UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________________ to __________________
Commission File No. 1-11775
AVIATION SALES COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 65-0665658
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6905 NW 25TH STREET 33122
MIAMI, FLORIDA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (305) 592-4055
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 12,483,897 shares
of common stock, $.001 par value per share, were outstanding as of November 12,
1998.
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,236,751 $ 15,693,126
Accounts receivable, net 82,779,155 112,532,541
Inventories 145,342,722 235,197,438
Deferred income taxes 3,057,148 5,100,000
Other current assets 6,853,728 4,988,021
------------ ------------
Total current assets 244,269,504 373,511,126
------------ ------------
EQUIPMENT ON LEASE, net 22,758,149 31,179,434
------------ ------------
FIXED ASSETS, net 38,061,275 67,405,627
------------ ------------
AMOUNTS DUE FROM RELATED PARTIES 2,891,343 2,332,742
------------ ------------
OTHER ASSETS:
Goodwill, net 17,712,145 57,876,608
Deferred income taxes 1,485,380 350,000
Deferred financing costs, net 2,675,684 8,088,211
Other assets 3,732,369 11,009,808
------------ ------------
Total other assets 25,605,578 77,324,627
------------ ------------
Total assets $333,585,849 $551,753,556
============ ============
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(CONTINUED)
DECEMBER 30, SEPTEMBER 30,
1997 1998
------------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 23,753,462 $ 33,966,330
Accrued expenses 21,317,777 29,937,903
Current maturities of notes payable 12,541,391 4,898,215
Current maturities of capital lease obligations 84,000 84,000
Bank line of credit 96,126,959 148,296,132
------------- -------------
Total current liabilities 153,823,589 217,182,580
------------- -------------
LONG-TERM LIABILITIES:
Deferred income 962,063 2,268,794
Notes payable, net of current portion 52,875,550 19,244,551
Capital lease obligations, net of current portion 4,174,000 4,102,000
Bonds payable, net -- 164,138,884
Other long-term liabilities 471,000 72,000
------------- -------------
Total long-term liabilities 58,482,613 189,826,229
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares -- --
authorized, none outstanding
Common stock, $.001 par value, 30,000,000 shares
authorized, 13,362,568 and 12,436,066 shares
outstanding at December 31, 1997 and September 30,
1998, respectively 13,363 12,436
Additional paid-in capital 72,962,449 63,012,515
Retained earnings 64,448,835 81,719,796
------------- -------------
137,424,647 144,744,747
------------- -------------
Less treasury stock (1,111,562 shares at
December 31, 1997), at cost (16,145,000) --
------------- -------------
Total stockholders' equity 121,279,647 144,744,747
------------- -------------
Total liabilities and stockholders' equity $ 333,585,849 $ 551,753,556
------------- -------------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
-2-
<PAGE>
<TABLE>
<CAPTION>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended For the nine months ended
September 30, September 30,
------------------------------- ------------------------------
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES
Sales of products, net $ 64,695,178 $ 98,191,086 $ 172,042,331 $ 266,982,844
Services and other 16,629,706 29,277,633 54,764,012 71,794,709
------------- ------------- ------------- -------------
81,324,884 127,468,719 226,806,343 338,777,553
COST OF SALES AND SERVICES 68,148,734 94,834,606 174,374,783 251,827,546
------------- ------------- ------------- -------------
GROSS PROFIT 13,176,150 32,634,113 52,431,560 86,950,007
OPERATING EXPENSES 12,707,882 14,902,158 34,181,542 45,362,213
------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 468,268 17,731,955 18,250,018 41,587,794
INTEREST EXPENSE 2,073,259 5,383,107 4,801,083 14,130,297
OTHER (INCOME) EXPENSE 4,755,000 (174,000) 3,706,000 (1,338,000)
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (6,359,991) 12,522,848 9,742,935 28,795,497
INCOME TAX EXPENSE (BENEFIT) (2,613,145) 4,602,178 3,727,019 10,927,864
------------- ------------- ------------- -------------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (3,746,846) 7,920,670 6,015,916 17,867,633
EXTRAORDINARY ITEM, NET OF
INCOME TAXES (Note 5) -- -- -- 598,671
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ (3,746,846) $ 7,920,670 $ 6,015,916 $ 17,268,962
============= ============= ============= =============
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $ (0.31) $ 0.64 $ 0.49 $ 1.45
Extraordinary item, net of income taxes -- -- -- 0.05
------------- ------------- ------------- -------------
Net income (loss) $ (0.31) $ 0.64 $ 0.49 $ 1.40
============= ============= ============= =============
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before extraordinary item $ (0.30) $ 0.63 $ 0.48 $ 1.42
Extraordinary item, net of income taxes -- -- -- 0.05
------------- ------------- ------------- -------------
Net income (loss) $ (0.30) $ 0.63 $ 0.48 $ 1.37
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended
September 30,
----------------------------
1997 1998
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,015,917 $ 17,268,962
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,762,334 7,523,711
Proceeds from sale of equipment on lease, net of gain 2,577,078 --
Write-off of investment 4,500,000 --
Gain on sale of electronic segment (727,000) --
Provision for doubtful accounts 1,331,063 896,993
Equity in earnings of equity investment (29,000) (1,338,000)
Extraordinary item, net of income taxes -- 598,671
Deferred income taxes (130,262) 1,753,728
(Increase) decrease in accounts receivable (23,491,434) 1,223,622
Increase in inventory (40,333,987) (62,647,448)
Increase in other current assets (2,552,643) (804,469)
Increase in other assets (1,849,493) (4,711,597)
Increase in accounts payable 4,146,791 1,371,240
Increase (decrease) in accrued expenses 8,347,901 (7,820,231)
Increase in deferred revenue 184,400 1,306,731
Increase in other liabilities 924,468 --
------------ -------------
Net cash used in operating activities (37,323,867) (45,378,087)
------------ -------------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash used in acquisitions (1,841,595) (75,568,442)
Purchases of equipment (9,682,826) (11,480,796)
Proceeds from sale of electronic segment 1,720,000 --
Purchase of equipment on lease (4,788,431) (21,971,908)
(Advances to) payments from related parties (13,441) 558,601
------------ -------------
Net cash used in investing activities (14,606,293) (108,462,545)
------------ -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings under revolving facilities 41,476,127 52,169,173
Net borrowings (payments) under term and acquisition loan facilities 10,755,645 (56,188,858)
Payment on equipment loans -- (569,161)
Proceeds from issuance of senior subordinated notes -- 164,001,750
Proceeds from equipment loans -- 10,483,844
Stock options exercised 558,821 479,416
Payments on capital leases -- (72,000)
Payments of deferred financing costs (1,419,595) (7,007,157)
------------ -------------
Net cash provided by financing activities 51,370,998 163,297,007
------------ -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (559,162) 9,456,375
------------ -------------
CASH AND CASH EQUIVALENTS, beginning of period 3,918,149 6,236,751
------------ -------------
CASH AND CASH EQUIVALENTS, end of period $ 3,358,987 $ 15,693,126
============ =============
Interest paid $ 3,256,744 $ 11,603,310
============ =============
Income taxes paid $ 5,948,018 $ 11,965,430
============ =============
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Transfer of equipment on lease to inventory $ -- $ 12,150,331
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION:
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such
rules and regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying unaudited
interim condensed consolidated financial statements should be read in
conjunction with the December 31, 1997 supplemental financial statements of
Aviation Sales Company (the "Company") and the notes thereto included in the
Company's Form 8-K/A dated October 9, 1998 (File No. 001-11775).
In the opinion of management, the accompanying unaudited interim
condensed consolidated financial statements of the Company contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of the Company as of September 30, 1998
and the results of its operations and cash flows for the three and nine month
periods ended September 30, 1998 and 1997. The results of operations and cash
flows for the nine month period ended September 30, 1998 are not necessarily
indicative of the results of operations or cash flows which may be reported for
the year ending December 31, 1998.
The accompanying unaudited interim condensed consolidated financial
statements give retroactive effect to the acquisition of Whitehall Corporation
("Whitehall") which the Company acquired in July 1998. The acquisition of
Whitehall has been accounted for under the pooling of interests method of
accounting. See Note 4 for a further discussion of this transaction.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"), during the quarter ended March 31, 1998.
This statement specifies the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. Earnings per share have been restated to comply with
SFAS 128 for all periods presented.
The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), during the quarter ended
March 31, 1998. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
The objective of SFAS 130 is to report a measure (comprehensive income) of all
changes in equity of an enterprise that result from transactions and other
economic events in a period other than transactions with owners. The adoption of
SFAS 130 did not have a material impact on the Company's consolidated financial
statements, as comprehensive income was equal to net income for all periods
presented.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), was issued by
the Financial Accounting Standards 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
-5-
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
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.
2. JOINT VENTURE:
During 1994, Whitehall obtained a 40% ownership in AvAero Noise
Reduction Joint Venture ("AvAero"), a joint venture involved in the development
of aircraft-related technology for an initial investment of $1,000. The Company
accounts for its investment in AvAero under the equity method. In 1994,
Whitehall obtained a promissory note for an advance of $2.0 million to the joint
venture. The principal balance of the promissory note accrues interest at a
maximum rate of 5% and the principal balance together with accrued interest are
due January 5, 1999. The note is secured by certain assets of AvAero, net of
repayments. Whitehall made additional advances to AvAero of $75,000 and
$815,000, respectively, during 1996 and 1997. These advances are included in
accounts receivable. The Company's equity in AvAero's earnings totaled $29,000
and $1,338,000 for the nine months ended September 30, 1997 and 1998,
respectively, which is included in other (income) expense in the unaudited
consolidated statements of income.
3. OTHER ASSETS:
In March 1998, the Company entered into an aircraft purchase agreement
with Philippines Airlines, Inc. ("PAI") to purchase five-Airbus A-300 aircraft.
Subsequently, PAI filed for bankruptcy in the Philippines. At September 30,
1998, the Company had received and paid for one of the five aircraft.
Subsequently, a second aircraft was received and paid for and PAI has scheduled
delivery dates on the remaining three aircraft. Deposits held by PAI relating to
future aircraft to be purchased are $900,000 per aircraft.
4. ACQUISITIONS:
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING:
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 an
initial purchase price of $69.0 million in cash. The acquisition was financed
from the Company's bank lines of credit (see Note 5). 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 and the Company has posted an irrevocable letter of credit to secure its
obligations thereunder. Further, as a closing adjustment, the Seller contributed
approximately $5.7 million in cash to TIMCO relating to customer deposits,
resulting in a net purchase price of $63.3 million (exclusive of transaction
costs). The acquisition has been accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon their fair market values at the
date of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was approximately $31.4 million, which amount has been
recorded as goodwill and will be amortized on a straight-line basis over 20
years. The operations of TIMCO have been included in the accompanying condensed
consolidated financial statements from the date of acquisition.
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 paid by the Company to
acquire Caribe and
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<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
AIDI was approximately $23.3 million, consisting of: (i) $5.0 million in cash,
(ii) $5.0 million in promissory notes payable over two years, (iii) the issuance
of 182,143 shares of the Company's authorized, but unissued, common stock, and
(iv) the repayment of approximately $7.6 million of indebtedness owed by Caribe
and AIDI to a financial institution. The acquisition has been accounted for
using the purchase method of accounting and accordingly, the purchase price has
been allocated to the assets purchased and the liabilities assumed based upon
their fair market values at the date of acquisition. The excess of the purchase
price over the fair values of the net assets acquired was approximately $9.6
million, which amount has been recorded as goodwill and will be amortized on a
straight-line basis over 20 years. The operations of Caribe and AIDI have been
included in the accompanying condensed consolidated financial statements from
the date of acquisition. The pre-acquisition operations of Caribe and AIDI were
not material to the operations of the Company.
In October 1997, the Company completed the acquisition of substantially
all of the assets of the business of Kratz- Wilde Machine Company
("Kratz-Wilde") for a purchase price, including acquisition costs
and net of cash acquired, of approximately $39.6 million in cash and notes and
the assumption of certain liabilities of Kratz-Wilde in the approximate amount
of $2.2 million. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon their fair market values at the
date of acquisition. The excess of the purchase price over the fair values of
the net assets acquired was approximately $17.9 million, which amount has been
recorded as goodwill and will be amortized on a straight-line basis over 20
years. The operations of Kratz-Wilde have been included in the accompanying
condensed consolidated financial statements from the date of acquisition.
The acquisition was financed from the Company's bank lines of credit (see Note
5), with the remainder of the acquisition price payable to the prior owners over
a two-year period (see Note 5).
The Company's unaudited pro forma consolidated results of operations
assuming the TIMCO and Kratz-Wilde acquisitions had occurred on January 1, 1997
are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPTS EARNINGS PER SHARE)
<S> <C> <C>
Operating Revenues $ 368,799 $ 448,486
Income before extraordinary item (a) 5,371 19,557
Diluted earnings per share before extraordinary item (a) $ 0.43 $ 1.55
</TABLE>
- ----------------
(a) September 30, 1997 amounts include an adjustment to record pro forma
income tax expense as if Kratz-Wilde had been a C corporation since
January 1, 1997 and adjustments to record goodwill amortization and
incremental interest, depreciation and salaries as if the acquisitions had
occurred on January 1, 1997.
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING:
In July 1998, the Company acquired Whitehall Corporation ("Whitehall")
for consideration of 2,844,079 shares of its common stock. The acquisition was
accounted for using the pooling of interests method of accounting and
accordingly, the accompanying condensed consolidated financial statements have
been restated to give retroactive effect for the acquisition for all periods
presented. In connection with this acquisition, all shares of Whitehall common
stock (including shares held as treasury stock) were cancelled and no payments
were made with respect thereto.
-7-
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
In December 1997, the Company acquired Apex Manufacturing, Inc.
("Apex") for consideration of 238,572 shares of its common stock. The
acquisition was accounted for using the pooling of interests method of
accounting and accordingly, the accompanying condensed consolidated financial
statements have been restated to give retroactive effect for the acquisition for
all periods presented.
In September 1997, the Company acquired Aerocell Structures, Inc.
("Aerocell") for consideration of 620,970 shares of its common stock. The
acquisition was accounted for using the pooling of interests method of
accounting and accordingly, the accompanying condensed consolidated financial
statements have been restated to give retroactive effect for the acquisition for
all periods presented.
The following reflects the results of operations of the Company, and of
Whitehall, Apex and Aerocell (the "Acquired Entities"), which were acquired in
1997 and 1998, for periods before the poolings of interests combinations were
consummated:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997 September 30, 1998
(IN THOUSANDS)
<S> <C> <C>
Revenues:
The Company $ 160,043 $ 292,908
Aerocell and Apex 19,921 -
Whitehall 46,842 45,870
------------- -----------
$ 226,806 $ 338,778
============= ===========
Net income (loss):
The Company $ 9,702 $ 15,960
Aerocell and Apex 2,081 -
Whitehall (5,767) 1,309
------------- -----------
$ 6,016 $ 17,269
============= ===========
</TABLE>
The preliminary purchase price allocations for business combinations
accounted for under the purchase method of accounting (including historical
accounts of immaterial acquisitions accounted for under the pooling of interests
method of accounting) were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
1997 1998
<S> <C> <C>
Accounts receivable ........................................................................ $ 1,820,751 $ 31,874,001
Inventories ................................................................................ 2,222,774 15,056,937
Prepaid expenses ........................................................................... 10,168 139,844
Deposits and other ......................................................................... 4,576 1,259,342
Fixed assets ............................................................................... 10,479,883 22,245,096
Goodwill ................................................................................... -- 40,979,250
Accounts payable ........................................................................... (1,563,497) (8,843,193)
Accrued expenses ........................................................................... (1,224,437) (16,424,114)
Deferred incomes taxes ..................................................................... (557,270) --
Notes payable .............................................................................. (3,445,825) (5,000,000)
Capital lease obligations .................................................................. (4,290,000) --
Common stock issued ........................................................................ (1,615,528) (5,718,721)
------------ ------------
Cash used in acquisitions .................................................................. $ 1,841,595 $ 75,568,442
============ ============
</TABLE>
-8-
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
5. NOTES PAYABLE:
On September 18, 1998, in connection with the TIMCO acquisition (see
Note 4), the Company amended its existing credit facility pursuant to the terms
of a four year senior secured revolving credit facility (the "Revolving 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,
subject to certain borrowing criteria based on the satisfaction of certain debt
ratios. The eligible borrowing base includes certain receivables and inventories
of the Company, including certain receivables and inventory of TIMCO. The
interest rate on the Revolving 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 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 November 10, 1998, the margin was 0.5%
for prime rate loans and 2.0% for LIBOR rate loans. The Company borrowed $70.0
million under the Revolving Credit Facility to complete the TIMCO acquisition.
At November 10, 1998, $ 156.4 million was outstanding under the Revolving Credit
Facility.
The Revolving Credit Facility contains certain financial covenants
regarding the financial performance of the Company and certain other covenants,
including limitations on the amount of annual capital expenditures and the
incurrence of additional debt, and provides for the suspension of the Revolving
Credit Facility and repayment of all debt in the event of a material adverse
change in the business or a change in control. In addition, the Revolving Credit
Facility requires mandatory repayments from the proceeds of a sale of assets or
an issuance of equity or debt securities or as a result of insufficient
collateral to meet the borrowing base requirements thereunder. Substantially all
of the Company's assets are pledged as collateral for amounts borrowed. The
Revolving Credit Facility will terminate on July 31, 2002. At September 30,
1998, the Company was in compliance with all of the covenants of the Revolving
Credit Facility.
In February, 1998, the Company completed the offering and sale of
$165.0 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 all
amounts then outstanding under the Company's term, acquisition and revolving
credit facilities and to fund the cash requirements related to the acquisition
of Caribe and AIDI. In connection with the repayment of the term and acquisition
portions of its credit facility, the Company wrote off $981,428 of deferred
financing costs resulting in an extraordinary item, net of income taxes, of
$598,671 for the nine months ended September 30, 1998.
The Notes are unconditionally guaranteed, on a senior subordinated
basis, by substantially all of the Company's existing subsidiaries and each
subsidiary that will be organized in the future by the Company, unless such
subsidiary is designated as an unrestricted subsidiary (the "Subsidiary
Guarantors"). Subsidiary Guarantees are joint and several, general unsecured
obligations of the Subsidiary Guarantors. The Subsidiary Guarantors are all
wholly-owned subsidiaries of the Company. At present, the Subsidiary Guarantors
comprise all of the direct and indirect subsidiaries of the Company, other than
one inconsequential subsidiary. Upon consummation of the TIMCO and Whitehall
acquisitions, TIMCO and Whitehall became Subsidiary Guarantors. Subsidiary
Guarantees are subordinated in right of payment to all existing and future
Senior Debt of Subsidiary Guarantors, including the Revolving Credit Facility,
and are also effectively subordinated to all secured obligations of Subsidiary
Guarantors to the extent of the assets securing such obligations, including the
Revolving Credit Facility. Furthermore, the indenture pursuant to which the
Notes have been issued (the "Indenture") permits Subsidiary Guarantors to incur
additional indebtedness, including Senior Debt, subject to certain limitations.
The Company has not presented separate financial statements and other
disclosures concerning each of the Subsidiary Guarantors because management has
determined that such information is not material to investors.
The Notes are redeemable, at the option of the Company, in whole or in
part, at any time after February 15, 2003, at the following redemption prices,
plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date: (i) 2003--104.063%; (ii) 2004--102.708%; (iii) 2005--101.354%;
and (iv) 2006 and thereafter--100%. In addition, on or
-9-
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
prior to February 15, 2001, the Company may redeem up to 35% of the aggregate
principal amount of the Notes at a redemption price of 108.125% of the principal
amount thereof, plus accrued and unpaid interest and liquidated damages, if any,
thereon to the redemption date with the net proceeds of a public offering of
common stock of the Company; provided, that at least 65% of the aggregate
principal amount of the Notes originally issued remains outstanding immediately
after the occurrence of such redemption.
Upon the occurrence of a change of control, the Company will be
required to make an offer to repurchase all or any part of holder's Notes at a
repurchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the repurchase date.
There can be no assurance that the Company will have the financial resources
necessary to purchase the Notes upon a change of control or that such repurchase
will be permitted under the Revolving Credit Facility.
The Indenture contains certain covenants that, among other things, will
limit the ability of the Company and its subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, make investments, dispose of assets, issue capital stock of
subsidiaries, create certain liens securing indebtedness, enter into certain
transactions with affiliates, sell assets or enter into certain mergers and
consolidations or sell all or substantially all of their assets.
In connection with the acquisition of Caribe and AIDI (see Note 4), the
Company entered into an agreement with the prior owners to pay $5.0 million of
the acquisition price over a two year period. Principal payments of $2.5 million
plus interest accrued at 8%, are due on March 6, 1999 and March 6, 2000. In
connection with the acquisition of Kratz-Wilde (see Note 4), the Company entered
into an agreement with the prior owners to pay $2.2 million of the acquisition
price over a two year period. Payments of $1,250,000 are due on January 1, 1999
and January 1, 2000. Interest on this note has been imputed at 8%.
The Company has entered into various term loan agreements to finance
certain equipment and rotable parts on long-term lease which secure the loans.
These loans, in the original aggregate principal amount of $17.7 million, bear
interest ranging from 7.40% to 8.21% and are payable monthly through July 2003.
These term loans contain financial and other covenants and mandatory prepayment
events, as defined. At September 30, 1998, the Company was in compliance with
all covenants of these term loans.
6. RELATED-PARTY TRANSACTIONS
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.
7. COMMITMENTS AND CONTINGENCIES:
The Company's Lake City, Florida maintenance facility ("Aero Corp-Lake
City") is taking remedial action, pursuant to Environmental Protection Agency
("EPA") regulations. In addition, the Company was required to perform an
environmental site assessment at the facility of a subsidiary in connection with
the sale of the facility during the first quarter
-10-
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
of 1997. The Company does not anticipate any material direct effects upon the
capital expenditures, earnings and competitive position of the Company from
compliance with present Federal, State and local provisions which have been
enacted or adopted regulating the discharge of materials into the environment,
or otherwise relating to the protection of the environment in excess of the
Company's reserves. The Company does expect, however, that compliance with such
regulations will require, from time to time, both increased operating costs and
capital expenditures which may be substantial. As of September 30, 1998 and
December 31, 1997, the Company had reserved, in the aggregate, approximately
$3.30 million and $3.95 million, respectively, for anticipated environmental
remediation costs. Included among the remaining costs to be incurred are
anticipated expenditures for testing and monitoring to be performed over a 20 to
30 year period. Actual costs to be incurred in future periods may vary from the
estimate, given the inherent uncertainties in evaluating environmental
exposures. These uncertainties include the extent of required remediation based
on testing and evaluation not yet completed and the varying costs and
effectiveness of remediation methods.
Additionally, there are other areas adjacent to Aero Corp-Lake City's
facility that could also require remediation. The Company does not believe it is
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,
the Company 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.
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 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 4). 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. Although there can be no
assurance, based upon the available facts, the Company believes that the
ultimate disposition should not have a material adverse effect upon the
financial condition of the Company.
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 (See Note 4). 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 by
Paine Webber against the Company under this agreement will be without merit. The
Company intends to vigorously defend any claim which may be brought by Paine
Webber. 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.
-11-
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1998
(UNAUDITED)
The Company is also involved in other legal proceedings in the normal
course of its business. In the opinion of management, the ultimate resolution of
these proceedings will not have a material effect on the financial condition of
the Company.
8. EARNINGS PER SHARE:
The computation of weighted average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding used in calculating
basic earnings per share ......................................... 12,292,900 12,366,958 12,278,352 12,435,340
Effect of dilutive options ........................................ 143,710 268,215 147,359 224,870
---------- ---------- ---------- ----------
Weighted average common and common equivalent
shares used in calculating diluted earnings per share ............ 12,436,610 12,635,173 12,425,711 12,660,210
========== ========== ========== ==========
Options and warrants outstanding which are not included
in the calculation of diluted earnings per share because
their impact is antidilutive ..................................... 90,000 55,072 258,860 119,143
========== ========== ========== ==========
</TABLE>
- ------------------------
For business combinations accounted for as a pooling of interests, earnings per
share computations are based on the aggregate of the weighted-average
outstanding shares of the surviving business for all periods presented.
9. SUBSEQUENT EVENT:
On October 12, 1998, the Company entered into an agreement to
provide for the construction of a build-to-suit facility supporting
distribution, component overhaul and corporate headquarter activities. The
facility will be constructed in Miramar, Florida and will be leased to the
Company for an initial term of five (5) years.
-12-
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS OR MAY CONTAIN FORWARD-LOOKING
STATEMENTS, SUCH AS STATEMENTS REGARDING THE COMPANY'S GROWTH STRATEGY AND
ANTICIPATED TRENDS IN THE INDUSTRIES AND ECONOMIES IN WHICH THE COMPANY
OPERATES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON THE COMPANY'S CURRENT
EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES AND ASSUMPTIONS
(MANY OF WHICH ARE OUTSIDE THE CONTROL OF THE COMPANY) RELATING TO THE COMPANY'S
OPERATIONS AND RESULTS OF OPERATIONS, COMPETITIVE FACTORS, SHIFTS IN MARKET
DEMAND, AND OTHER RISKS AND UNCERTAINTIES, INCLUDING IN ADDITION TO THOSE
DESCRIBED BELOW THOSE DISCLOSED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K, AS
AMENDED, FOR THE YEAR ENDED DECEMBER 31, 1997, UNCERTAINTIES WITH RESPECT TO
CHANGES OR DEVELOPMENTS IN SOCIAL, BUSINESS, ECONOMIC, INDUSTRY, MARKET, LEGAL
AND REGULATORY CIRCUMSTANCES AND CONDITIONS AND ACTIONS TAKEN OR OMITTED TO BE
TAKEN BY THIRD PARTIES, INCLUDING THE COMPANY'S CONTRACTORS, CUSTOMERS,
SUPPLIERS, COMPETITORS, STOCKHOLDERS, LEGISLATIVE, REGULATORY AND JUDICIAL AND
OTHER GOVERNMENTAL AUTHORITIES. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM RESULTS EXPRESSED OR IMPLIED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY THE COMPANY IN THIS QUARTERLY REPORT ON FORM
10-Q. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO REVISE THESE
FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
OVERVIEW
The following discussion and analysis should be read in conjunction
with the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Company's Annual Report on
Form 10-K (the "Form 10-K"), as amended, for the year ended December 31, 1997
and in the Company's Supplemental Financial Statements filed under Form 8-K/A on
October 9, 1998 (the "Form 8-K/A").
RECENT DEVELOPMENTS
On September 22, 1998, the Company completed 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 an
initial purchase price of $69.0 million in cash. The acquisition was financed
from the Company's bank lines of credit. 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, and the
Company has posted an irrevocable letter of credit to secure its obligations
thereunder. Further, as a closing adjustment, the Seller contributed
approximately $5.7 million to TIMCO relating to customer deposits, resulting in
a net purchase price of $63.3 million (exclusive of transaction costs). The
acquisition has been accounted for using the purchase method of accounting and
accordingly, the purchase price has been allocated to the assets purchased and
the liabilities assumed based upon their fair market values at the date of
acquisition. The excess of the purchase price over the fair values of the net
assets acquired was approximately $ 31.4 million. This amount has been recorded
as goodwill and will be amortized on a straight-line basis over 15 years. The
operations of TIMCO have been included in the accompanying condensed
consolidated financial statements from the date of acquisition. TIMCO
contributed approximately $3.4 million to the Company's 1998 operating revenues.
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. The condensed
consolidated financial statements and this "Management's Discussion and Analysis
of Financial Condition and Results of Operations" gives retroactive effect to
the Company's acquisition of Whitehall. For information regarding the Company's
supplemental financial statements giving retroactive effect to the Company's
acquisition of Whitehall, see the Form 8K/A. For information regarding the
Company's financial statements and results of operations without Whitehall, see
the Form 10-K, as amended, and the Company's Quarterly Report on Form 10-Q for
the quarter and six months ended June 30, 1998.
RESULTS OF OPERATIONS
-13-
<PAGE>
The Company's operating results are affected by many factors, including
the volume and 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.
Operating revenues for the nine months ended September 30,1998
increased $112.0 million or 49.4% to $338.8 million from $226.8 million for the
same period in 1997. Operating revenues for the three months ended September 30,
1998 increased $46.2 million or 56.8% to $127.5 million from $81.3 million for
the same period in 1997. On July 31, 1998, the Company completed its merger with
Whitehall in a transaction accounted for as a pooling of interests, for
consideration of 2,844,079 shares of the Company's stock. Accordingly the
Company's financial statements give retroactive effect for the acquisition of
Whitehall. On March 6, 1998 the Company acquired Caribe Aviation, Inc.
("Caribe") and Aircraft Interior Design, Inc. ("AIDI"). The Company's
Kratz-Wilde Machine Company operation, ("Kratz-Wilde") was acquired during the
fourth quarter of 1997 and Aero-Corp Macon, was acquired by Whitehall during the
third quarter of 1997. On September 23, 1998, the Company acquired TIMCO. Each
of these acquisitions was accounted for under the purchase method of accounting.
As a result of the acquisitions of Caribe, AIDI, Kratz-Wilde and TIMCO, the
Company's revenues increased $52.4 million during the nine months ended
September 30, 1998 and $21.6 million for the three months ended September 30,
1998. Product and service revenues also increased due to increased customer
penetration, increased sales from investments in additional inventories and
improved capacity utilization of the airframe maintenance facilities. Service
revenues for the nine months ended September 30, 1997 were adversely impacted as
a result of unused hangar space that was reserved during 1997 in anticipation of
services to be rendered under a U.S. Air Force C-130 maintenance contract
awarded in April 1997. The C-130 contract was subsequently canceled at the
convenience of the government in June 1997. The C-130 contract provides for
reimbursement of costs incurred during its operations and during the third
quarter of 1997, a $3.5 million receivable from the government relating to these
costs was recorded. The Company is currently negotiating a termination
settlement with the government.
Gross profit increased $34.6 million or 66.0% to $87.0 million,
compared with $52.4 million for the nine months ended September 30, 1998 and
1997 respectively. Gross profit margin for the nine months ended September 30,
1998 increased to 25.7% from 23.1% for the same period in 1997. For the three
months ended September 30, 1998, gross profit margin increased to 25.6% from
16.2% for the same period in 1997. Margins were negatively impacted in 1997 as a
result of the C-130 contract previously discussed, as well as by the write off
by Whitehall in the third quarter of 1997 of approximately $3.5 million of
account receivables. Gross profit margin was favorably impacted during 1998 due
to improved utilization of the Lake City, Florida airframe maintenance, repair
and overhaul facility. Without the results of Whitehall, gross profit margin
would have been 28% for the three months ended September 30, 1998.
The Company's operating expenses increased $11.2 million to $45.4
million for the nine months ended September 30, 1998 compared with $34.2 million
for the same period in 1997 and $2.2 million to $14.9 million for the three
months ended September 30, 1998 compared with $12.7 million for the same period
in 1997. Included in the 1998 operating expenses were $1.8 million of merger
expenses relating to the Whitehall merger. Operating expenses as a percentage of
operating revenues for the 1998 nine month period were 13.4% (12.9% after
adjustment for Whitehall merger expenses), compared to 15.1% for 1997. The
improvement in operating leverage is due primarily to economies of scale and
improved operating efficiencies.
Interest expense for the nine months ended September 30, 1998 increased
by $9.3 million from period to period due to net borrowings of $238.3 million
during the last three months of 1997 and the first nine months of 1998 to
finance the acquisitions of Kratz-Wilde, Caribe and TIMCO, inventory
acquisitions and equipment held for lease.
Other income in 1998 consists primarily of equity in the earnings of Av
Aero. Other expense in 1997 includes equity in Av Aero's earnings, as well as a
$4.5 million writedown of Whitehall's investment in the preferred stock of
Hydroscience Technologies, Inc. and a $727,000 gain on the sale by Whitehall of
its electronics subsidiary.
As a result of the above factors, income before income taxes and
extraordinary item for the nine months ended September 30, 1998 was $28.8
million, an increase of 195.6% over the same period in 1997.
-14-
<PAGE>
In connection with the repayment of the term and acquisition portions
of the credit facility utilizing the proceeds of the Company's Senior
Subordinated Notes due 2008, the Company wrote off, during the first quarter of
1998, $1.0 million of deferred financing costs resulting in an extraordinary
item, net of income taxes, of $0.6 million.
After accounting for income taxes and the extraordinary item, net
income for the nine months ended September 30, 1998 was $17.3 million ($1.37 per
diluted share) compared to net income of $6.0 million ($0.48 per diluted share)
for the nine months ended September 30, 1997. Weighted average common and common
equivalent shares outstanding (diluted) were 12.6 million during the nine months
ended September 30, 1998 compared with 12.4 million for the nine months ended
September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
CASH
Cash used in operations during the nine months ended September 30, 1997
and 1998 was $37.3 million and $45.4 million, respectively. Cash used in
investing activities during the nine months ended September 30, 1997 and 1998
was $14.6 million and $108.5 million, respectively. The Company continues to
invest in spare parts inventories in order to support increased parts sales.
During the nine months ended September 30, 1997 and 1998, the Company financed
its operating and investing activities primarily with its cash flow from
financing activities, amounting to $51.3 million and $163.3 million,
respectively.
CREDIT FACILITY
On September 18, 1998, in connection with the TIMCO acquisition (see
Note 5 in the accompanying Notes to Condensed Consolidated Financial
Statements), the Company amended its existing credit facility pursuant to the
terms of a four year senior secured revolving credit facility (the "Revolving
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, with certain borrowings based on the satisfaction of certain debt
ratios. The eligible borrowing base includes certain receivables and inventories
of the Company, including certain receivables and inventory of TIMCO. The
interest rate on the Revolving 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 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 November 10, 1998, the margin was 0.5%
for prime rate loans and 2.0% for LIBOR rate loans. The Company borrowed $70.0
million under the Revolving Credit Facility to complete the TIMCO acquisition.
At November 10, 1998, $156.4 million was outstanding under the Revolving Credit
Facility.
The Revolving Credit Facility contains certain financial covenants
regarding the financial performance of the Company and certain other covenants,
including limitations on the amount of annual capital expenditures and the
incurrence of additional debt, and provides for the suspension of the Revolving
Credit Facility and repayment of all debt in the event of a material adverse
change in the business or a change in control. In addition, the Revolving Credit
Facility requires mandatory repayments from the proceeds of a sale of assets or
an issuance of equity or debt securities or as a result of insufficient
collateral to meet the borrowing base requirements thereunder. Substantially all
of the Company's assets are pledged as collateral for amounts borrowed. The
Revolving Credit Facility will terminate on July 31, 2002. At September 30,
1998, the Company was in compliance with all of the covenants of the Revolving
Credit Facility.
SENIOR SUBORDINATED NOTES
In February, 1998 the Company completed the offering and sale of $165.0
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 all amounts
outstanding under the Company's term, acquisition and revolving credit
facilities and to fund the cash requirements related to the acquisition of
Caribe and AIDI. The funds repaid under the Credit Facility included amounts
borrowed during 1997 to repay assumed indebtedness of Aerocell and Apex in
connection with those acquisitions and borrowings incurred to fund the purchase
price in connection with the acquisition of Kratz.
The Notes mature on February 15, 2008. Interest is payable on February
15 and August 15 of each year, commencing August 15, 1998. The Notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior debt of the Company, including indebtedness
outstanding under the Credit Facility and under facilities which may replace the
Credit Facility in the future. In addition, the Notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including the Credit Facility.
-15-
<PAGE>
The indenture pursuant to which the Notes have been issued (the
"Indenture") permits the Company and its subsidiaries to incur substantial
additional indebtedness, including Senior Debt. Under the Indenture, the Company
may borrow unlimited additional amounts so long as after incurring such debt the
Company meets a fixed charge coverage ratio for the most recent four fiscal
quarters of 2.0 to 1 until February 15, 2000 and 2.25 to 1 thereafter. At
September 30, 1998, the Company's fixed charge coverage ratio for the last four
fiscal quarters was 3.1 to 1. Additionally, the Indenture allows the Company to
borrow and have outstanding additional amounts of indebtedness (even if the
Company does not meet the required fixed charge coverage ratios), up to
enumerated limits. The Notes are also effectively subordinated in right of
payment to all existing and future liabilities of any subsidiaries of the
Company which do not guarantee the Notes.
The Notes are unconditionally guaranteed, on a senior subordinated
basis, by substantially all of the Company's existing subsidiaries and each
subsidiary that will be organized in the future by the Company, unless such
subsidiary is designated as an unrestricted subsidiary (the "Subsidiary
Guarantors"). Subsidiary Guarantees are joint and several, full and
unconditional, general unsecured obligations of Subsidiary Guarantors.
Subsidiary Guarantees are subordinated in right of payment to all existing and
future Senior Debt of Subsidiary Guarantors, including the Credit Facility, and
are also effectively subordinated to all secured obligations of Subsidiary
Guarantors to the extent of the assets securing such obligations, including the
Credit Facility. Furthermore, the Indenture permits Subsidiary Guarantors to
incur additional indebtedness, including senior debt, subject to certain
limitations.
The Notes are redeemable, at the option of the Company, in whole or in
part, at any time after February 15, 2003, at the following redemption prices,
plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date: (i) 2003--104.063%; (ii) 2004--102.708%; (iii) 2005--101.354%;
and (iv) 2006 and thereafter--100%. In addition, on or prior to February 15,
2001, the Company may redeem up to 35% of the aggregate principal amount of the
Notes at a redemption price of 108.125% of the principal amount thereof, plus
accrued and unpaid interest and liquidated damages, if any, thereon to the
redemption date with the net proceeds of a public offering of common stock of
the Company; provided, that at least 65% of the aggregate principal amount of
the Notes originally issued remains outstanding immediately after the occurrence
of such redemption.
Upon the occurrence of a change of control, the Company will be
required to make an offer to repurchase all or any part of holder's Notes at a
repurchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, thereon to the repurchase date.
There can be no assurance that the Company will have the financial resources
necessary to purchase the Notes upon a change of control or that such repurchase
will be permitted under the Revolving Credit Facility.
The Indenture contains certain covenants that, among other things, will
limit the ability of the Company and its subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, make investments, dispose of assets, issue capital stock of
subsidiaries, create certain liens securing indebtedness, enter into certain
transactions with affiliates, sell assets or enter into certain mergers and
consolidations or sell all or substantially all of their assets.
OTHER NOTES
The Company has entered into various term loan agreements to finance
certain equipment and rotable parts on long-term lease which secure the loans.
These loans, in the original aggregate principal amount of $17.7 million, bear
interest ranging from 7.40% to 8.21% and are payable monthly through July 2003.
These term loans contain financial and other covenants and mandatory prepayment
events, as defined. At September 30, 1998, the Company was in compliance with
all covenants of these term loans.
In connection with its acquisition of Kratz-Wilde, AVS/Kratz-Wilde
Machine Company, a subsidiary of the Company, delivered a non-interest bearing
promissory note in the original principal amount of $2.2 million, which was
guaranteed by the Company, to the seller. At September 30, 1998, the Company was
in compliance with the terms of this promissory note.
In connection with its acquisition of Caribe and AIDI, on March 6, 1998
Aviation Sales Manufacturing & Repair Company, a subsidiary of the Company,
delivered a promissory note in the original principal amount of $5.0 million,
which was guaranteed by the Company, to the seller. The note is payable over a
two year period with interest at the rate of 8% per annum.
-16-
<PAGE>
CAPITAL EXPENDITURES
During the nine month periods ended September 30, 1997 and 1998, the
Company incurred capital expenditures of approximately $11.2 million and $11.5
million, respectively, primarily to renovate the maintenance facility operated
by Aero Corp- Lake City and to make enhancements to the Company's management
information systems, telecommunications systems and other capital equipment and
improvements. Several of the Company's current management information systems
are not Year 2000 compliant. The Company is currently implementing a new
management information system, which among other things, management believes
will allow the Company to continue to maintain its competitive advantage
resulting from the availability of information regarding its market and will
mitigate the Year 2000 issues currently inherent in the Company's existing
systems. The cost of the new MIS system is expected to be approximately $8.0
million, which will be incurred over approximately a two-year period. Financing
for the new system will be provided from operations and from borrowings under
the Revolving Credit Facility.
On October 12, 1998, the Company entered into a contractor agreement to
provide for the construction of a build-to-suit facility supporting
distribution, component overhaul and corporate headquarter activities. The
facility will be constructed in Miramar, Florida and will be leased to the
Company for an initial term of five (5) years.
As part of its growth strategy, the Company intends to continue to
pursue acquisitions of bulk inventories of aircraft spare parts and
complementary businesses. Financing for such activities would be provided from
operations and from borrowings under the Revolving Credit Facility. The Company
may also in the future issue additional debt and/or equity securities in
connection with financing one or more of its activities, although the Company
does not have any current plans to issue additional securities. The Company
believes that cash flow from operations and borrowing availability under the
Revolving Credit Facility will be sufficient to satisfy the Company's
anticipated working capital requirements over the next twelve months.
ENVIRONMENTAL
The Company is taking remedial action pursuant to Environmental
Protection Agency ("EPA") and Florida Department of Environmental Protection
("FDEP") regulations at 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 had been accrued at
September 30, 1997. Testing and evaluation for all known sites on Aero Corp-Lake
City's property 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, the Company'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's
facility that could also require remediation. The Company does not believe that
it is responsible for these areas; however, it may be asserted that Whitehall
and other parties are jointly and severally liable and are responsible for the
remediation of 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,
the Company does not believe that the compliance and remediation costs with
respect
-17-
<PAGE>
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.
IMPACT OF THE YEAR 2000
As described above, the Company is currently implementing a new
management information system to mitigate the Year 2000 issues currently
inherent in the Company's existing systems. The Company is also currently
assessing its information technology systems and its non information technology
systems to determine if it has other Year 2000 issues which need to be
addressed, and is currently addressing the issue of the impact on the Company of
Year 2000 issues of its customers and suppliers. The Company expects to be in a
position to report on those matters by December 31, 1998.
-18-
<PAGE>
PART II. OTHER INFORMATION
Item 1. LITIGATION
See Note 7 to the Company's Unaudited Condensed Consolidated
Financial Statements included in this filing.
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's 1998 Annual Meeting of Stockholders
on July 30, 1998, the stockholders of the Company voted upon
and elected the following directors and approved and adopted
the following proposals:
(A) To approve a transaction whereby the Company will
issue 2,844,079 shares of the Company's common stock in
exchange for all of the issued and outstanding shares of
Whitehall and will issue up to 257,150 shares of Company
common stock upon exercise of outstanding options to purchase
Whitehall common stock pursuant to the Agreement and Plan of
Merger, dated as of March 26, 1998, by and among the Company,
WHC Acquisition Corp., a wholly-owned subsidiary of the
Company, and Whitehall(6,940,573 votes were cast in favor of
this proposal, 3,486 were cast against this proposal and there
were 2,690 abstentions and broker non- votes).
(B) DIRECTOR NOMINEE VOTES CAST FOR VOTES AGAINST
---------------- -------------- --------------
Robert Alpert 7,556,066 24,881
--------------- --------------
Philip B. Schwartz 7,577,656 39,586
--------------- --------------
(C) To ratify the selection of Arthur Andersen LLP as
Company's independent auditors for the 1998 fiscal year.
(7,577,656 votes were cast in favor of this proposal, 1,601
votes were cast against this proposal and there were 1,690
abstentions and broker non-votes).
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
10.1
Stock Purchase Agreement dated August 20, 1998 by and among
Aviation Sales Maintenance, Repair & Overhaul Company, Primark
Corporation and Triad
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<PAGE>
International Maintenance Corporation.(Incorporated by
reference from the Company's Current Report on Form 8-K filed
October 7, 1998).
10.2 First Amendment to Stock Purchase Agreement dated September
22,1998. (Incorporated by reference from the Company's Current
Report on Form 8-K filed October 7, 1998).
10.3 Amendment No. 2 and Consent dated as of September 18, 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,
the Company, the Lenders, and Citicorp USA, Inc., as agent
(Incorporated by reference from the Company's Current Report
on Form 8-K filed November 7, 1998).
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
(i) Current Report on Form 8-K filed on August 14, 1998
(ii) Current Report on Form 8-K filed on August 27, 1998
-20-
<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: November 16, 1998
-21-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 15,693,126
<SECURITIES> 0
<RECEIVABLES> 112,532,541
<ALLOWANCES> 0
<INVENTORY> 235,197,438
<CURRENT-ASSETS> 373,511,126
<PP&E> 67,405,627
<DEPRECIATION> 21,399,548
<TOTAL-ASSETS> 551,753,556
<CURRENT-LIABILITIES> 217,182,580
<BONDS> 187,485,435
0
0
<COMMON> 12,436
<OTHER-SE> 144,732,311
<TOTAL-LIABILITY-AND-EQUITY> 551,753,556
<SALES> 338,777,553
<TOTAL-REVENUES> 338,777,553
<CGS> 251,827,546
<TOTAL-COSTS> 251,827,546
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,130,297
<INCOME-PRETAX> 28,795,496
<INCOME-TAX> 10,927,864
<INCOME-CONTINUING> 17,867,633
<DISCONTINUED> 0
<EXTRAORDINARY> 598,671
<CHANGES> 0
<NET-INCOME> 17,268,962
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.37
</TABLE>
