompanying Consolidated Financial Statements give retroactive
effect to the acquisition of Whitehall. The operations of ASC prior to the
acquisition of Whitehall and the operations of ASC and Whitehall retroactively
consolidated are referred to herein as the operations of the Company.
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
the Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated.
F-7
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(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 and repairs are recognized as product sales when
the unit is shipped and title has passed to the customer and the repaired unit
is returned 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 sales of aircraft parts from consignment
inventories as product sales upon shipment of the unit. 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 as product
sales at the time the unit 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. Aircraft maintenance service revenues
are recognized when services are performed and unbilled receivables are
recorded. Unbilled receivables are billed on the basis of contract terms (which
are generally on completion of an aircraft) and deliveries. Gain on sale of
equipment on lease is included in services and other.
INVENTORIES
Inventories, which consist primarily of aircraft spare 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-Wilde in 1997 and Whitehall in 1998,
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>
DECEMBER 31,
--------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Finished goods including aircraft spare parts ......... $74,149,397 $131,582,005
Work in progress ...................................... 5,000 2,114,408
Raw materials ......................................... 5,260,000 11,646,309
----------- ------------
$79,414,397 $145,342,722
=========== ============
</TABLE>
EQUIPMENT ON LEASE
The 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
F-8
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
PROPERTY AND EQUIPMENT
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1996 1997
---------------- ----------------
<S> <C> <C>
Land ............................... $ 399,000 $ 1,306,810
Buildings .......................... 1,293,000 8,770,493
Machinery and equipment ............ 12,265,666 28,170,515
Furniture and fixtures ............. 3,857,404 6,763,125
Leasehold improvements ............. 8,710,000 10,259,000
------------- -------------
26,525,070 55,269,943
Accumulated depreciation ......... (14,565,197) (17,208,668)
------------- -------------
$ 11,959,873 $ 38,061,275
============= =============
</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.
Depreciation expense amounted to $1,607,455, $1,842,626 and $3,119,559 for
the years ended December 31, 1995, 1996 and 1997, respectively.
INVESTMENTS
In November 1996, Whitehall sold substantially all of the assets related
to its ocean systems subsidiary in exchange for 818,182 shares of the acquiring
entity's preferred stock, which carries a liquidation preference of $5.50 per
share. At the Company's election, the preferred stock is convertible after
December 31, 1997, into common stock at a 45% conversion rate. In 1996,
Whitehall 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 the assets exchanged for the stock. However, although the
purchaser of ocean systems assets provided additional capital and new
management, the continuing decline in defense spending and other concerns
caused Whitehall's management to reevaluate in 1997 the value of this preferred
stock, in 1997, and such value was written off in that year.
In March 1997, Whitehall entered into an agreement to sell its electronics
subsidiary to a group of private investors for approximately $2.7 million. The
purchase consideration consisted of approximately $1.9 million in cash and
$864,000 in promissory notes bearing interest at a rate of 10% per annum.
F-9
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
During 1994, Whitehall obtained a 40% ownership interest in 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, Whitehall loaned $2,000,000 to
the joint venture, which is evidenced by a promissory note which accrues
interest at a maximum rate of 5% per annum. Principal and accrued interest is
due on January 5, 1999. The note is secured by certain assets of the joint
venture. During 1996 and 1997, Whitehall advanced an additional $75,000 and
$815,000 to the joint venture. The 1996 and 1997 advances are included in
accounts receivable.
Summarized balance sheet information for the joint venture as of December
31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1997
------------- --------------
<S> <C> <C>
Current assets ................. $6,578,000 $14,358,000
Noncurrent assets .............. 3,818,000 2,782,000
Current liabilities ............ 5,176,000 12,489,000
Noncurrent liabilities ......... 2,000,000 2,000,000
</TABLE>
Summarized financial information for the joint venture for the years ended
December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- -------------- --------------
<S> <C> <C> <C>
Net sales .................. $5,244,000 $11,520,000 $17,810,000
Gross profit ............... 1,501,000 4,104,000 3,578,000
Net income (loss) .......... (710,000) 1,044,000 (569,000)
</TABLE>
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 5.
F-10
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
<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.
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 operating expenses in
the accompanying consolidated statements of operations.
OTHER (INCOME) EXPENSE
Other (income) expense in 1997 includes the $4.5 million writedown of
Whitehall's investment in the preferred stock of the purchaser of its ocean
systems subsidiary. Other (income) expense in 1995 and 1996 includes gains on
sales of fixed assets of $650,000 and $11,000, respectively.
STOCK COMPENSATION PLANS
The Company accounts for the fair value of its grants under its stock
option 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.
F-11
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INCOME TAXES
Prior to June 26, 1996, the business of ASC was conducted by the
Partnership and therefore was not subject to income taxes. ASC, as a result of
the transfer of the net assets of the Partnership to the Company and the 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 ASC described in Note 1 resulted in a step-up in basis in ASC's
net assets for tax purposes. As a result, during 1996, a deferred tax benefit
of $3,962,498 was recorded. See Note 11.
Prior to the merger, Whitehall filed a consolidated federal income tax
return with its subsidiaries. Deferred federal income taxes have been provided
for temporary differences between tax and financial reporting resulting
primarily from depreciation provisions, allowances and expense accruals.
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.
F-12
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") in 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 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. The Company adopted SFAS 130 effective March 31, 1998.
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.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), is effective for
fiscal years ending after June 15, 1999. This statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or a liability at its fair value. Upon
adoption, the Company will quantify the impact of adopting SFAS 133 on its
consolidated financial statements. SFAS 133 could increase volatility in
earnings and other comprehensive income.
NOTE 2--BUSINESS COMBINATIONS
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING:
In August 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
F-13
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 2--BUSINESS COMBINATIONS--(CONTINUED)
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 $6.0 million of senior
notes payable to financial institutions and paid the balance in cash. See Note
5.
In July 1997, Whitehall completed the acquisition of an aircraft
maintenance facility located in Macon, Georgia ("Aero Corp-Macon") 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, the operations of Aero Corp-Macon since the acquisition have been
included in the accompanying consolidated financial statements from the date of
acquisition. As a result of this acquisition, operating revenues increased
approximately $11.7 million from the date of the acquisition through December
31, 1997.
In October 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, 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.
Unaudited pro forma consolidated results of operations assuming the
Kratz-Wilde and Aero Corp-Macon acquisitions had occurred at the beginning of
the periods presented are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1996 1997
---------------- -----------
(IN $ MILLIONS EXCEPT
EARNINGS PER SHARE)
<S> <C> <C>
Revenue ...................................................... $ 267.9 $ 362.6
Income before extraordinary item ............................. 11.5 (a) 6.5
Diluted earnings per share before extraordinary item ......... $ 1.07 $ 0.52
</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 these businesses as of January 1, 1996.
F-14
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(RESTATED)--(CONTINUED)
NOTE 2--BUSINESS COMBINATIONS--(CONTINUED)
In March 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 was approximately $23.3 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 $7.6 million of
indebtedness owed by Caribe and AIDI 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 AIDI will be included in the Company's
consolidated financial statements from the date of acquisition. Caribe and AIDI
had consolidated fiscal 1997 revenues of approximately $27 million. The
pre-acquisition operations of Caribe are not material to the operations of the
Company.
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.
In December 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 financial statements prior to December 31, 1995 have not been
restated to give retroactive effect for the acquisition due to the immateriality
of the restated amounts.
In September 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.
In December 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.
In July 1998, the Company acquired Whitehall for consideration of 2,844,079
shares of the Company's common stock. The acquisition was accounted for using
the pooling of interests method of accounting and thus, the accompanying
consolidated financial statements have been restated to give retroactive effect
for the acquisition for all periods presented.
F-15
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 2--BUSINESS COMBINATIONS--(CONTINUED)
Details of the results of operations of ASC and the pooled entities for
the periods before the pooling of interest combinations were consummated are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
(IN $ MILLIONS)
<S> <C> <C> <C>
Revenue:
ASC ............................ $ 113.6 $ 152.2 $ 230.1
AvEng .......................... -- 9.3 --
Aerocell and Apex .............. -- -- 26.6
Whitehall ...................... 56.2 70.2 65.8
-------- -------- --------
$ 169.8 $ 231.7 $ 322.5
======== ======== ========
Income from continuing operations
before extraordinary item:
ASC ............................ $ 10.3 $ 16.6 $ 13.7
AvEng .......................... -- 0.8 --
Aerocell and Apex .............. -- -- 3.1
Whitehall ...................... 2.9 4.3 ( 12.0)
-------- -------- --------
$ 13.2 $ 21.7 $ 4.8
======== ======== ========
</TABLE>
The 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 8,802,904
Prepaid expenses ......................................... -- -- 19,472
Deposits and other ....................................... -- -- 619,072
Fixed assets ............................................. -- 100,000 21,961,528
Goodwill ................................................. -- -- 17,901,747
Accounts payable ......................................... 1,582,977 (44,640) (2,328,468)
Accrued expenses ......................................... -- -- (2,631,763)
Deferred income taxes .................................... -- -- (557,270)
Notes payable ............................................ -- -- (3,445,825)
Capital lease obligations ................................ -- -- (4,290,000)
Common stock issued and paid in capital received ......... -- -- (1,615,528)
---------- ---------- ------------
1,060,538 8,953,820 44,417,560
Less cash acquired ....................................... -- -- (2,970,714)
---------- ---------- ------------
Cash used in acquisitions, net of cash acquired .......... $1,060,538 $8,953,820 $ 41,446,846
========== ========== ============
</TABLE>
F-16
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(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.
Accrued sales not billed for aircraft maintenance services will be billed on
the basis of contract terms (which are generally on completion of an aircraft)
and deliveries. Accrued sales not billed amounted to $5,574,000 and $6,578,000
at December 31, 1996 and 1997, respectively. All accrued amounts at December
31, 1997 are expected to be billed and collected in 1998.
In April 1997, Whitehall 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 Whitehall. The
C-130 contract provides for reimbursement by the United States Air Force of
costs incurred during its operation. At December 31, 1997, the Company had
recorded a $2.8 million net receivable from the government for these costs,
which is the Company's best estimate of the amount it will collect for the
claim it has made. The Company is currently negotiating a termination
settlement with the government.
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.
F-17
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(RESTATED)--(CONTINUED)
NOTE 4--EQUIPMENT ON LEASE--(CONTINUED)
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>
NOTE 5--NOTES PAYABLE AND BANK LINE OF CREDIT
At December 31, 1996 and 1997, notes payable and bank line of credit
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
Revolving loan, Whitehall ........................... 2,550,000 9,713,000
Term loan--purchased assets ......................... 826,000 546,000
Term loan--leased assets ............................ -- 7,028,084
Note payable to prior owners of Kratz-Wilde ......... -- 2,200,000
Less--Current maturities ............................ (26,956,556) (108,668,350)
------------- --------------
Net long-term notes payable ......................... $ 15,403,143 $ 52,875,550
============= ==============
</TABLE>
Future maturities of notes payable at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- ---------------------------
<S> <C>
1998 .................... $108,668,350
1999 .................... 13,609,159
2000 .................... 13,522,188
2001 .................... 12,414,538
2002 .................... 13,329,665
------------
$161,543,900
============
</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")
F-18
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 5--NOTES PAYABLE AND BANK LINE OF CREDIT--(CONTINUED)
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
$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.
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.
Whitehall entered into a long-term note secured by certain fixed assets
and an unsecured credit facility during 1996 with a bank. The credit facility
consisted of a $12,000,000 line of credit agreement
F-19
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 5--NOTES PAYABLE AND BANK LINE OF CREDIT--(CONTINUED)
and a $3,000,000 standby letter of credit agreement. Advances under the line of
credit agreement accrued interest at the prime interest rate (8.5% at December
31, 1997) while the long-term note bore interest at 7.98%. Upon completion of
the Whitehall acquisition in July 1998, the Company repaid this debt with
proceeds from its Third Amended Revolving Credit Facility.
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 bears interest at 8.21%
and is payable monthly through August 2002. 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.
In connection with the acquisition of Kratz-Wilde (See Note 2), a
subsidiary of the Company delivered a non-interest bearing promissory note
(guaranteed by the Company) to the sellers in the original principal amount of
$2.2 million. Payments of $1,250,000 are due on January 1, 1999 and January 1,
2000. Interest on this note has been imputed at 8%.
In the normal course of business, the Company is required to issue letters
of credit to secure certain transactions. At December 31, 1997, the Company had
issued and outstanding letters of credit totaling $1.9 million.
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. 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.
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.
On June 18, 1998, the Company's Compensation Committee rescinded this share
grant. No consideration was provided or will be provided in the future in
connection with the rescission.
At December 31, 1997, two former officers of Whitehall 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 were
written off by Whitehall in 1998.
F-20
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
In May 1991, Lee D. Webster, the former Chairman, President and Chief
Executive Officer of Whitehall, brought a claim in the District Court of Dallas
County, Texas against Whitehall, Cambridge Capital Fund, L.P. ("Cambridge") and
certain members of Whitehall's Board of Directors. The suit originally sought
damages arising as a result of the alleged wrongful termination of Mr.
Webster's employment with Whitehall. The suit was later amended in October 1994
to include additional contract and tort claims against Cambridge, George F.
Baker and John J. McAtee. The suit as amended sought damages in excess of $35
million. In 1995, the court abated one of the contract claims against Whitehall
and granted summary judgment in favor of the defendants on all but one of the
claims. In February 1996, the Court granted summary judgment on the remaining
claim and dismissed the suit with prejudice. Thereafter, Mr. Webster appealed
the trial court's ruling to the Texas Court of Appeals and in April 1998 the
appeals court affirmed the trial court's determination to grant summary
judgment in this matter. All time periods for further appeals have now expired.
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 a gain on litigation settlement with former
employee.
On June 24, 1998, an action captioned Zantop International Airlines, Inc.
vs. Aero Corp-Macon, Inc. was filed in the Superior Court of Bibb County,
Macon, Georgia. The suit seeks an unspecified amount of damages and certain
equitable relief arising out of the July 1997 sale to the defendant (a
subsidiary of Whitehall) of certain assets used in connection with the
operation of Aero Corp-Macon. See Note 2. The nature of the action involves a
contractual dispute relative to certain purchase price adjustments and
inventory purchases. The Company intends to vigorously defend this action.
Based upon the available facts, the Company believes that although no assurance
can be given as to the outcome of this matter, the ultimate disposition should
not have a material adverse effect upon the financial condition of the Company.
The Company is also 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.
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 the 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
F-21
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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 Company's Lake City, Florida facility ("Aero Corp-Lake
City"). 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 amount had been accrued by Whitehall at
December 31, 1997. Testing and evaluation for all known sites at Aero Corp-Lake
City is substantially complete and the Company has commenced a remediation
program. The Company 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, the Company 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 Aero Corp-Lake City that
could also require remediation. The Company believes it is not responsible for
these areas; however, it may be asserted that the Company and other parties are
jointly and severally liable and are responsible for the remediation of those
properties. No estimate of any such costs to the Company is available at this
time.
In connection with the sale of Whitehall's electronics subsidiary,
Whitehall was required to perform, at its own expense, an environmental site
assessment at the electronics subsidiary's facility. Whitehall was also
required to remedy all recognized environmental conditions identified in the
assessment to bring such facility into compliance with all applicable Federal,
State, and local environmental laws. If the facility is not brought into
compliance with environmental laws by December 31, 1998, the buyer, subject to
the terms and conditions set forth in the agreement, has the option of
requiring Whitehall to repurchase the property for $300,000. The Company has
engaged environmental consultants to review potential environmental liabilities
at the facility. Such investigation and testing resulted in the identification
of likely environmental remedial actions. The Company has completed the
preliminary testing for the environmental evaluation of the facility. Based on
current testing, technology and environmental law, the Company believes that
the likely remediation and compliance costs will be approximately $1 million,
which amount had been accrued by Whitehall at December 31, 1997. The Company 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 does exist 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.
F-22
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
To comply with the financial assurances required by the FDEP, the Company
requested and a bank issued a $1.7 million standby letter of credit in favor of
the FDEP. This letter of credit meets all conditions required by the FDEP.
OTHER MATTERS
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 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.
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 $15.0
million 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.
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. Subsequently, PAI filed for bankruptcy in the Phillipines. The
Company is vigorously pursuing this action and 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.
F-23
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
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 $1,659,677, $2,118,113 and
$2,581,585, respectively.
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. Leased property included in the accompanying balance sheets under
capital leases at December 31, 1997 included land of $588,000 and buildings, net
of accumulated depreciation, of $3,613,000.
Minimum rental commitments under all leases are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
-----------------------------------------
YEARS ENDING DECEMBER 31, TO RELATED PARTIES TO THIRD PARTIES CAPITAL LEASES
- --------------------------------------- -------------------- ------------------ ---------------
<S> <C> <C> <C>
1998 ............................... $ 1,007,458 $1,524,654 $ 432,000
1999 ............................... 1,007,458 818,537 432,000
2000 ............................... 997,919 503,099 432,000
2001 ............................... 892,990 403,960 432,000
2002 ............................... 892,990 832,522 432,000
Thereafter ......................... 10,715,884 290,688 6,660,000
Amount related to interest ......... -- -- (4,562,000)
----------- ---------- ------------
$15,514,699 $4,373,460 $ 4,258,000
=========== ========== ============
</TABLE>
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 Revenue by Geographical Areas:
United States ................... $124,020 $164,381 $245,515
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
-------- -------- --------
$169,771 $231,734 $322,538
======== ======== ========
</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
F-24
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 10--EARNINGS PER SHARE--(CONTINUED)
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 ...................................... 9,050,331 10,630,352 12,261,309
Effect of dilutive options ..................................... 111,048 139,056 188,867
--------- ---------- ----------
Weighted average common and common equivalent
shares used in calculating diluted earnings per share ......... 9,161,379 10,769,408 12,450,176
========= ========== ==========
</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 ASC 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
Historical income before income taxes and
extraordinary item ................................ $14,123,723 $23,456,815
Pro forma provision for income taxes ............... 4,900,432 8,810,188
----------- -----------
Pro forma income before extraordinary item ......... 9,223,291 14,646,627
Extraordinary item, net of income taxes ............ -- 1,862,140
----------- -----------
Pro forma net income ............................... $ 9,223,291 $12,784,487
=========== ===========
</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.
F-25
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 11--INCOME TAXES
The income tax (benefit) expense for the years ended December 31, 1995,
1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
------------- --------------- -------------
<S> <C> <C> <C>
Current
Federal ................................. $1,279,000 $ 5,365,832 $6,464,389
State ................................... -- 602,328 428,187
---------- ------------ ----------
1,279,000 5,968,160 6,892,576
---------- ------------ ----------
Deferred
Federal ................................. (390,000) (4,689,159) 142,333
State ................................... -- (689,582) 136,610
---------- ------------ ----------
(390,000) (5,378,741) 278,943
---------- ------------ ----------
Total income tax expense ................. 889,000 589,419 7,171,519
Less: benefit for income taxes relating to
extraordinary item ...................... -- (1,190,548) --
---------- ------------ ----------
Income tax expense relating to
continuing operations ................... $ 889,000 $ 1,779,967 $7,171,519
========== ============ ==========
</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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
Deferred tax assets, net:
Allowance for doubtful accounts ......... $1,103,384 $ 534,106
Accruals ................................ 520,000 2,166,000
Writedown of investment ................. -- 1,800,000
Inventories ............................. 1,144,941 1,783,222
Property and equipment .................. 3,386,079 1,843,910
Spare parts on lease .................... (198,626) (692,936)
Other ................................... 24,706 134,969
---------- ------------
5,980,484 7,569,271
Less: valuation allowance .............. (601,743) (3,026,743)
---------- ------------
Net deferred tax assets ................ $5,378,741 $ 4,542,528
========== ============
</TABLE>
The Company has established a valuation allowance to offset the deferred
tax assets that have resulted from items that will only be deductible when such
items are actually incurred. The valuation allowance will be maintained until
it is more likely than not that these deferred tax assets will be realized.
F-26
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 11--INCOME TAXES--(CONTINUED)
The reconciliation of the federal statutory rate and the Company's
effective tax rate is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal income tax at the statutory rate ...................... 35.0% 35.0% 35.0%
Increases (reductions) in tax rate resulting from:
Partnership income not subject to taxation ................... (16.9) ( 8.8) 0.0
Step-up in tax basis resulting from transfer of J/T's interest
(See Note 1) ............................................... 0.0 (15.2) 0.0
Transfer of net assets of the Partnership to the Company
(see Note 1) ............................................... 0.0 ( 5.1) 0.0
Change in deferred tax allowance ............................. (13.4) ( 0.7) 20.2
State income taxes, net of federal tax benefit ............... 0.0 3.8 4.9
Other ........................................................ 1.6 ( 1.4) (0.5)
----- ----- ----
Effective income tax rate ..................................... 6.3% 7.6% 59.6%
===== ===== ====
</TABLE>
NOTE 12--STOCK OPTION PLANS
In connection with the organization of ASC, 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-27
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 12--STOCK OPTION PLANS--(CONTINUED)
A summary of activity in ASC's stock option plans through December 31,
1997 is as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE
UNDER 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
Canceled ....................................... (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
REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICE SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE 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.
Prior to the merger, Whitehall had two stock option plans, the Whitehall
Corporation Incentive Stock Option Plan and the Whitehall Corporation
Non-Employee Directors Stock Option Plan. Under the Whitehall stock option
plans, stock options expire ten years from the date of grant 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 of December 31, 1995,
1996, and 1997 there were 100,906, 112,426, and 178,514 options exercisable,
respectively, under Whitehall's stock option plans. Transactions involving the
Whitehall stock option plans are summarized as follow:
F-28
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 12--STOCK OPTION PLANS--(CONTINUED)
<TABLE>
<CAPTION>
SHARES
------------
<S> <C>
Options outstanding, December 31, 1994 .......... 228,349
Granted ($27.47 per share) ..................... 10,286
Canceled ....................................... --
Exercised ($10.95-$15.07 per share) ............ (13,989)
-------
Options outstanding, December 31, 1995 .......... 224,646
Granted ($34.51-$37.97 per share) .............. 66,859
Canceled ....................................... --
Exercised ($11.30-$15.07 per share) ............ (33,738)
-------
Options outstanding, December 31, 1996 .......... 257,767
Granted ($31.84 per share) ..................... 20,572
Canceled ($15.07-$34.51 per share) ............. (8,537)
Exercised ($11.30-$15.07 per share) ............ (12,652)
-------
Options outstanding, December 31, 1997 .......... 257,150
=======
</TABLE>
The weighted average exercise prices of the Whitehall Plans' stock options
outstanding and exercisable in 1995, 1996 and 1997 are:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Outstanding at beginning of the year .......... $ 12.41 $ 13.22 $ 19.68
Granted ...................................... 27.47 35.58 31.85
Exercised .................................... 11.47 12.13 11.86
Canceled ..................................... -- -- 32.65
Outstanding at end of year .................... 13.22 19.68 19.95
Exercisable at end of year .................... $ 12.58 $ 12.97 $ 15.46
</TABLE>
In connection with the merger with Whitehall, outstanding stock options to
purchase shares of Whitehall common stock under the Whitehall stock option
plans were converted into the right to receive that number of shares of the
Company's common stock as the holder would have been entitled to receive had
they exercised their options immediately prior to the merger and participated
in the merger.
F-29
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(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,
-----------------------------------------------------
1995 1996 1997
---------------- ---------------- ---------------
<S> <C> <C> <C>
Pro forma net income ........................... $13,114,723 $18,034,681 $3,346,498
Pro forma basic earnings per share ............. $ 1.45 $ 1.67 $ 0.27
Pro forma diluted earnings per share ........... $ 1.43 $ 1.67 $ 0.27
Risk free interest rates ....................... 7% 6% 7%
Expected lives ................................. 10 years 7-10 years 7-10 years
Expected volatility ............................ 38% 40% 40%
Weighted average grant date fair value ......... $ 8.86 $ 15.81 $ 16.35
</TABLE>
NOTE 13--SAVINGS PLAN
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.
Whitehall had implemented a voluntary 401(k) savings plan for eligible
employees (as defined by the Plan document) effective September 1, 1992. At its
discretion, Whitehall contributed 50% of employee contributions, up to 1.5% of
the employee's base salary. Contributions totaled approximately $25,000 in
1995, $40,000 in 1996, and $86,000 in 1997.
F-30
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 14--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 ......................................... $ 68,404 $ 77,153 $ 81,360 $ 95,621
Income from operations ..................................... 7,148 10,634 468 6,748 (a)
Net income (loss) .......................................... 4,183 5,580 (3,747) (1,172)
Diluted income before extraordinary item per share ......... $ 0.34 $ 0.45 $ (0.30) $ (0.10)
Diluted net income per share ............................... $ 0.34 $ 0.45 $ (0.30) $ (0.10)
1996:
Operating revenues ......................................... $ 55,741 $ 56,380 $ 57,499 $ 62,114
Income from operations ..................................... 6,984 6,363 6,902 7,740
Net income ................................................. 4,458 5,033 6,266 4,058
Pro forma diluted income before extraordinary item
per share ................................................. $ 0.49 $ 0.55 $ 0.67 $ 0.33
Pro forma diluted net income per share ..................... $ 0.49 $ 0.55 $ 0.51 $ 0.33
</TABLE>
- ----------------
(a) Includes gain on legal settlement with former employee and shareholder of
approximately $2.6 million.
NOTE 15--SUBSEQUENT EVENTS
On September 22, 1998, the Company closed on the acquisition of Triad
International Maintenance Corporation ("TIMCO"), pursuant to a Stock Purchase
Agreement dated August 10, 1998 (the "Purchase Agreement") by and among the
Company, Primark Corporation, a Michigan corporation (the "Seller") and its
wholly-owned subsidiary, TIMCO. Pursuant to the Purchase Agreement, the Company
purchased from Seller all of the outstanding common stock of TIMCO for a
purchase price of $70.0 million in cash. The acquisition was financed from the
Company's bank lines of credit (see below). The purchase price was determined
in arms-length negotiations between the Company and the Seller. Additionally,
as part of the transaction, the Buyer agreed to guaranty certain industrial
revenue bond financing incurred in connection with the development of TIMCO's
Greensboro operating facilities, in the approximate amount of $11.4 million.
Further, as a closing adjustment, the Seller contributed approximately $8.0
million to TIMCO.
TIMCO, based in Greensboro, North Carolina, operates an FAA licensed
aircraft repair station specializing in the maintenance, repair and overhaul
("MR&O") of narrowbody and widebody aircraft. Pursuant to the terms of the
Purchase Agreement, the Seller has agreed that for a period of five years
following the Closing Date, the Seller and its subsidiaries will not engage,
directly or indirectly, in the aircraft MR&O business. TIMCO had 1997 revenues
of approximately $113.3 million.
On September 18, 1998, in connection with the TIMCO acquisition, the
Company amended its existing credit facility and increased its availability
from $91.4 million to $200.0 million of revolving credit, including a $30.0
million letter of credit sublimit. The eligible borrowing base includes certain
receivables and inventories of the Company, including certain receivables and
inventory of TIMCO.
The interest rate on the amended credit facility is, at the option of the
Company, (a) prime plus a margin, or (b) LIBOR plus a margin, where the
respective margin determination is made upon the
F-31
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)--(CONTINUED)
NOTE 15--SUBSEQUENT EVENTS--(CONTINUED)
Company's financial performance over a 12 month period (ranging from 0.0% to
1.0% in the event prime is utilized, or 1.125% to 2.5% in the event LIBOR is
utilized). At September 22, 1998, the margin was 0.5% for prime rate loans and
2.00% for LIBOR rate loans. The Company borrowed $70.0 million under the
amended credit facility to complete the TIMCO acquisition. At September 22,
1998, $146.0 million was outstanding under the Credit Facility.
The Company has been advised by Paine Webber that they intend to assert a
claim for a finders fee of approximately $1.0 million based upon the Company's
acquisition of TIMCO. This claim arises based upon a 1997 agreement between
Whitehall and Paine Webber relating to a proposed acquisition of TIMCO by
Whitehall. The Company believes that its acquisition of TIMCO was not within
the scope of the Paine Webber/Whitehall agreement and that any claim brought
under this agreement against the Company will be without merit. The Company
intends to vigorously defend any claim which may be brought by Paine Webber
relating to its agreement with Whitehall. Although no assurance can be given,
the Company believes that the ultimate outcome of this matter will not have a
material adverse effect on the financial condition of the Company.
F-32
<PAGE>
SCHEDULE II
AVIATION SALES COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1997 (RESTATED)
<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 ........................ $3,483,809 $1,108,000 $ -- $1,908,414 $2,683,395
========== ========== ==== ========== ==========
1996 ........................ $2,683,395 $1,954,000 $ -- $ 339,815 $4,297,580
========== ========== ==== ========== ==========
1997 ........................ $4,297,580 $8,157,063 $ -- $5,133,111 $7,321,532
========== ========== ==== ========== ==========
</TABLE>
- ----------------
(A) Represents accounts receivable written-off.
F-33
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(a) FINANCIAL STATEMENTS IF BUSINESS ACQUIRED.
Not applicable.
(b) PRO FORMA FINANCIAL INFORMATION.
Not applicable
(c) EXHIBITS.
EXHIBIT NO. DESCRIPTION
- ---------- -----------
10.1 Amendment No. 3 dated as of November 24, 1998 to the Third
Amended and Restated Credit Agreement dated as of October 17,
1997 among Aviation Sales Operating Company, Aerocell
Structures, Inc., AVS/Kratz-Wilde Machine Company, Whitehall
Corporation, Triad International Maintenance Corporation,
Aviation Sales Company, Citicorp Securities, Inc., as arranger
and Citicorp USA, Inc., as agent.
23.1 Consent of Arthur Andersen LLP
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AVIATION SALES COMPANY
By: /s/ JOSEPH E. CIVILETTO
-----------------------------------
Joseph E. Civiletto, Vice President and CFO
Dated: December 4, 1998
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION OF EXHIBIT
- -------- -------------------------------
<S> <C>
10.1 Amendment No. 3 dated as of November 24, 1998 to the Third
Amended and Restated Credit Agreement dated as of October 17,
1997 among Aviation Sales Operating Company, Aerocell
Structures, Inc., AVS/Kratz-Wilde Machine Company, Whitehall
Corporation, Triad International Maintenance Corporation,
Aviation Sales Company, Citicorp Securities, Inc., as arranger
and Citicorp USA, Inc., as agent.
23.1 Consent of Arthur Andersen LLP
</TABLE>
AMENDMENT NO. 3
Dated as of November 24, 1998
to
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of October 17, 1997
This Amendment No. 3 ("Agreement") dated as of November 24, 1998 is entered
into among AVIATION SALES DISTRIBUTION SERVICES COMPANY, a Delaware corporation
(formerly known as Aviation Sales Operating Company) ("ASDC"), AEROCELL
STRUCTURES, INC., an Arkansas corporation ("Aerocell"), AVS/KRATZ-WILDE MACHINE
COMPANY, a Delaware corporation ("Kratz-Wilde"), WHITEHALL CORPORATION, a
Delaware corporation ("Whitehall"), TRIAD INTERNATIONAL MAINTENANCE CORPORATION,
a Delaware corporation ("TIMCO") (ASDC, Aerocell, Kratz-Wilde, Whitehall and
TIMCO being collectively referred to as the "Existing Borrowers" and each
individually, an "Existing Borrower"), APEX MANUFACTURING, INC., an Arizona
corporation ("Apex"), CARIBE AVIATION, INC., a Florida corporation ("Caribe"),
AIRCRAFT INTERIOR DESIGN, INC., a Florida corporation ("Design"), AERO
CORPORATION, a Florida corporation "Aero Florida"), and AERO CORP MACON, INC., a
Delaware corporation ("Aero Macon") (Apex, Caribe, Design, Aero Florida, and
Aero Macon, together with the Existing Borrowers, being collectively referred to
as the "Borrowers") and the "Lenders" (as defined in the Credit Agreement
identified below). Capitalized terms used herein without definition are used
herein as defined in the Credit Agreement.
PRELIMINARY STATEMENT:
WHEREAS, the Existing Borrowers, Citicorp USA, Inc., as Agent, and certain
financial institutions, as Lenders and Issuing Bank, are parties to that certain
Third Amended and Restated Credit Agreement dated as of October 17, 1997, as
heretofore amended (the "Credit Agreement");
WHEREAS, in view of the Parent having effected certain changes in its
corporate structure as permitted by certain consents heretofore delivered under
the terms of the Credit Agreement and that certain Amendment No. 2 and Consent
dated as of September 18, 1998, the parties hereto are desirous of certain
Guarantors becoming borrowers under the Credit Agreement and the Borrowers have
requested an increase in the Revolving Credit Commitments; and
WHEREAS, subject to the terms and conditions stated herein, parties hereto
have agreed to amend the Credit Agreement as set forth below in SECTION 1;
NOW, THEREFORE, the parties hereto hereby agree as follows:
<PAGE>
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of November 24,
1998, subject to the satisfaction of the conditions precedent set forth in
SECTION 2 hereof, the Credit Agreement is hereby amended as follows:
1.1 The introductory paragraph of the Credit Agreement is deleted in its
entirety and the following substituted therefor:
This Third Amended and Restated Credit Agreement dated as of October
17, 1997 (as amended, supplemented or modified from time to time, the
"Agreement") is entered into among Aviation Sales Distribution Services Company,
a Delaware corporation formerly known as Aviation Sales Operating Company,
Aerocell Structures, Inc., an Arkansas corporation, AVS/Kratz-Wilde Machine
Company, a Delaware corporation, Whitehall Corporation, a Delaware corporation,
Triad International Maintenance Corporation, a Delaware corporation, Apex
Manufacturing, Inc., an Arizona corporation, Caribe Aviation, Inc., a Florida
corporation, Aircraft Interior Design, Inc., a Florida corporation, Aero
Corporation, a Florida corporation, and Aero Corp Macon, Inc., a Delaware
corporation, Aviation Sales Company, a Delaware corporation (the "Parent"), the
institutions from time to time a party hereto as Lenders, whether by execution
of this Agreement or an Assignment and Acceptance, the institutions from time to
time a party hereto as Issuing Banks, whether by execution of this Agreement or
an Assignment and Acceptance, Citicorp Securities, Inc., a Delaware corporation,
in its capacity as arranger, and Citicorp USA, Inc., a Delaware corporation, in
its capacity as agent for the Lenders and the Issuing Banks hereunder (in such
capacity, the "Agent").
1.2 SECTION 1.01 is amended to (i) delete the definitions of "Acquisition
Loan Notes", "Acquisition Subfacility", "Term Lender", "Term Loan Pro Rata
Share", "Term Loan Reserve", "Term Loan Termination Date", "Term Loans", and
"Term Notes" in their entirety and all references to such terms appearing in the
Agreement; (ii) delete the definitions of "Borrower", "Borrowers", and
"Revolving Credit Commitment" in their entirety and substitute the following
therefor:
"BORROWER" means, individually, any of Aviation Sales Distribution
Services Company, a Delaware corporation; Aerocell Structures, Inc., an
Arkansas corporation; Apex Manufacturing, Inc., an Arizona corporation;
Caribe Aviation, Inc., a Florida corporation; AVS/Kratz-Wilde Machine
Company, a Delaware corporation; Aircraft Interior Design, Inc., a
Florida corporation; Triad International Maintenance Corporation, a
Delaware corporation; Whitehall Corporation, a Delaware corporation;
Aero Corporation, a Florida corporation; and Aero Corp Macon, Inc., a
2
<PAGE>
Delaware corporation; and "BORROWERS" means, collectively, all of such
Persons.
"REVOLVING CREDIT COMMITMENT" means, with respect to any Revolving
Lender, the obligation of such Lender to make Revolving Loans and to
participate in Letters of Credit pursuant to the terms and conditions
of this Agreement, in an aggregate amount at any time outstanding which
shall not exceed the principal amount set forth on SCHEDULE 1.01.9
attached hereto and made a part hereof under the heading "Revolving
Credit Commitment" thereon or on the signature page of the Assignment
and Acceptance by which it became a Lender, as modified from time to
time pursuant to the terms of this Agreement, or to give effect to any
applicable Assignment and Acceptance, and "REVOLVING CREDIT
COMMITMENTS" means the aggregate principal amount of the Revolving
Credit Commitments of all the Revolving Lenders, the maximum amount of
which shall be $250,000,000, as reduced from time to time pursuant to
SECTION 4.01.
(iii) delete all references to Caribe, Apex, and the Whitehall Subsidiaries in
the definitions of "ELIGIBLE INVENTORY" and "ELIGIBLE RECEIVABLES", and (iv) add
the following definitions thereto:
"ASOC" means Aviation Sales Distribution Services Company, a Delaware
corporation, formerly known as Aviation Sales Operating Company.
"MR&O" means Aviation Sales Maintenance, Repair & Overhaul Company, a
Delaware corporation and wholly-owned Subsidiary of Parent.
1.3 SECTION 2.01 is amended to delete the provisions thereof in their
entirety.
1.4 SECTION 2.02(C)(I)(A) is amended to delete the second and third
sentences thereof in their entirety and substitute the following therefor:
Subject to the fulfillment of the conditions precedent set forth in
SECTION 6.01 or SECTION 6.02, as applicable, each Revolving Lender
shall deposit an amount equal to its Revolving Loan Pro Rata Share of
the amount requested by ASOC to be made as Revolving Loans with the
Agent at its office in New York, New York, in immediately available
funds, (A) on the Effective Date with respect to the Borrowing of
Revolving Loans on such date specified in the initial Notice of
Borrowing and (B) not later than 1:00 p.m. (New York time) on any other
Funding Date for Revolving
3
<PAGE>
Loans and the Agent shall make the proceeds of such amounts received by
it available to the Borrowers at the Agent's office in New York, New
York on such Funding Date (or on the date received if later than such
Funding Date) and shall disburse such proceeds in accordance with the
disbursement instructions set forth in the applicable Notice of
Borrowing.
1.5 SECTION 2.02(E) is amended to delete the amount "$131,428,571.40"
therein and substitute therefor the amount "$250,000,000".
1.6 SECTION 2.03 is amended to delete the provisions thereof in their
entirety.
1.7 SECTION 8.03 is amended to delete the language ", Caribe, Apex, the
Whitehall Subsidiaries" appearing after each reference in the last sentence of
such section to "the Borrowers".
1.8 ARTICLE VIII is amended to add the following as Section 8.14
thereof:
8.14. YEAR 2000. The Parent and Borrowers covenant and agree that their
computer systems and equipment containing embedded microchips
(including systems and equipment supplied by others, with which such
systems interface or on which such Persons rely) will function properly
on December 31, 1999 and thereafter and the Parent and each Borrower is
taking all necessary and appropriate action to reasonably ensure the
same.
1.9 ARTICLE IX is amended to (i) delete SECTION 9.16(C) thereof in its
entirety and substitute the following therefor:
(c) Notwithstanding the foregoing, nothing in this SECTION 9.16 shall
permit any Borrower or Parent or any Subsidiary of a Borrower to make
any Investment, directly or indirectly, not otherwise permitted by
SECTION 10.04 or SECTION 10.17.
and (ii) add the following as Section 9.18 thereof:
9.18. ADDITIONAL PARENT COVENANTS. The Parent shall:
(a) maintain its existence as a corporation duly organized and existing
and qualified and in good standing as a corporation authorized to do
business in the states of Delaware and Florida and in each other
jurisdiction in which failure to be so qualified and in good standing
will result, or is reasonably likely to result, in a Material Adverse
Effect;
4
<PAGE>
(b) comply in all material respects with all Requirements of Law
applicable to it;
(c) file all tax returns and reports required to be filed by it with
any Governmental Authority as and when required to be filed or to pay
taxes, assessments, fees or other governmental charges upon it or its
Property, assets, income or franchises which are shown in such returns
or reports to be due and payable as and when due and payable, except
for taxes, assessments, fees and other governmental charges (i) that
are being contested by it in good faith by an appropriate proceeding
diligently pursued, (ii) for which adequate reserves have been made on
its books and records, and (iii) the amounts the non-payment of which
would not individually, or in the aggregate, result in a Material
Adverse Effect; and
(d) within three (3) days after its receipt of any distribution,
dividend or payment from any Subsidiary of Parent, make a capital
contribution in the amount thereof (net of taxes allocable to transfers
under Requirements of Law) to ASOC.
1.10 ARTICLE X is amended to add "(A)" immediately before the first
sentence thereof and the following provisions after the conclusion of SECTION
10.16 thereof:
(B) The Parent covenants and agrees that it shall comply with the
following covenants so long as any Revolving Credit Commitments are
outstanding and thereafter until payment in full of all of the
Obligations (other than indemnities not yet due), unless the Requisite
Lenders shall otherwise give prior written consent:
10.17. PARENT COVENANTS. The Parent shall not:
(a) merge or liquidate with or into any other Person and, as a result
thereof and after giving effect thereto, the Parent is not the
surviving Person;
(b) repurchase or redeem any of its Capital Stock other than as
required with respect to the Permitted Equity Securities Options;
(c) engage in any business other than that of acting as a holding
company for ASOC, Leasing Affiliate, Finance Affiliate, M&R, MR&O and
Aviation Sales Company FSC, Ltd., a Barbados corporation;
(d) make or maintain any Investments other than (i) its Investments in
Leasing Affiliate existing as of the Effective Date or from the
proceeds of issuance of (A)
5
<PAGE>
Indebtedness by Parent which is unsecured and subordinated to the
Parent's obligations as a Guarantor pursuant to agreements in form and
substance satisfactory to the Agent or (B) equity Securities of Parent,
(ii) Investments in ASOC, M&R, Finance Affiliate, and MR&O, an (iii)
Investments in Cash Equivalents;
(e) incur any Indebtedness other than that identified on SCHEDULE
1.01.3 or described in CLAUSE (D)(I)(A) above;
(f) grant or suffer to exist any Lien against any property or asset of
the Parent other than Liens securing the Obligations.
1.11 ARTICLE XI is amended to add "(A)" immediately before the first
sentence thereof and the following provisions after the conclusion of SECTION
11.07 thereof:
(B) The Parent covenants and agrees that so long as any Revolving
Credit Commitments are outstanding and thereafter until payment in full
of all of the Obligations (other than indemnities not yet due):
11.08. PARENT FINANCIAL COVENANTS. The Parent shall:
(a) maintain a Fixed Charge Coverage Ratio, as determined as of the
last day of each fiscal quarter of the Parent commencing with the
fiscal quarter ending June 30, 1997 and ending with the fiscal quarter
ending September 30, 2000, for the four-fiscal-quarter period then
ending, of at least 1.10 to 1.00;
(b) maintain a Fixed Charge Coverage Ratio, as determined as of the
last day of each fiscal quarter of the Parent commencing with the
fiscal quarter ending December 31, 2000 and ending with the fiscal
quarter ending September 30, 2001, for the four-fiscal-quarter period
then ending, of at least 1.15 to 1.00;
(c) maintain a Fixed Charge Coverage Ratio, as determined as of the
last day of each fiscal quarter of the Parent commencing with the
fiscal quarter ending December 31, 2001 and ending with the fiscal
quarter ending June 30, 2002, for the four-fiscal-quarter period then
ending, of at least 1.20 to 1.00;
(d) maintain a ratio of Funded Debt of the Parent to EBITDA of the
Parent, determined as of the end of each fiscal quarter of the Parent,
for the four-fiscal-quarter period then ended, of not more than 6.00 to
1.00;
6
<PAGE>
(e) limit the Capital Expenditures made by the Parent and its
Subsidiaries during (i) the period commencing on the Effective Date and
ending on December 31, 1997 to no more than $3,000,000, (ii) the period
commencing on January 1, 1998 and ending on December 31, 1998 to no
more than $17,000,000, (iii) the period commencing on January 1, 1999
and ending on December 31, 1999 aggregating more than $14,400,000, (iv)
the period commencing on January 1, 2000 and ending on December 31,
2000 aggregating more than $12,200,000, (v) the period commencing on
January 1, 2001 and ending on December 31, 2001 aggregating more than
$7,300,000, or (vi) any Fiscal Year ending after 2001 in excess of
$7,400,000 in the aggregate; PROVIDED, HOWEVER, to the extent the
Parent and its Subsidiaries have not made Capital Expenditures in the
amount permitted in CLAUSES (I) - (VI) above for a given period,
Capital Expenditures in an amount equal to 100% of the amount specified
for any such respective period but not made in such period may be made
in the immediately next succeeding Fiscal Year; PROVIDED THAT to the
extent amounts carried forward from one period to the next succeeding
Fiscal Year are not expended in such Fiscal Year, such surplus may not
be carried forward to any other succeeding year.
1.12 ARTICLE XII is amended to add the following sentence at the end of
CLAUSE (B) thereof:
Parent shall fail duly and punctually to perform or observe any
agreement, covenant or obligation binding on the Parent under SECTION
9.18, ARTICLE X or ARTICLE XI.
and (ii) delete the provisions of SECTION 12.01(O) thereof in their entirety.
1.13 SECTION 15.20 is amended to add the following provisions at the
end thereof:
The Parent and each Borrower acknowledges that each of the Agent,
Issuing Bank and Lenders and their respective Affiliates (collectively,
the "Bank Parties") may be providing debt financing, equity capital or
other services, including, without limitation, advisory services, to
other companies in respect of which the Parent and Borrowers may have
conflicting interests regarding transactions described herein and
otherwise. Each of the Bank Parties hereby agrees that it will not use
confidential information obtained from the Parent and/or Borrowers by
virtue of the transactions contemplated by this Agreement or its other
relationships with the Parent and/or Borrowers in
7
<PAGE>
connection with the performance by such Bank Party of services for
other companies nor will it furnish any such information to such other
companies. The Parent and Borrowers each hereby acknowledge that no
Bank Party has any obligation to use confidential information obtained
from other companies in connection with the transactions contemplated
by this Agreement or to furnish the same to the Parent or any Borrower.
1.14 SCHEDULE 1.01.9 is amended to delete the provisions thereof in
their entirety and substitute therefor SCHEDULE 1.01.9 attached hereto and made
a part hereof.
1.15 EXHIBIT B is amended to delete the provisions thereof in their
entirety and substitute therefor EXHIBIT B attached hereto and made a part
hereof
SECTION 2. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT.
This Amendment shall become effective as of November 24, 1998, if, and only if
the Agent shall have received by 11:00 a.m. (New York time) on November 24,
1998, a facsimile or original executed copy of this Amendment executed by the
Parent, each Borrower and each Lender.
SECTION 3. REPRESENTATIONS AND WARRANTIES. The Borrowers hereby
represent and warrant as follows:
3.1 This Amendment and the Credit Agreement as previously executed and
delivered and as amended hereby constitute legal, valid and binding obligations
of the Borrowers and are enforceable against the Borrowers in accordance with
their terms.
3.2 No Event of Default or Potential Event of Default exists or would
result from any of the transactions contemplated by this Amendment.
3.3 Upon the effectiveness of this Amendment, each Borrower hereby
reaffirms all covenants, representations and warranties made by it in the Credit
Agreement to the extent the same are not amended hereby and agree that all such
covenants, representations and warranties shall be deemed to have been remade as
of the date this Amendment becomes effective (unless a representation and
warranty is stated to be given on and as of a specific date, in which case such
representation and warranty shall be true, correct and complete as of such
date).
SECTION 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT.
4.1 Upon the effectiveness of this Amendment, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words
of like import shall
8
<PAGE>
mean and be a reference to the Credit Agreement, as amended hereby, and each
reference to the Credit Agreement in any other document, instrument or agreement
executed and/or delivered in connection with the Credit Agreement shall mean and
be a reference to the Credit Agreement as amended hereby.
4.2 Except as specifically amended above, the Credit Agreement, the
Notes and all other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
4.3 The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of any Lender or Issuing
Bank or the Agent under the Credit Agreement, the Notes or any of the other Loan
Documents, nor constitute a waiver of any provision contained therein, except as
specifically set forth herein.
SECTION 5. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument. Delivery of an executed counterpart of this Amendment by
telecopier shall be effective as delivery of a manually executed counterpart of
this Amendment.
SECTION 6. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. HEADINGS. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
AVIATION SALES DISTRIBUTION SERVICES COMPANY
By___________________________
William H. Alderman
Authorized Signatory
AEROCELL STRUCTURES, INC.
By___________________________
William H. Alderman
Authorized Signatory
AVS/KRATZ-WILDE MACHINE COMPANY
By___________________________
William H. Alderman
Authorized Signatory
WHITEHALL CORPORATION
By___________________________
William H. Alderman
Authorized Signatory
TRIAD INTERNATIONAL MAINTENANCE CORPORATION
By___________________________
William H. Alderman
Authorized Signatory
10
<PAGE>
APEX MANUFACTURING, INC.
By___________________________
William H. Alderman
Authorized Signatory
CARIBE AVIATION, INC.
By___________________________
William H. Alderman
Authorized Signatory
AIRCRAFT INTERIOR DESIGN, INC.
By__________________________
William H. Alderman
Authorized Signatory
AERO CORPORATION
By__________________________
William H. Alderman
Authorized Signatory
AERO CORP MACON, INC.
By__________________________
William H. Alderman
Authorized Signatory
AVIATION SALES COMPANY
By__________________________
William H. Alderman
Senior Vice President
11
<PAGE>
CITICORP USA, INC. HELLER FINANCIAL, INC.
By___________________________ By__________________________
John W. Podkowsky Name:
Attorney-in-Fact Title:
CONGRESS FINANCIAL CORPORATION NATIONAL CITY COMMERCIAL
FINANCE, INC.
By____________________________ By__________________________
Name: Name:
Title: Title:
FIRST UNION COMMERCIAL CREDIT LYONNAIS, ATLANTA
CORPORATION AGENCY
By___________________________ By__________________________
Name: David M. Cawrse
Title: First Vice President &
Manager
IBJ SCHRODER BUSINESS CREDIT BANKBOSTON, N.A.
CORPORATION
By__________________________ By__________________________
Thomas M. Bayer Tony Zhang
Title: Vice President
12
<PAGE>
SUNTRUST BANK, MIAMI, N.A. BANKATLANTIC
By_________________________ By_________________________
Carol F. Fine Ana C. Bolduc
Vice President Senior Vice President
THE INTERNATIONAL BANK OF NATIONAL BANK OF CANADA
MIAMI, N.A. A Canadian Chartered Bank
By_________________________ By_________________________
Caridad C. Errazquin Frank H. D'Alto
Vice President Vice President
Trade Finance Division
By_________________________
Michael S. Bloomenfeld
Vice President & Manager
MERCANTILE BUSINESS CREDIT, INC. CITIZENS BUSINESS CREDIT
COMPANY
By_________________________ By_________________________
Name: Name:
Title: Title:
AMSOUTH BANK PNC BANK NATIONAL ASSOCIATION
By__________________________ By_________________________
Joseph Huston Name:
Attorney-in-Fact Title:
13
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the
incorporation of our report included in this Form 8-K, into the Company's
previously filed Registration Statements on Form S-8 (File Nos. 333-07021 and
333-51479-01) and Form S-3 (File Nos. 333-40429 and 333-55881).
ARTHUR ANDERSEN LLP
Miami, Florida,
December 4, 1998.
