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 MARCH 31, 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: 9,593,560 shares of
common stock, $.001 par value per share, were outstanding as of March 31, 1998.
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
--------------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $4,985,751 $5,074,019
Accounts receivable, net.......................................... 66,545,155 76,209,381
Inventories....................................................... 139,313,722 179,850,077
Prepaid expenses.................................................. 3,111,728 3,418,913
Deferred income taxes............................................. 2,004,148 2,454,148
--------------------- ------------------
Total current assets.................................... 215,960,504 267,006,538
--------------------- ------------------
SPARE PARTS ON LEASE, net............................................. 22,758,149 16,823,403
FIXED ASSETS
Property and equipment............................................ 25,502,943 33,274,233
Less - Accumulated depreciation................................... (5,008,668) (5,809,024)
--------------------- ------------------
Total fixed assets...................................... 20,494,275 27,465,209
AMOUNTS DUE FROM RELATED PARTIES...................................... 2,891,343 2,354,153
--------------------- ------------------
OTHER ASSETS
Goodwill.......................................................... 17,712,145 27,051,995
Deposits and other................................................ 1,009,369 1,414,261
Deferred income taxes............................................. 1,485,380 1,243,580
Deferred financing costs, net..................................... 2,675,684 6,180,248
--------------------- ------------------
Total other assets...................................... 22,882,578 35,890,084
--------------------- ------------------
Total assets............................................ $284,986,849 $349,539,387
===================== ==================
</TABLE>
(Continued)
- 2 -
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Continued)
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
--------------------- -----------------
(Unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................. $18,136,462 $21,209,327
Accrued expenses.................................................. 16,362,777 15,774,618
Notes payable, current maturities
Senior........................................................ 12,258,391 555,396
Revolver...................................................... 86,413,959 25,238,424
Other......................................................... - 3,500,000
--------------------- -----------------
Total current liabilities............................... 133,171,589 66,277,765
--------------------- -----------------
LONG-TERM LIABILITIES
Deferred income................................................... 962,063 1,240,147
Notes Payable -
Senior........................................................ 50,412,550 6,340,795
Other......................................................... 2,200,000 3,700,000
Bonds payable, net................................................ - 164,014,228
--------------------- -----------------
Total long-term liabilities............................. 53,574,613 175,295,170
--------------------- -----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding.................................. - -
Common stock, $.001 par value, 30,000,000 shares
authorized, 9,399,932 and 9,593,560 shares
outstanding at December 31, 1997 and March 31,
1998, respectively............................................ 9,400 9,594
Additional paid-in capital........................................ 70,660,457 76,635,371
Retained earnings................................................. 27,570,790 31,321,487
--------------------- -----------------
Total stockholders' equity.............................. 98,240,647 107,966,452
--------------------- -----------------
Total liabilities and stockholders' equity............. $284,986,849 $349,539,387
===================== =================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated balance sheets.
- 3 -
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------------
1997 1998
------------- --------------
<S> <C> <C>
OPERATING REVENUES
Sales of aircraft parts, net................................ $52,476,263 $80,329,623
Rentals from leases and other............................... 2,376,639 2,126,480
------------- --------------
54,852,902 82,456,103
COST OF SALES................................................... 39,749,192 57,860,554
------------- --------------
15,103,710 24,595,549
------------- --------------
OPERATING EXPENSES
Operating................................................... 3,405,776 3,305,454
Selling..................................................... 1,941,325 2,734,140
General and administrative.................................. 2,995,444 6,752,868
Depreciation and amortization............................... 673,936 1,111,319
------------- --------------
9,016,481 13,903,781
------------- --------------
INCOME FROM OPERATIONS.......................................... 6,087,229 10,691,768
OTHER EXPENSES
Interest expense and amortization
of deferred financing costs............................. 1,072,221 3,630,049
------------- --------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM...................................... 5,015,008 7,061,719
INCOME TAX EXPENSE.............................................. 1,966,830 2,712,351
------------- --------------
INCOME BEFORE EXTRAORDINARY ITEM................................ 3,048,178 4,349,368
EXTRAORDINARY ITEM, NET OF
INCOME TAXES (Note 3)....................................... - 598,671
------------- --------------
NET INCOME...................................................... $3,048,178 $3,750,697
============= ==============
BASIC EARNINGS PER SHARE:
Income before extraordinary item............................ $0.32 $0.46
Extraordinary item, net of income taxes..................... - 0.06
------------- --------------
Net income.................................................. $0.32 $0.40
============= ==============
DILUTED EARNINGS PER SHARE:
Income before extraordinary item............................ $0.32 $0.45
Extraordinary item, net of income taxes..................... - 0.06
------------- --------------
Net income.................................................. $0.32 $0.39
============= ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 4 -
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------------------
1997 1998
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................................. $ 3,048,178 $ 3,750,697
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization...................................... 882,583 1,695,019
Extraordinary item, net of income taxes............................ - 598,671
Gain on sale of spare parts on lease, net of proceeds.............. 2,158,162 -
Provision for doubtful accounts.................................... 285,000 390,000
Increase in accounts receivable.................................... (6,937,167) (5,914,090)
Increase in inventory.............................................. (8,426,633) (31,412,002)
(Increase) decrease in prepaid expenses............................ 1,675,621 (307,185)
Increase in deferred income taxes.................................. (155,595) (208,200)
Increase in deposits and other..................................... (466,415) (298,941)
Increase in accounts payable...................................... (5,949,618) (278,772)
Increase (decrease) in accrued expenses............................ 4,272,355 (205,402)
Increase in deferred revenue....................................... - 278,084
---------------- ------------------
Net cash (used in) operating activities....................... (9,613,529) (31,912,121)
---------------- ------------------
CASH FLOW FROM INVESTING ACTIVITIES
Cash used in acquisitions................................................... (341,595) (12,564,442)
Purchases of equipment...................................................... (712,735) (4,104,948)
Transfer of spare parts on lease to inventory............................... - 7,506,528
Purchase of spare parts on lease............................................ (1,098,226) (2,020,618)
Payments from related parties............................................... 79,335 537,190
---------------- ------------------
Net cash used in investing activities ........................ (2,073,221) (10,646,290)
---------------- ------------------
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (payments) under senior revolving facility................... 13,321,711 (61,175,535)
(Payments) under term and acquisition loan facilities....................... (1,857,143) (55,642,857)
Payment on equipment loan................................................... - (131,893)
Proceeds from issuance of senior subordinated notes......................... - 164,001,750
Stock options exercised..................................................... - 256,387
Payment of deferred financing costs......................................... (80,244) (4,661,173)
---------------- ------------------
Net cash provided by financing activities..................... 11,384,324 42,646,679
---------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............................ (302,426) 88,268
---------------- ------------------
CASH AND CASH EQUIVALENTS, beginning of period.................................. 1,262,149 4,985,751
---------------- ------------------
CASH AND CASH EQUIVALENTS, end of period........................................ $959,723 $ 5,074,019
================ ==================
Interest paid............................................................... $ 822,033 $ 2,560,308
================ ==================
Income taxes paid........................................................... $ 425,230 $ 4,798,530
================ ==================
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
- 5 -
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION:
Interim Condensed Consolidated Financial Statements
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and
regulations, certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying unaudited interim
condensed consolidated financial statements should be read in conjunction with
the Company's December 31, 1997 financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997 (File No. 1-11775).
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements of Aviation Sales Company (the "Company")
contain all adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company as of March
31,1998 and the results of its operations and cash flows for the three month
periods ended March 31, 1998 and 1997. The results of operations and cash flows
for the three month period ended March 31, 1998 are not necessarily indicative
of the results of operations or cash flows which may be reported for the year
ending December 31, 1998.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"), is effective for fiscal years ending after December 15, 1997. This
statement specifies the computation, presentation and disclosure requirements
for earnings per share for entities with publicly held common stock or potential
common stock. Earnings per share have been restated to comply with SFAS 128 for
all periods presented.
The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), during the quarter ended March
31, 1998. SFAS 130 was issued by the Financial Accounting Standards Board in
June 1997 and establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
The objective of SFAS 130 is to report a measure (comprehensive income) of all
changes in equity of an enterprise that result from transactions and other
economic events in a period other than transactions with owners. The adoption of
SFAS 130 did not
- 6 -
<PAGE>
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.
2. ACQUISITIONS:
On March 26, 1998, the Company entered into a definitive agreement with
Whitehall Corporation ("Whitehall"), pursuant to which the two companies agreed
to merge. Under the terms of the agreement, at the effective date of the merger,
the shareholders of Whitehall will receive 0.5143 shares of the Company's common
stock for each share of Whitehall stock outstanding on such date. Based on the
approximately 6.0 million Whitehall shares outstanding as of March 31, 1998, the
Company will issue approximately 3.1 million shares of the Company's common
stock to Whitehall's stockholders in the merger transaction. Based upon the
closing price of the Company's common stock on March 25, 1998, the value of the
transaction is approximately $142 million, which includes the assumption of
approximately $9.4 million of Whitehall's outstanding indebtedness. The
transaction, which will be accounted for as a pooling of interest, is expected
to close during the third quarter of 1998. Whitehall had revenues of
approximately $65.8 million for the fiscal year ended December 31, 1997. During
the quarter ended March 31, 1998, the Company incurred merger expenses of
approximately $.7 million relating to the Whitehall transaction, which are
included in general and administrative expenses in the accompanying condensed
consolidated statement of income for such period.
On March 9, 1998 the Company completed the acquisition of Caribe Aviation, Inc.
("Caribe") and Caribe's wholly-owned subsidiary Aircraft Interior Design, Inc.
("AIDI"). The purchase price paid by the Company to acquire Caribe and AIDI was
approximately $23.3 million, consisting of: (i) $5.0 million in cash, (ii) $5.0
million in promissory notes payable over two years, (iii) the issuance of
182,143 shares of the Company's authorized, but unissued, common stock, and (iv)
the repayment of approximately $7.5 million of indebtedness owed by Caribe and
AIDI to a financial institution. The acquisition has been accounted for using
the purchase method of accounting and accordingly, the purchase price has been
allocated to the assets purchased and the liabilities assumed based upon the
fair market value at the date of acquisition. The excess of the purchase price
over the fair values of the net assets acquired is approximately $9.6 million.
This amount has been recorded as goodwill and will be amortized on a
straight-line basis over 20 years. The operations of Caribe and AIDI have been
included in the accompanying condensed consolidated financial statements from
the date of acquisition. Caribe and AIDI contributed approximately $2.2 million
to the Company's first quarter 1998 operating revenues. Caribe and AIDI had
consolidated revenues of approximately $27 million for the fiscal year ended
December 31, 1997. The pre-acquisition operations of Caribe and AIDI were not
material to the operations of the Company.
On December 31, 1997, the Company acquired Apex Manufacturing, Inc. ("Apex") for
consideration of 238,572 shares of the Company's common stock. The acquisition
was accounted for using the pooling of interests method of accounting and,
accordingly, the accompanying condensed consolidated financial statements have
been restated to include the accounts of Apex.
- 7 -
<PAGE>
On October 17, 1997 the Company completed the acquisition of substantially all
of the assets of the business of Kratz-Wilde Machine Company, a Kentucky
corporation ("Kratz-Wilde") for a purchase price, including acquisition costs
and net cash acquired, of approximately $39.6 million in cash and notes and the
assumption of certain liabilities of Kratz-Wilde in the approximate amount of
$2.2 million. The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price has been allocated to the assets
purchased and the liabilities assumed based upon the fair values at the date of
acquisition. The operations of Kratz-Wilde since the acquisition have been
included in the accompanying condensed consolidated financial statements from
the date of acquisition. Kratz-Wilde contributed approximately $10.5 million to
the Company's first quarter 1998 operating revenues. In connection with the
acquisition, the Company borrowed $40,000,000 of senior notes payable to
financial institutions, with the remainder of the acquisition price payable to
the prior owners over a two-year period (see Note 3).
The Company's unaudited pro forma consolidated results of operations assuming
the Kratz-Wilde acquisition had occurred on January 1, 1997 are as follows:
THREE MONTHS
ENDED MARCH 31,
1997
----
(in thousands, except earnings per share)
Revenue................................................ $ 65,142
Income before extraordinary item(a).................... 4,112
Diluted earnings per share before extraordinary
item(a)................................................ $ .43
- ------------------------------------------------
(a) Includes an adjustment to record pro forma income tax expense as if
Kratz-Wilde had been a C corporation since January 1, 1997 and adjustments to
record goodwill amortization and incremental interest, depreciation and
salaries as if the acquisition had occurred on January 1, 1997.
On September 30, 1997, the Company acquired Aerocell Structures, Inc.
("Aerocell") for consideration of 620,970 shares of the Company's common stock.
The acquisition was accounted for using the pooling of interests method of
accounting and, accordingly, the accompanying condensed consolidated financial
statements have been restated to include the accounts of Aerocell.
[INTENTIONALLY LEFT BLANK]
- 8 -
<PAGE>
The preliminary purchase price allocations for business combinations accounted
for under the purchase method of accounting (including historical accounts of
immaterial acquisitions accounted for under the pooling of interests method of
accounting) were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Accounts receivable.............................. $ 1,820,751 $ 4,140,136
Inventories...................................... 1,922,774 9,124,353
Prepaid expenses................................. 10,168 -
Deposits and other............................... 4,576 115,951
Fixed assets..................................... 4,089,883 3,666,777
Goodwill......................................... - 9,587,583
Accounts payable................................. (1,063,497) (3,351,637)
Accrued expenses................................. (824,437) -
Deferred income taxes............................ (557,270) -
Notes payable.................................... (3,445,825) ( 5,000,000)
Common stock issued.............................. (1,615,528) (5,718,721)
--------------- ---------------
Cash used in acquisitions........................ $ 341,595 $ 12,564,442
================== ===============
</TABLE>
3. NOTES PAYABLE:
On October 17, 1997, the Company amended its banking agreement pursuant to the
terms of a Third Amended and Restated Credit Agreement (the "Third Amended
Credit Agreement"). Pursuant to the Third Amended Credit Agreement, the Company
obtained a credit facility consisting of (a) a term loan facility in a principal
amount of $18.6 million, and (b) a $131.4 million revolving loan, letter of
credit and acquisition loan facility (the "Third Amended Revolving Credit
Facility"), subject to an availability calculation based on the eligible
borrowing base (collectively, the Credit Facility"). The eligible borrowing base
includes certain receivables and inventories of the Company. The letter of
credit portion of the Third Amended Revolving Credit Facility is subject to a
$15 million sublimit and the acquisition loan portion of the Third Amended
Revolving Credit Facility was subject to a $40 million sublimit, with the
imposition of certain borrowing criteria based on the satisfaction of certain
debt ratios. The acquisition loan portion of the Third Amended Revolving Credit
Facility was converted into a term loan in October 1997 in connection with the
acquisition of Kratz-Wilde. The interest rate on the Third Amended Credit
Agreement is, at the option of the Company, (a) prime plus a margin, or (b)
LIBOR plus a margin, where the margin determination is made based upon the
Company's financial performance over the 12 month period (ranging from 0.0% to
1.25% in the event prime is utilized, or 1.50% to 2.75% in the event LIBOR is
utilized). At March 31, 1998, the margin was .25% for prime rate loans and 1.75%
for LIBOR rate loans.
- 9 -
<PAGE>
In connection with the Company's February 1998 sale of $165.0 million in senior
subordinated notes, the Company repaid in full and terminated the term loan and
acquisition loan portions of the Credit Facility, and repaid in full the then
current balance of the Third Amended Revolving Credit Facility. The Third
Amended Revolving Credit Facility presently allows the Company to borrow up to
$91.4 million and terminates on July 31, 2002. The Third Amended Credit
Agreement contains financial and other covenants and mandatory prepayment
events, as defined. At March 31, 1998, the Company was in compliance with all
covenants of the Third Amended Credit Agreement. The Third Amended Credit
Agreement is secured by a lien on substantially all of the assets of the
Company. On March 31, 1998, the outstanding balance under the Third Amended
Revolving Credit Facility was approximately $25.2 million.
In February 1998, in connection with the repayment of the term and acquisition
portions of the Credit Facility, the Company wrote off $981,428 of deferred
financing costs resulting in an extraordinary item, net of income taxes, of
$598,671.
On February 17, 1998 the Company completed the offering and sale of $165 million
in senior subordinated notes (the "Notes") due in 2008 with a coupon rate of
8.125% at a price of 99.395%. Proceeds were used (as described above) to repay
all amounts then outstanding under the Company's term, acquisition and revolving
credit facilities and to fund the cash requirements related to the acquisition
of Caribe and AIDI. The Notes are unconditionally guaranteed, on a senior
subordinated basis, by substantially all of the Company's existing subsidiaries.
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 Company's March 9, 1998 acquisition of Caribe and AIDI
(see Note 2), the Company entered into an agreement with the prior owners to pay
$5 million of the acquisition price over a two year period. Principal payments
of $2,500,000 plus interest accrued at 8%, are due on March 9, 1999 and March 9,
2000.
In connection with the October 17, 1997 acquisition of Kratz-Wilde (see Note 2),
the Company entered into an agreement with the prior owners to pay $2.2 million
of the acquisition price over a two year period. Payments of $1,250,000 are due
on January 1, 1999 and January 1, 2000. Interest on this note has been imputed
at 8%.
On August 5, 1997, the Company entered into a term loan agreement in a principal
amount of $7.2 million to finance certain equipment and rotable parts on long
term lease which secure the loan. This loan is payable in 59 consecutive equal
monthly payments of $91,750 commencing September 14, 1997, with a final balloon
payment due on August 14, 2002. Interest on this term loan is fixed at 8.21%.
The Company has leased the underlying equipment and rotable parts to unrelated
third parties. Interim payments under the term loan will be made from the
proceeds of these parts leases. This term loan contains financial and other
covenants and mandatory prepayment events, as defined. At March 31, 1998, the
Company was in compliance with all covenants of this term loan.
On March 13, 1998, the Company entered into an agreement to purchase its
Pearland, Texas warehouse facility from a related party. The total purchase
price of approximately $1.8 million was paid in cash and through the reduction
of amounts receivable from the related party at the date of the transaction.
- 10 -
<PAGE>
4. EARNINGS PER SHARE:
The computation of weighted average common and common equivalent shares used in
the calculation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
---------
1997 1998
---- ----
<S> <C> <C>
Weighted average shares outstanding used in
calculating basic earnings per share.............. 9,422,042 9,448,944
Effect of dilutive options........................ 41,925 143,876
----------- ----------
Weighted average common and common
equivalent shares used in calculating diluted
earnings per share................................ 9,463,967 9,592,820
========= =========
Options and warrants outstanding which are
not included in the calculation of diluted
earnings per share because their impact is
antidilutive...................................... 166,400 19,500
========== ===========
</TABLE>
- -----------------------------------------
For business combinations accounted for as a pooling of interests, earnings per
share computations are based on the aggregate of the weighted-average
outstanding shares of the surviving business for all periods presented.
- 11 -
<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
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 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 on pages 14 through 21 of the
Company's Annual Report on Form 10-K for the year ended December 31, 1997. This
discussion contains forward looking information which involves risks and
uncertainties and is based upon information currently available to the Company.
Actual results could differ from those described herein and future results may
be subject to numerous factors, many of which are beyond the control of the
Company.
RESULTS OF OPERATIONS
First quarter operating revenues rose 50.3% to $82.5 million, compared
with $54.9 million for the same period last year. On March 9, 1998 the Company
acquired Caribe and its wholly-owned subsidiary, AIDI. The operations of Caribe
and AIDI since the acquisition have been included in the accompanying condensed
consolidated financial statements from the date of acquisition. As a result of
the Caribe and AIDI acquisition, the Company's operating revenues increased
approximately $2.2 million from the date of the acquisition through March 31,
1998. Kratz-Wilde, which was acquired during the fourth quarter of 1997 and
accounted for using the purchase method of accounting, generated approximately
$10.5 million in revenue during the first quarter of 1998. Operating revenues
also increased due to increased customer penetration, increased sales due to the
Company's investment in and availability of increased amounts of inventory and
the continued expansion of inventory management services being offered to and
utilized by the Company's customers.
Gross profit increased 62.8% to $24.6 million for the quarter ended
March 31, 1998, compared with $15.1 million for the same period last year. Gross
profit margin increased to 29.8% for the first quarter of 1998, from 27.5% for
the first quarter of 1997. The increase in gross profit margin compared to 1997
was due primarily to a slightly different mix of products and services delivered
from period to period and remains in line with the 29.8% gross profit margin
reported for the fourth quarter of 1997.
The Company's operating expenses increased 54.2% to $13.9 million in the
first quarter of 1998, compared with $9.0 million in the first quarter of 1997,
due to higher sales levels resulting in higher selling and operating expenses.
Operating expenses as a percentage of operating revenues increased to 16.9% in
the first quarter of 1998 from 16.4% in the corresponding period of 1997 due, in
large measure, to the approximately $.7 million in legal and professional fees
incurred during the period in connection with the Company's contemplated
- 12 -
<PAGE>
acquisition of Whitehall. Without these expenses, operating expenses as a
percentage of operating revenues for the first quarter of 1998 would have been
16.0%.
Interest expense and amortization of deferred financing costs increased by
$2.6 million from period to period due to net borrowings of $142.3 million
during the last nine months of 1997 and the first three months of 1998 to
finance the acquisitions of Kratz-Wilde and Caribe, inventory acquisitions and
spare parts and engines held for lease.
As a result of the above factors, income before income taxes and
extraordinary item increased $2.1 million, or 40.8%, from $5.0 million in the
first quarter of 1997 to $7.1 million in the first quarter of 1998.
In connection with the repayment of the term and acquisition portions of
the Credit Facility utilizing the proceeds of the Company's Senior Subordinated
Notes due 2008, the Company wrote off, during the first quarter of 1998,
$981,428 of deferred financing costs resulting in an extraordinary item, net of
income taxes, of $598,671.
After accounting for income taxes and the extraordinary item, net income
for the three months ended March 31, 1998 was $3.8 million ($0.39 per diluted
share) compared to net income of $3.0 million ($0.32 per diluted share) for the
three months ended March 31, 1997. Weighted average common and common equivalent
shares outstanding (diluted) were 9.59 million during the three months ended
March 31, 1998, compared with 9.46 million for the three months ended March 31,
1997.
LIQUIDITY AND FINANCIAL RESOURCES
Cash used in operations during the three months ended March 31, 1997 and
1998 was $9.6 million and $31.9 million, respectively. Cash used in investing
activities during the three month periods ended March 31, 1997 and 1998 was $2.1
million and $10.6 million, respectively. During the three month periods ended
March 31, 1997 and 1998, the Company financed its operating and investing
activities primarily with its cash flow from financing activities, amounting to
$11.4 million and $42.6 million, respectively.
The Company and its subsidiaries have entered into the Credit Facility
with certain financial institutions. At present, the Credit Facility consists of
a $91.4 million revolving loan and letter of credit facility, subject to an
availability calculation based on the eligible borrowing base (the "Revolving
Credit Facility"). The eligible borrowing base includes certain receivables and
inventories of the Company. The letter of credit portion of the Revolving Credit
Facility is subject to a $15.0 million sublimit, with the imposition of certain
borrowing criteria based on the satisfaction of certain debt ratios. The
interest rate on the Credit Facility is, at the option of the Company, (a) prime
plus a margin, or (b) LIBOR plus a margin, where the margin determination is
made based upon The Company's financial performance over a 12 month period
(ranging from 0.0% to 1.25% in the event prime is utilized, or 1.50% to 2.75% in
the event LIBOR is utilized). At March 31, 1998, the margin was .25% for prime
rate loans and 1.75% for LIBOR rate loans.
The Credit Facility contains certain financial covenants regarding the
financial performance of the Company and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the suspension of the Credit Facility and
repayment of all debt in the event of a material adverse change in the business
or a change in control. In addition, the Credit Facility requires mandatory
repayments from the proceeds of a sale of assets or an issuance of equity or
debt securities or as a result of insufficient collateral to meet the borrowing
base requirements thereunder. Substantially all of the Company's assets are
pledged as collateral for amounts borrowed. The Revolving Credit Facility will
terminate
- 13 -
<PAGE>
on July 31, 2002. At March 31, 1998, the Company was in compliance with all
covenants of the Credit Facility and $25.2 million was outstanding under the
Credit Facility.
On February 17, 1998, the Company sold $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 amounts then outstanding under the Credit
Facility and to fund the cash requirements relating to the acquisition of Caribe
and AIDI.
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. The indenture pursuant to which
the Notes have been issued (the "Indenture") permits the Company and its
subsidiaries to incur additional indebtedness, including Senior Debt, subject to
certain limitations. 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, 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 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.
- 14 -
<PAGE>
Pursuant to a registration rights agreement, the Company has agreed to (a)
file a registration statement on or prior to April 3, 1998 with respect to an
offer to exchange the Notes for a new issue of debt securities of the Company
registered under the Securities Act of 1933, as amended, with terms
substantially identical to those of the Notes (the "Exchange Offer"), which
registration statement was filed on March 26, 1998, and (b) use their best
efforts to cause the registration statement to be declared effective by the
Securities and Exchange Commission on or prior to June 17, 1998. The Company has
also agreed to file a shelf registration statement relating to the resale of the
Notes under certain circumstances. If the Company fails to satisfy these
registration obligations, it will be required to pay liquidated damages to
holders of Notes under certain circumstances.
On August 5, 1997, a subsidiary of the Company, Aviation Sales SPS I,
Inc., entered into a term loan agreement in a principal amount of $7.2 million
which was guaranteed by the Company, to finance certain equipment and rotable
parts on long-term lease, which secure the loan. This loan is payable in 59
consecutive equal monthly payments of $91,750 commencing September 14, 1997,
with a final balloon payment due on August 14, 2002. Interest on this term loan
is fixed at 8.21%. The Company has leased the underlying equipment and rotable
parts to unrelated third parties. Interim payments under the term loan will be
made from the proceeds of these parts leases. This term loan contains financial
and other covenants and mandatory prepayment events, as defined. At March 31,
1998, the Company was in compliance with all covenants of this term loan.
In connection with its acquisition of Kratz-Wilde Machine Company,
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 note was guaranteed by the Company, to the seller. At March 31,
1998, the Company was in compliance with the terms of this promissory note.
In connection with its acquisition of Caribe, on March 6, 1998, Aviation
Sales Manufacturing & Repair Company, a subsidiary of the Company, delivered a
promissory note in the original principal amount of $5.0 million, which note 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.
During the three month period ended March 31, 1998, the Company incurred
capital expenditures of approximately $4.1 million, primarily to make
enhancements to the Company's management information systems, telecommunication
systems and other capital equipment and improvements. The Company's current
management information statement is not Year 2000 compliant. The Company is
currently implementing a new management information system, which among other
things, will allow the Company to continue to maintain its competitive advantage
resulting from the availability of information regarding its market and will
mitigate any 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 Credit Facility.
As part of its growth strategy, the Company intends to continue to pursue
acquisitions of bulk inventories of aircraft spare parts and complementary
businesses. Additionally, the Company is actively considering the prospect of
consolidating its various facilities into a single warehouse facility. Financing
for such activities would be provided from operations and from borrowings under
the Credit Facility. The Company may also in the future issue additional debt
and/or equity securities in connection with financing one or more of its
activities. The Company believes that cash flow from operations and borrowing
availability under the Credit Facility will be sufficient to satisfy the
Company's anticipated working capital requirements over the next twelve months.
- 15 -
<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
- 16 -
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 6, 1998, the Company issued to Benito Quevedo and
Damaris Quevedo a total of 182,143 shares of the Company's
common stock as part of the purchase price for the Company's
acquisition of all of the issued and outstanding shares of
Caribe and its wholly-owned subsidiary AIDI. Benito and Damaris
Quevedo, the stockholders of Caribe, received the shares of the
Company's common stock pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933,
as amended.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
4.1 Indenture, dated February 17, 1998, among Aviation Sales
Company, certain of its subsidiaries and SunTrust Bank Central
Florida, National Association, Trustee (incorporated by
reference from the Company's Registration Statement on Form S-4,
dated March 26, 1998, File No. 333-48669).
10.1 Agreement and Plan of Merger dated as of March 26, 1998 by and
among Aviation Sales Company, WHC Acquisition Corp. and
Whitehall Corporation (incorporated by reference to the
Company's Registration Statement on Form S-4 filed April 30,
1998, File No. 333-31479).
10.2 Merger Agreement by and between Aviation Sales Company, The
Company/CAI Merger Corp., Caribe Aviation, Inc., ("Caribe"),
Aircraft Interior Design, Inc. and the shareholders of Caribe,
dated as of February 12, 1998 (incorporated by reference from
the Company's Current Report on Form 8-K filed March 18, 1998).
- 17 -
<PAGE>
10.3 Registration Rights Agreement, dated as of February 17, 1998,
among Aviation Sales Company, certain of its subsidiaries and
Salomon Brothers, Inc., BT Alex. Brown Incorporated and Citicorp
Securities (incorporated by reference from the Company's
Registration Statement on Form S-4, dated March 26, 1998, File
No. 333-48669).
27 Financial Data Schedule
REPORTS ON FORM 8-K
(i) Company's Current Report on Form 8-K filed January 13, 1998.
(ii) Company's Current Report on Form 8-K filed March 5, 1998.
(iii) Company's Current Report on Form 8-K filed March 18, 1998.
- 18 -
<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 DATE
----
By: /S/ JOSEPH E. CIVILETTO May 15, 1998
--------------------------------------
Joseph E. Civiletto, Vice President
and Chief Financial Officer (Authorized
Officer and Principal Financial Officer)
- 19 -
<PAGE>
EXHIBIT INDEX
EXHIBIT PAGE
- ------- ----
27 Financial Data Schedule 21
<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 MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,074,019
<SECURITIES> 0
<RECEIVABLES> 76,209,381
<ALLOWANCES> 3,763,756
<INVENTORY> 179,850,077
<CURRENT-ASSETS> 267,006,538
<PP&E> 33,274,233
<DEPRECIATION> 5,809,024
<TOTAL-ASSETS> 349,539,387
<CURRENT-LIABILITIES> 66,277,765
<BONDS> 174,055,023
0
0
<COMMON> 9,594
<OTHER-SE> 107,956,858
<TOTAL-LIABILITY-AND-EQUITY> 349,539,387
<SALES> 80,329,623
<TOTAL-REVENUES> 82,456,103
<CGS> 57,860,554
<TOTAL-COSTS> 57,860,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,630,049
<INCOME-PRETAX> 7,061,719
<INCOME-TAX> 2,712,351
<INCOME-CONTINUING> 4,349,368
<DISCONTINUED> 0
<EXTRAORDINARY> 598,671
<CHANGES> 0
<NET-INCOME> 3,750,697
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.39
</TABLE>
