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, 1999
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 checkmark 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: 15,049,485 shares
of common stock, $.001 par value per share, were outstanding as of November 10,
1999.
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,536 $ 8,725
Accounts receivable, net 115,974 171,576
Inventories 277,131 343,912
Deferred income taxes 5,932 5,766
Other current assets 16,416 22,294
-------- --------
Total current assets 425,989 552,273
-------- --------
EQUIPMENT ON LEASE, net 28,354 24,509
-------- --------
FIXED ASSETS, net 69,744 85,861
-------- --------
AMOUNTS DUE FROM RELATED PARTIES 2,204 2,126
-------- --------
OTHER ASSETS:
Goodwill, net 56,936 65,523
Deferred financing costs, net 8,104 8,408
Other assets 8,046 20,953
-------- --------
Total other assets 73,086 94,884
-------- --------
Total assets $599,377 $759,653
======== ========
(Continued)
1
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Continued)
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 50,931 $ 45,780
Accrued expenses 26,317 24,621
Current maturities of notes payable 4,908 3,750
Current maturities of capital lease obligations 84 84
Revolving loan 174,007 250,631
-------- --------
Total current liabilities 256,247 324,866
-------- --------
LONG-TERM LIABILITIES:
Senior subordinated notes 164,163 164,231
Notes payable, net of current portion 18,881 945
Capital lease obligations, net of current portion 4,133 4,126
Deferred income 1,371 1,004
Other long-term liabilities 284 309
-------- --------
Total long-term liabilities 188,832 170,615
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares -- --
authorized, none outstanding
Common stock, $.001 par value, 30,000,000 shares
authorized, 12,515,809 and 15,015,317 shares
outstanding at December 31, 1998 and September 30,
1999, respectively 12 15
Additional paid-in capital 64,344 149,449
Retained earnings 89,942 114,708
-------- --------
Total stockholders' equity 154,298 264,172
-------- --------
Total liabilities and stockholders' equity $599,377 $759,653
======== ========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated balance sheets.
2
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- -------------------------
1998 1999 1998 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Sales of products, net $ 98,191 $ 86,004 $ 266,983 $ 296,985
Services and other 29,278 83,209 71,795 229,475
--------- --------- --------- ---------
127,469 169,213 338,778 526,460
COST OF SALES AND SERVICES 94,835 128,528 251,828 400,317
--------- --------- --------- ---------
GROSS PROFIT 32,634 40,685 86,950 126,143
OPERATING EXPENSES 14,902 20,542 45,362 61,680
--------- --------- --------- ---------
INCOME FROM OPERATIONS 17,732 20,143 41,588 64,463
INTEREST EXPENSE AND OTHER 5,397 8,496 14,130 25,607
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES, EQUITY INCOME OF
AFFILIATE AND EXTRAORDINARY ITEM 12,335 11,647 27,458 38,856
INCOME TAX EXPENSE 4,543 4,572 10,420 15,210
--------- --------- --------- ---------
INCOME BEFORE EQUITY INCOME OF AFFILIATE AND
EXTRAORDINARY ITEM 7,792 7,075 17,038 23,646
EQUITY INCOME OF AFFILIATE (129) (270) (830) (1,120)
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 7,921 7,345 17,868 24,766
EXTRAORDINARY ITEM, NET OF INCOME TAXES -- -- 599 --
--------- --------- --------- ---------
NET INCOME $ 7,921 $ 7,345 $ 17,269 $ 24,766
========= ========= ========= =========
BASIC EARNINGS PER SHARE:
Income before extraordinary item $ 0.64 $ 0.49 $ 1.45 $ 1.83
Extraordinary item, net of income taxes -- -- 0.05 --
--------- --------- --------- ---------
Net income $ 0.64 $ 0.49 $ 1.40 $ 1.83
========= ========= ========= =========
DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 0.63 $ 0.48 $ 1.42 $ 1.79
Extraordinary item, net of income taxes -- -- 0.05 --
--------- --------- --------- ---------
Net income $ 0.63 $ 0.48 $ 1.37 $ 1.79
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these condensed consolidated financial statements.
3
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-------------------------
1998 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,269 $ 24,766
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 7,524 12,300
Proceeds from sale of equipment on lease, net of gain -- (448)
Provision for doubtful accounts 897 1,714
Equity in earnings of affiliate, net of taxes (830) (1,120)
Extraordinary item, net of income taxes 599 --
Deferred income taxes 1,754 191
Decrease (increase) in accounts receivable 1,223 (57,316)
Increase in inventories (62,647) (66,486)
Increase in other current assets (805) (5,878)
Increase in other assets (4,712) (10,352)
Increase (decrease) in accounts payable 1,371 (5,151)
Decrease in accrued expenses (8,328) (1,696)
Increase (decrease) in deferred income 1,307 (367)
--------- ---------
Net cash used in operating activities (45,378) (109,843)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash acquired (75,569) (17,875)
Purchases of fixed assets (11,481) (20,883)
Purchases of equipment on lease (21,972) (9,087)
Payments from related parties 559 78
--------- ---------
Net cash used in investing activities (108,463) (47,767)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior debt facilities 146,674 426,592
Payments under senior debt facilities (150,694) (349,968)
Payments on equipment loans (569) (624)
Payments on notes payable -- (3,749)
Proceeds from issuance of senior subordinated notes 164,002 --
Proceeds from secondary public offering -- 79,890
Proceeds from equipment loan 10,484 --
Stock options exercised 479 5,218
Payments on capital leases (72) (130)
Payments of deferred financing costs (7,007) (1,430)
--------- ---------
Net cash provided by financing activities 163,297 155,799
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,456 (1,811)
CASH AND CASH EQUIVALENTS, beginning of period 6,237 10,536
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 15,693 $ 8,725
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 11,603 $ 26,394
========= =========
Income taxes paid $ 11,965 $ 16,186
========= =========
</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, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(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 Aviation Sales Company's (the "Company") December 31, 1998
financial statements and the notes thereto included in the Company's Form 10-K,
as amended, (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, 1999
and the results of its operations for the three and nine month periods ended
September 30, 1998 and 1999 and its cash flows for the nine month periods ended
September 30, 1998 and 1999. The results of operations and cash flows for the
nine month period ended September 30, 1999 are not necessarily indicative of the
results of operations or cash flows which may be reported for the year ending
December 31, 1999.
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 3 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.
COMPREHENSIVE INCOME
For all periods presented comprehensive income is equal to net income.
RECLASSIFICATIONS
Certain 1998 account balances have been reclassified to conform with
the 1999 presentation.
2. INVESTMENT IN AFFILIATES:
During 1994, Whitehall obtained a 40% ownership in a joint venture
involved in the development of aircraft-related technology for an initial
investment of $1. The Company accounts for its investment in the joint venture
under the equity method. In 1994, Whitehall loaned $2,000 to the joint venture,
which is evidenced by a promissory note which accrues interest at a maximum rate
of 5% per annum. Principal and accrued interest became due on January 5, 1999.
Management is evaluating the possibility of extending the note or converting the
note and accrued interest into a capital contribution. The note is secured by
certain assets of the joint venture.
In August 1999, the Company obtained a 50% interest in a limited
liability corporation that designs, manufactures and installs an FAA approved
conversion kit that converts certain Boeing 727 aircraft from passenger
configuration to freighter configuration. The initial investment was $2,500. The
Company accounts for the investment under the equity method.
5
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
3. BUSINESS COMBINATIONS:
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING:
In March 1998, the Company acquired Caribe Aviation, Inc. ("Caribe")
and Caribe's wholly owned subsidiary Aircraft Interior Design, Inc. ("AIDI") for
$23,300, consisting of $5,000 in cash; $5,000 in promissory notes payable over
two years; the issuance of 182,143 shares of the Company's common stock; and the
repayment of approximately $7,600 of indebtedness owed by Caribe and AIDI to a
financial institution.
In September 1998, the Company acquired Triad International Maintenance
Corporation ("TIMCO") for $63,300 in cash. Additionally, as a part of the
transaction, the Company agreed to guarantee certain industrial revenue bond
financing incurred in connection with the development of TIMCO's Greensboro
operating facilities, in the approximate amount of $11,700. The Company has
posted an irrevocable letter of credit to secure its obligations thereunder.
In August 1999, the Company completed the acquisition of the assets of
Kitty Hawk, Inc.'s airframe and JT8D engine maintenance operations located in
Oscoda, Michigan and entered into agreements to provide heavy airframe and
engine maintenance services to Kitty Hawk on its fleet of Boeing 727 airplanes
and JT8D engines for a three year period. Under the terms of the acquisition
agreement, the Company paid $17,875 in cash and will deliver $3,500 in purchase
credits to Kitty Hawk during future periods. The pre-acquisition operations of
Kitty Hawk, Inc.'s airframe and JT8D engine maintenance operations were not
material to the operations of the Company.
The Company's acquisitions of Caribe, AIDI, TIMCO and Kitty Hawk,
Inc.'s airframe and JT8D engine maintenance operations have been accounted for
under the purchase method of accounting and accordingly, the purchase price has
been allocated to the assets purchased and liabilities assumed based upon the
fair values at the date of acquisition, and their results of operations have
been included in the accompanying condensed consolidated financial statements
from their respective dates of acquisition.
The Company's unaudited pro forma condensed consolidated results of
operations for the three and nine months ended September 30, 1998 assuming the
Caribe, AIDI and TIMCO acquisitions had occurred on January 1, 1998 are as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, 1998 September 30, 1998
---------------------------- ----------------------------
<S> <C> <C>
Operating revenues $ 165,219 $ 452,944
Income before extraordinary item $ 8,799 $ 19,496
Net income $ 8,799 $ 18,897
Diluted earnings per share before extraordinary item $ 0.70 $ 1.49
</TABLE>
The preliminary purchase price allocations for business combinations
accounted for under the purchase method of accounting were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
September 30, 1998 September 30, 1999
--------------------- ---------------------
<S> <C> <C>
Accounts receivable...................................... $ 31,874 $ -
Inventories.............................................. 15,057 3,535
Other assets............................................. 1,399 1,000
Fixed assets............................................. 22,245 2,322
Goodwill................................................. 40,979 11,018
Accounts payable......................................... (8,843) -
Accrued expenses......................................... (16,424) -
Notes payable............................................ (5,000) -
Common stock issued...................................... (5,718) -
-------------------- ---------------------
Cash used in acquisitions, net of cash acquired.......... $ 75,569 $ 17,875
==================== =====================
</TABLE>
6
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
3. BUSINESS COMBINATIONS--(CONTINUED):
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING:
In July 1998, the Company acquired Whitehall for consideration of
2,844,079 shares of the Company's common stock. The acquisition was accounted
for using the pooling of interests method of accounting and thus, the
accompanying 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 for the nine months
ended September 30, 1998 of the Company and of Whitehall, which was acquired in
1998, for the period before the pooling of interests combination was
consummated:
Revenue:
The Company $ 292,908
Whitehall 45,870
------------
$ 338,778
============
Income before extraordinary item:
The Company $ 16,559
Whitehall 1,309
------------
$ 17,868
============
4. NOTES PAYABLE AND REVOLVING LOAN:
The Company has a revolving loan and letter of credit facility (the
"Credit Facility") of $300,000. Borrowings under the credit facility are secured
by a lien on substantially all of the Company's assets and the borrowing base
consists of substantially all of the Company's receivables and inventory.
Interest under the 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 September 30, 1999, the margin was
0.75% for prime rate loans and 2.25% for LIBOR rate loans.
The Credit Facility contains certain financial covenants regarding the
Company's financial performance 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 borrowing and repayment of
all debt in the event of a material adverse change in the business of the
Company 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 (see Note 6) or as a result of insufficient collateral
to meet the borrowing base requirements thereunder. At September 30, 1999, the
Company was in compliance with its financial covenants. At September 30, 1999,
$18,006 was available for borrowing under the Credit Facility and outstanding
letters of credit aggregated $23,591.
SENIOR SUBORDINATED NOTES
In February 1998, the Company sold $165,000 of senior subordinated
notes due in 2008 with a coupon rate of 8.125% at a price of 99.395% . The
proceeds of the sale were used to repay all amounts then outstanding under the
Company's Credit Facility and to fund the cash requirements related to the
acquisition of Caribe and AIDI. The Company wrote off deferred financing costs
of $981 in connection with the repayment of the term loan portion of the Credit
Facility, resulting in an extraordinary item, net of taxes, of $599.
7
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
4. NOTES PAYABLE AND REVOLVING LOAN--(CONTINUED):
The senior subordinated notes mature on February 15, 2008 and interest
is payable thereon on February 15 and August 15 of each year. The senior
subordinated notes are general unsecured obligations of the Company,
subordinated in right of payment to all existing and future senior debt,
including indebtedness outstanding under the Credit Facility and under
facilities which may replace the Credit Facility in the future. In addition, the
senior subordinated 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 senior subordinated notes have been
issued permits the Company and its subsidiaries to incur substantial additional
indebtedness, including additional senior debt. Under the indenture, the Company
may borrow unlimited additional amounts so long as after incurring such debt it
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,
1999, 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 it does not
meet the required fixed charge coverage ratios), up to enumerated limits. The
senior subordinated notes are also effectively subordinated in right of payment
to all existing and future liabilities of any of its subsidiaries which do not
guarantee the senior subordinated notes.
The senior subordinated notes are fully and 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.
Subsidiary guarantees are joint and several, full and unconditional, general
unsecured obligations of the 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 their obligations, including the Credit Facility.
Furthermore, the indenture permits subsidiary guarantors to incur additional
indebtedness, including senior debt, subject to certain limitations. The Company
has not presented separate financial statements and other disclosures concerning
each of the subsidiary guarantors because management has determined that such
information is not material to investors.
The senior subordinated notes are redeemable, at the Company's option,
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 senior subordinated 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 senior subordinated notes originally
issued remains outstanding immediately after the occurrence of this 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 each holder's senior
subordinated 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 senior subordinated notes
upon a change of control or that such repurchase will then be permitted under
the Credit Facility.
The indenture contains certain covenants that, among other things,
limit the Company's ability and that of 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 the Company's assets.
8
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
4. NOTES PAYABLE AND REVOLVING LOAN--(CONTINUED):
OTHER LOANS
The Company has a term loan agreement outstanding in the amount of
$1,245 to finance certain equipment and rotable parts on a long-term lease which
secures the loan. The loan bears interest at a rate of 8.21% and is payable
monthly through August 2002. The loan contains financial and other covenants and
mandatory prepayment events, as defined. At September 30, 1999, the Company was
in compliance with all covenants of the loan.
In connection with the Company's acquisition of Kratz-Wilde Machine
Company in October 1997, a subsidiary of the Company delivered a
non-interest-bearing promissory note (guaranteed by the Company) to the sellers
in the original principal amount of $2,200. A payment of $1,250 was made during
January 1999 and another payment of $1,250 is due January 1, 2000. Interest on
this note has been imputed at 8% per annum.
In connection with the acquisition of Caribe and AIDI, a subsidiary of
the Company delivered to the sellers a promissory note in the original principal
amount of $5,000, which was guaranteed by the Company. The note is payable over
a two year period with an interest rate of 8% per annum. The first payment of
$2,500 was made during March 1999 and the second payment of $2,500 is due on
March 6, 2000.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION AND CLAIMS
Several lawsuits have been filed against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of Florida. The plaintiffs in these lawsuits claim, on behalf of a
purported class of purchasers of the Company's common stock between June 11,
1999 and September 17, 1999, that the defendants violated Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, among other things, in allegedly making materially false and
misleading statements and omissions regarding the Company's position, the demand
for its services, its operations and its earnings. The Company expects that the
lawsuits will be consolidated by the court as they allege common facts and
claims, and that the Company will file a motion to dismiss these claims in the
consolidated lawsuit. The Company believes the allegations contained in the
complaints to be without merit and will vigorously defend these and any related
actions. Nevertheless, unfavorable resolution of these lawsuits could have a
material adverse effect on the Company in one or more future periods.
On January 8, 1999, Paine Webber Incorporated filed in the Supreme
Court of the State of New York a complaint against the Company and its
subsidiary, Whitehall, alleging breach of contract claims and related claims
against the Company and Whitehall and a tortious interference with a contract
claim against the Company. Paine Webber alleges that it is due a fee in
connection with the Company's acquisition of TIMCO, based upon a 1997 agreement
between Whitehall and Paine Webber relating to a then proposed acquisition of
TIMCO by Whitehall which did not occur. Paine Webber is seeking approximately
$1,000, plus costs and an unstated amount of punitive damages. Paine Webber is
also seeking approximately $250 allegedly due relating to the failure of
Whitehall to honor an alleged right of first refusal provision in the 1997
agreement. The Company believes that its acquisition of TIMCO was not within the
scope of the 1997 Paine Webber/Whitehall agreement and that claims brought under
this agreement against the Company and Whitehall are without merit. The Company
is vigorously defending these claims. Although the Company can give no
assurance, based upon the available facts, the Company believes that the
ultimate outcome of this matter will not have a material adverse effect upon its
financial condition.
On June 24, 1998, Zantop International Airlines, Inc. filed an action
against Aero Corp.-Macon, Inc. (which is now part of TIMCO) in the Superior
Court of Bibb County, Georgia. The suit seeks an unspecified amount of damages
and certain equitable relief arising out of the July 1997 sale to Aero
Corp.-Macon, Inc. (then a subsidiary of Whitehall) of certain assets used in
connection with the operation of Aero Corp.-Macon, Inc. The nature of the action
involves a contractual dispute relative to certain purchase price adjustments
and inventory purchases. The Company is vigorously defending this action.
Although the Company can give no assurance, based upon the available facts, the
Company believes that the ultimate outcome of this matter will not have a
material adverse effect upon its financial condition.
9
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED):
The Company is also involved in various lawsuits and other
contingencies arising out of operations in the normal course of business. In the
opinion of management, the ultimate resolution of these claims and lawsuits will
not have a material adverse effect upon the financial position of the Company.
ENVIRONMENTAL MATTERS
The Company is taking remedial action pursuant to Environmental
Protection Agency and Florida Department of Environmental Protection ("FDEP")
regulations at TIMCO-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 $2,400. Testing and evaluation for all known sites on
TIMCO-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. Subsequently, 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. To comply with the financial assurances
required by the FDEP, the Company has issued a $1,700 standby letter of credit
in favor of the FDEP.
Additionally, there are other areas adjacent to TIMCO-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 TIMCO and
other parties are jointly and severally liable and are responsible for the
remediation of these properties. No estimate of any such costs is available at
this time.
In connection with the sale of Whitehall's electronics business,
Whitehall was required to perform, at its own expense, an environmental site
assessment at the electronics business' 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. The buyer of this business, subject to the terms and
conditions set forth in the agreement, recently exercised its option of
requiring Whitehall to repurchase this property for $300.
Accrued expenses in the accompanying September 30, 1999 condensed
consolidated balance sheet includes $2,586 related to obligations to remediate
the environmental matters described above.
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
estimates, given the inherent uncertainties in evaluating environmental
exposures. These uncertainties include the extent of required remediation based
on future testing and evaluation and the varying costs and effectiveness of
remediation methods.
LEASE FOR NEW FACILITY
On December 17, 1998, the Company entered into an operating lease for a
new corporate headquarters and warehouse facility with First Security Bank,
National Association, as trustee of a newly created trust, as lessor. The lease
has an initial term of five years and is a triple net lease with annual rent as
provided in the lease. The lease contains financial covenants regarding the
Company's financial performance and other affirmative and negative covenants.
Substantially all of the Company's subsidiaries have guaranteed the Company's
obligations under the lease. Additionally, the Company has an option to acquire
the new facility at the end of the lease for an option price determined in the
lease. Alternatively, if it does not purchase the new facility at the end of the
lease, it will be obligated to pay certain amounts as provided in the lease.
The development of the new facility has been financed by the trust
through a $35,500 loan facility provided by a financial institution. Pursuant to
the agreements entered into in connection with this financing, the Company is
obligated to develop the new facility on behalf of the trust and is responsible
for the timely completion thereof within an established construction budget. The
Company and substantially all of its subsidiaries have guaranteed the repayment
of $31,200 of the trust's obligations under the loan agreement. The trust's
obligations under these agreements are secured by a lien on the real property
and improvements comprising the new facility and on the fixtures therein.
Further, the Company has posted an irrevocable letter of credit in favor of the
trust in the amount of approximately $8,000 to secure both its obligations under
the lease and the trust's obligations under the loan agreement.
10
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
6. EQUITY OFFERING:
On June 16, 1999 the Company closed a public offering of 2,000,000
shares of common stock and on June 24, 1999 the Company's underwriters exercised
their option to purchase an additional 300,000 shares of common stock. The net
proceeds of the offering, $79,890, were used to repay amounts outstanding under
the Credit Facility. The Company also filed a separate registration statement
with respect to the public offering of $85.0 million of the Company's senior
subordinated notes due 2008, but has not sold any of these new notes to date.
The Company intends to continually assess market conditions and may complete the
offering of the notes if the Company determines market conditions are
appropriate. No assurances can be given as to when or if the Company will
complete the offering of its notes.
7. 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 FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ -----------------------------
1998 1999 1998 1999
---------------- --------------- ------------ ------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding used in
calculating basic earnings per share........................ 12,435,340 15,013,143 12,366,958 13,531,628
Effect of dilutive options.................................. 224,870 254,437 268,215 340,442
---------------- --------------- ------------ ------------
Weighted average common and common equivalent shares
outstanding used in calculating diluted earnings per
share..... 12,660,210 15,267,580 12,635,173 13,872,070
================ =============== ============ ============
Options outstanding which are not included in the
calculation of diluted earnings per share because their
impact is antidilutive......................... 119,143 218,257 55,072 38,350
================ =============== ============ ============
</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.
8. SUBSEQUENT EVENTS:
On November 2, 1999 the Company declared a dividend distribution of one
Preferred Share Purchase Right (a "Right") on each outstanding share of its
Common Stock. Each Right will entitle shareholders to buy one one-thousandth of
a share of newly created Series A Junior Participating Preferred Stock of the
Company at an initial exercise price of $90.00. In general, the Rights become
exercisable if a person or group hereafter acquires 15% or more of the Common
Stock of the Company or announces a tender offer for 15% or more of the Common
Stock. The Board of Directors will in general be entitled to redeem the Rights
at one cent per Right at any time before any such person hereafter acquires 15%
or more of the outstanding Common Stock.
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<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, WHICH ARE INTENDED TO BE COVERED BY
THE SAFE HARBOUR CONTAINED IN SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, 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, AS
AMENDED, FOR THE YEAR ENDED DECEMBER 31, 1998, 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.
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, 1998.
RECENT DEVELOPMENTS
On June 16, 1999 the Company closed a public offering of 2,000,000
shares of Common Stock and on June 24, 1999 the Company's underwriters exercised
their option to purchase an additional 300,000 shares of Common Stock. The net
proceeds of the offering, $79.9 million, were used to repay amounts outstanding
under the Credit Facility. The Company also filed a separate registration
statement with respect to the public offering of $85.0 million of the Company's
senior subordinated notes due 2008, but has not to date sold any of these new
notes. The Company intends to continually assess market conditions and may
complete the offering of the notes when the Company determines market conditions
are appropriate. No assurances can be given as to when or if the Company will
complete the offering of its notes.
In August 1999, the Company completed the acquisition of the assets of
Kitty Hawk, Inc.'s airframe and JT8D engine maintenance operations located in
Oscoda, Michigan and entered into three year agreements to provide heavy
airframe and engine maintenance services to Kitty Hawk on its fleet of Boeing
727 airplanes and JT8D engines. Under the terms of the acquisition agreement,
the Company paid $17.9 million in cash and will deliver $3.5 million in purchase
credits to Kitty Hawk during future periods.
During the third quarter of 1999, the Company commenced operations at
three new MR&O facilities located in Winston-Salem, N.C., Minneapolis, MN. and
Dallas, TX. The Company also added two additional hangers to its MR&O facility
in Greensboro, N.C. Additionally, during the quarter, the Company opened a
distribution facility in Amsterdam and continues to develop a manufacturing
facility in Mexico.
On November 2, 1999 the Company declared a dividend distribution of one
Preferred Share Purchase Right (a "Right") on each outstanding share of its
Common Stock. Each Right will entitle shareholders to buy one one-thousandth of
a share of newly created Series A Junior Participating Preferred Stock of the
Company at an initial exercise price of $90.00. In general, the Rights become
exercisable if a person or group hereafter acquires 15% or more of the Common
Stock of the Company or announces a tender offer for 15% or more of the Common
Stock. The Board of Directors will in general be entitled to redeem the Rights
at one cent per Right at any time before any such person hereafter acquires 15%
or more of the outstanding Common Stock.
RESULTS OF OPERATIONS
Operating revenues consist primarily of sales of products and service
revenues, net of allowances for returns. Cost of sales and services consists
primarily of product costs, labor, freight charges, commission to outside sales
representatives and an inventory provision for damaged and obsolete products.
Product costs consist of the acquisition cost of the products and any costs
associated with repairs, overhaul or certification.
The Company's operating results are affected by many factors, including
the timing of orders from large customers, the timing of expenditures to
purchase inventory in anticipation of future sales, the timing of bulk inventory
purchases, the number of airline customers seeking maintenance, repair and
overhaul ("MR&O") services at any time, the Company's ability to fully utilize
its available hangar space dedicated to MR&O operations from period to period,
the number of mechanics available to perform services at the Company's MR&O
facilities, the timeliness of customer aircraft in arriving for scheduled
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<PAGE>
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 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, 1999
increased $187.7 million or 55.4% to $526.5 million, from $338.8 million for the
same period in 1998. Operating revenues for the three months ended September 30,
1999 increased $41.7 million or 32.7% to $169.2 million, from $127.5 million for
the same period in 1998. A significant portion of the increase in revenues for
the 1999 three and nine month periods are attributable to the full period
contribution of TIMCO, which was acquired in September 1998, and to increased
revenue in the Company's distribution and heavy airframe maintenance operations
during the three and nine month periods, offset in part by revenue reductions at
the Company's manufacturing and repair and overhaul operations.
Gross profit increased $39.2 million or 45.1% to $126.2 million for the
nine months ended September 30, 1999, compared with $87.0 million for the nine
months ended September 30, 1998. Gross profit margin for the nine months ended
September 30, 1999 decreased to 24.0%, from 25.7% for the same period in 1998.
Gross profit increased $8.1 million or 24.7% to $40.7 million for the 1999 third
quarter, compared with $32.6 million for the 1998 third quarter. Gross profit
margin for the three months ended September 30, 1999 decreased to 24.0%, from
25.6% for the same period in 1998. Gross profit margins in 1999 were lower than
the comparable periods in 1998 primarily due to a higher percentage of sales
derived from the Company's MR&O operations, which generally operate at lower
gross profit margins than the Company's other operations.
The Company's operating expenses increased $16.3 million to $61.7
million for the nine months ended September 30, 1999, compared with $45.4
million for the same period in 1998, and increased $5.6 million to $20.5 million
for the three months ended September 30, 1999, compared with $14.9 million for
the same period in 1998. Operating expenses as a percentage of operating
revenues were 11.7% for the nine months ended September 30, 1999, compared to
13.4% for the comparative period in 1998. The improvement in operating leverage
is primarily due to a higher percentage of the Company's sales being derived
from the Company's MR&O operations, which generally operate at lower operating
expense levels than the Company's other operations. Operating expenses as a
percentage of revenues for the three months ended September 30, 1999 were 12.1%,
compared to 11.7% for the comparable period in 1998. The increase was primarily
due to start up costs associated with the newly opened facilities described
above and the write-off of one-time professional fees of approximately $500,000
incurred in connection with two merger transactions which were not completed.
Interest expense and other for the nine months ended September 30, 1999
increased by $11.5 million from period to period, due to an increase in interest
rates coupled with increased net borrowings during 1998 and 1999 to finance the
acquisitions of Caribe, AIDI and TIMCO, Kitty Hawk's airframe and JT8D engine
facilities, inventory acquisitions (including costs relating to five A-300
aircraft owned by the Company, four of which are held in inventory for sale or
lease and one of which is on lease) and equipment held for lease. During 1999,
the Company significantly expanded its inventory of jet engines and engine parts
in connection with an intended expansion of its engine parts distribution
operation. The Company believes that current inventory levels are now sufficient
to support its current business objectives over the next year without a
significant increase in inventory.
As a result of the above factors, income before equity income of
affiliate and extraordinary item for the nine months ended September 30, 1999
was $23.6 million, an increase of 38.8% over 1998 income before equity income of
affiliate and extraordinary item of $17.0 million.
Equity income of affiliate, net of income taxes, increased $0.3 million
for the nine months ended September 30, 1999 to $1.1 million, from $0.8 million
for the same period in 1998. The increase was due to increased sales of aircraft
noise reduction kits.
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 $0.6 million ($.05 per diluted share).
After accounting for income taxes and the extraordinary item, net
income for the nine months ended September 30, 1999 was $24.8 million ($1.79 per
diluted share) compared to net income of $17.3 million ($1.37 per diluted share)
for the nine months ended September 30, 1998. Weighted average common and common
equivalent shares outstanding (diluted) were 13.9 million during the nine months
ended September 30, 1999, compared to 12.6 million for the nine months ended
September 30, 1998.
After accounting for income taxes and the extraordinary item, net
income for the three months ended September 30, 1999 was $7.3 million ($0.48 per
diluted share) compared to net income of $7.9 million ($0.63 per diluted share)
for the three months ended September 30, 1998. Weighted average common and
common equivalent shares outstanding (diluted) were 15.3 million during the
three months ended September 30, 1999, compared to 12.7 million for the three
months ended September 30, 1998.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH
Net cash used in operating activities during the nine months ended
September 30, 1998 and 1999 was $45.4 million and $109.8 million, respectively.
The increase was primarily the result of increased receivable levels resulting
from increased operating revenues, increased deposits and other assets primarily
attributable to the Company's $2.5 million investment in a limited liability
corporation that designs, manufactures and installs kits to convert Boeing 727
aircraft from passanger to freighter configuration and an approximately $3.0
million deposit relating to a new MR&O facility, increased other current assets
of approximately $5.9 million, primarily relating to vendor deposits, and
increased inventory levels of approximately $66.5 million primarily relating to
costs associated with the A-300 aircraft owned by the Company and to efforts to
grow the Company's inventory of jet engines and engine parts to support
anticipated growth over the next year. Consistent with expectations expressed in
its June 30, 1999 Form 10-Q, the Company's inventory level at September 30, 1999
decreased slightly from the level at June 30, 1999. Increased uses of cash were
partially offset by positive growth in net income from period over period.
Accounts receivable at September 30, 1999 included several large accounts which
were expected to have been collected in the third quarter, but were actually
collected in early October.
Cash used in investing activities during the nine months ended
September 30, 1998 and 1999 was $108.5 million and $47.8 million, respectively.
This was primarily the result of a decrease in the volume and size of
acquisitions consumated period over period and a decrease in the level of
purchases of equipment on lease. These decreases were partially offset by
increased spending in support of the implementation of new MIS systems. During
the nine months ended September 30, 1998 and 1999, the Company financed its
operating and investing activities primarily with its cash flow from financing
activities, amounting to $163.3 million and $155.8 million, respectively.
CREDIT FACILITY
On September 18, 1998, the Company entered into a Four Year Senior
Secured Revolving Credit Facility (the "Credit Facility") which provided the
Company with a $200.0 million revolving line of credit, including a $30.0
million letter of credit sublimit, with the imposition of certain borrowing
criteria based on the satisfaction of certain debt ratios. The eligible
borrowing base includes certain receivables and inventories of the Company. 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).
In November 1998 and May 1999, the Credit Facility was further amended
to increase the revolving loan and letter of credit facility to $250.0 and
$300.0 million, respectively. At November 10, 1999, the margin was 0.75% for
prime rate loans and 2.25% for LIBOR rate loans and $257.7 million was
outstanding under the Credit Facility.
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. At September 30, 1999, the Company
was in compliance with all covenants of the 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%. The Notes mature on February 15, 2008.
Interest is payable on February 15 and August 15 of each year. 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 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, 1999, 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 the 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,
14
<PAGE>
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 (as described above) 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 a term loan agreement in the amount of $1.3 million to
finance certain equipment and rotable parts on a long-term lease which secures
the loan. The loan bears interest at a rate of 8.21% and is payable monthly
through August 2002. The loan contains financial and other covenants and
mandatory prepayment events, as defined. At September 30, 1999, the Company was
in compliance with all covenants of the loan.
In connection with the acquisition of Kratz-Wilde, a subsidiary of the
Company delivered a non-interest-bearing promissory note (guaranteed by the
Company) to the sellers in the original principal amount of $2.2 million. A
payment of $1.25 million was made during January 1999 and another payment of
$1.25 million is due January 1, 2000. Interest on this note has been imputed at
8% per annum.
In connection with the acquisition of Caribe and AIDI, a subsidiary of
the Company delivered to the sellers a promissory note in the original principal
amount of $5.0 million, which was guaranteed by the Company. The note is payable
over a two year period with an interest rate of 8% per annum. The first payment
of $2.5 million was made during March 1999 and the second payment is due on
March 6, 2000.
CAPITAL EXPENDITURES
During the nine month periods ended September 30, 1998 and 1999, the
Company incurred capital expenditures of approximately $11.5 million and $20.9
million, respectively, primarily to renovate existing MR&O facilities, expand
manufacturing facilities, open new facilities and to make enhancements to the
Company's management information systems. The Company expects to incur capital
expenditures of approximately $27.4 million for 1999.
LEASE FOR NEW FACILITY
In 1998, the Company decided to move to a new corporate headquarters
and warehouse facility. On December 17, 1998, the Company entered into an
operating lease for a new corporate headquarters and warehouse facility with
First Security Bank, National Association, as trustee of a newly created trust,
as lessor. The lease has an initial term of five years and is a triple net
lease. The lease contains financial covenants regarding the Company's financial
performance and other affirmative and negative covenants. Substantially all of
the Company's subsidiaries have guaranteed the Company's obligations under the
lease. Additionally, the Company has an option to acquire the new facility at
the end of the lease and if it does not purchase the new facility at the end of
the lease, it will be obligated to pay a fee. The Company expects to move into
its new headquarters and warehouse facility in April 2000.
The lessor has financed the development of the new facility through a
$35.5 million loan from a financial institution. The Company is obligated to
develop the new facility on behalf of the lessor and is responsible for the
timely completion of the facility within an established construction budget. The
Company and substantially all of its subsidiaries have guaranteed the repayment
of $31.2 million of the lessor's obligations under its loan agreement. The
lessor's obligations under the agreement are secured by a lien on the real
property and on the new facility. Further, the Company has posted an irrevocable
letter of credit in favor of the lessor in the amount of approximately $8.0
million to secure both the Company's obligations under the lease and the
lessor's obligations under the loan agreement.
LIQUIDITY
As part of its growth strategy, the Company intends to continue to
pursue growth through internal expansion as well as acquisitions of other
businesses. The Company believes that its available capital resources, assuming
that as described above the Company is able to continue to meet its current
business objectives over the next year without a substantial increase in its
inventory, will be sufficient to satisfy the Company's working capital
requirements for its existing businesses, including internal growth, over the
next 12 months. The Company expects in the future to obtain additional capital
either through the sale of debt securities or through increases in its available
lines of credit. However, the Company's failure to obtain such additional
capital may constrain the Company's ability to continue to grow through
acquisition or to grow internally over the next year beyond anticipated
levels if the Company's assumptions with respect to the capital required for its
internal growth turn out not to be accurate.
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<PAGE>
ENVIRONMENTAL
Except as described below, the Company believes that its properties are
in compliance in all material respects with applicable environmental laws.
Unidentified environmental liabilities could arise, however, and could
materially affect the Company's business, financial condition, or results of
operations. Federal, state and local laws and regulations relating to the
protection of the environment may require a current or previous owner or
operator of real estate to investigate and clean up hazardous or toxic
substances or petroleum product releases on a property. The owner or operator
may have to pay a governmental entity or third parties for property damage and
for investigation and clean-up costs incurred by these parties in connection
with the contamination. These laws typically impose clean-up responsibility and
liability without regard to whether the owner or operator knew of or caused the
presence of the contaminants. Even if more than one person may have been
responsible for the contamination, each person covered by applicable
environmental laws may be held responsible for all of the clean-up costs
incurred. In addition, third parties may sue the owner or operator of a site for
damages and costs resulting from environmental contamination emanating from that
site.
Due to the presence of soil and groundwater contamination at the
Company's facility in Lake City, Florida, the Company is taking remedial action
pursuant to regulations of Environmental Protection Agency ("EPA") and Florida
Department of Environmental Protection ("FDEP") and a post-closure permit issued
by FDEP. The Company is in the process of renewing the FDEP post-closure permit,
and recently filed a renewal application. The Company expects the renewal
application to be approved and does not expect FDEP, in connection with its
review, to impose additional remediation obligations.
The Company has substantially completed testing and evaluation for all
known sites on its property in Lake City, and has commenced a remediation
program. 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. This
amount is based on current testing, technology, environmental law and clean-up
experience to date. The Company will continue to monitor the remediation which
will extend into the future. To comply with the financial assurances required by
the FDEP, the Company has issued a $1.7 million standby letter of credit in
favor of the FDEP.
Additionally, there are other areas adjacent to the Timco-Lake City
facility that could also require remediation. While the Company does not believe
that it is responsible for these areas, it may be asserted that TIMCO and other
parties are jointly and severally liable and are responsible for the remediation
of these properties. The Company has no estimate of any such potential costs at
this time.
In connection with the sale of Whitehall's electronics business,
Whitehall was required to perform, at its own expense, an environmental site
assessment at the electronics business' facility. Whitehall was also required to
remedy all recognized environmental conditions identified in the assessment to
bring the facility into compliance with all applicable federal, state and local
environmental laws. The buyer of this business, subject to the terms and
conditions set forth in the agreement, recently exercised its option to require
Whitehall to repurchase this property for $300,000.
The Company has reserves of $2.6 million towards potential obligations
to remediate the environmental matters described above.
Future information and developments will require the Company to
continually reassess the expected impact of the environmental matters discussed
above. Other than as described above, the Company is not aware of any
environmental condition which the Company believes would have a material adverse
effect on its condition or results of operations. Nevertheless, it is possible
that there are environmental liabilities of which the Company is unaware.
Moreover, no assurances can be given that (i) future laws, ordinances or
regulations will not impose any material environmental liability or (ii) the
current environmental condition of the Company's properties have not been or
will not be affected by tenants and occupants of the properties, by the
condition of properties in the vicinity of the properties or by unrelated third
parties. As a result, actual costs incurred in future periods may vary from the
estimate, given the inherent uncertainties in evaluating environmental
exposures. The uncertainties include the extent to required remediation based on
testing and evaluation not yet completed and the varying costs and effectiveness
of remediation methods.
IMPACT OF THE YEAR 2000
Since the fourth quarter of 1997, the Company has been implementing new
management information systems ("MIS") in order to both meet the Company's needs
into the foreseeable future and to mitigate the Year 2000 issues inherent in its
existing systems.
The Year 2000 issue is the potential for system and processing failures
of date-related data and the result of computer-controlled systems using two
digits rather than four to define the applicable year. The Company may be
affected by Year 2000 issues in its non-
16
<PAGE>
compliant information technology ("IT") systems or non-IT systems, as well as by
Year 2000 issues related to non-compliant IT and non-IT systems operated by
third parties.
STATE OF READINESS
The Company has substantially completed an assessment of internal and
external (third-party) IT systems and non-IT systems. The Company's IT systems
consist of software licensed from third parties and hardware purchased or leased
from third parties. At this point in the assessment, which the Company believes
is approximately 95% complete (in the aggregate), other than as described
herein, the Company is not currently aware of any Year 2000 problems relating to
systems or the systems operated by third parties which would materially
adversely affect the Company's business, results of operations or financial
condition, without taking into account efforts to avoid such problems, although
there can be no assurances of this fact. In addition, the Company believes the
Year 2000 remediation and validation are approximately 95% and 92% complete (in
the aggregate), respectively.
The Company is in the process of implementing a new MIS system in its
distribution operation. The new system is not expected to be implemented until
sometime in 2000. In order to continue its operation, during the third quarter
of 1999 the Company remediated the current MIS system being used by its
redistribution operation, and such system is now Year 2000 compliant.
The Company has also substantially remediated the MIS systems used by
its manufacturing operations and by its maintenance and repair operations, and
such systems are now Year 2000 compliant.
The Company has substantially completed an assessment of the Year 2000
issues of the non-IT systems which have been identified as containing embedded
chip systems. The Company is not currently aware of any Year 2000 problems
relating to these systems which would materially adversely affect the Company's
business, results of operations, or financial condition, without taking into
account efforts to avoid these problems.
The Company is reviewing the efforts of vendors and customers to become
Year 2000 compliant. Letters and questionnaires have been or are in the process
of being sent to all critical entities with which the Company does business to
assess their Year 2000 readiness. To date, the Company has received responses
from approximately 70% of these third parties, and approximately 72% of the
companies that have responded have assured the Company that they have already
addressed, or that they will address on a timely basis, all of their known
significant Year 2000 issues. Although this review is continuing, the Company is
not currently aware of any vendor or customer circumstances that may materially
adversely impact the Company. The Company will seek alternate suppliers if
circumstances warrant. The Company cannot make assurances that Year 2000
compliance plans of vendors and customers will be completed on a timely manner.
A substantial majority of the aircraft spare parts in inventory do not
have date-sensitive technologies and, as a result, do not pose Year 2000
compliance issues. For the small portion of aircraft spare parts inventory that
may pose Year 2000 compliance issues, the Company has contacted vendors to
assess the Year 2000 compliance of those parts. The Company believes that issues
relating to the Year 2000 compliance of aircraft spare parts in inventory, if
any, will ultimately be the responsibility of the manufacturers of such parts,
although no assurances can be made of this fact. Further, it is unclear whether
the Company's product liability insurance would ultimately cover a claim based
upon a Year 2000 problem in a part sold.
COSTS
The Company believes that costs associated with the new MIS system to
be implemented in its redistribution operations will be approximately $13.5
million, of which approximately $8.6 million has been spent to date and
approximately $4.9 million will be expended during 2000. The Company spent $1.0
million to remediate the current MIS systems used in its redistribution
operation. Such amount will not be recoverable in connection with the
implementation of the Company's new MIS system to be used in its redistribution
operation. The Company also spent $2.1 million to develop a new MIS system for
its manufacturing operations. The Company is funding the costs of new MIS
systems from borrowings under the Credit Facility. The $10.7 million in the
aggregate spent to date on new MIS systems has related substantially to the cost
of new systems and not to bringing existing MIS systems into Year 2000
compliance. Such estimates include both hardware and software costs, as well as
the anticipated costs of the use of consultant services, but do not include
internal costs associated with such efforts, which are not separately tracked
for Year 2000 compliance efforts. Such internal costs principally consist of the
payroll costs for employees working on such compliance efforts.
17
<PAGE>
RISKS RELATING TO FAILURE TO BECOME YEAR 2000 COMPLIANT
The Company's failure to bring existing systems into Year 2000
compliance by the end of 1999 would likely materially adversely affect the
Company, in that it would make it very difficult to conduct business in the
ordinary course and would likely cause loss of revenues, increased operating
costs and business interruptions of a material nature (which would likely not be
covered by existing business interruption insurance) until the systems were
fixed. In addition, no assurances can be made that the Year 2000 issues of other
entities will not materially adversely impact the systems or results of
operations.
CONTINGENCY PLANS
The Company has recently completed a contingency plan with respect to
how it will handle Year 2000 problems in its MIS systems if they occur. The
Company's contingency plan focuses on customers, products, supplies and internal
operations. Each sector is establishing emergency operations centers at key
locations. These centers will be staffed ahead of the Year 2000 rollover and
well into the Year 2000. During critical times, the Company intends to staff
these operations 24-hours a day. Each of the Company's operations have
identified key individuals in a variety of functions to be on-site at the
Company's facilities to monitor the rollover to the Year 2000.
The Company's contingency plans also include procedures to maintain and
recover business operations, such as stockpiling critical supplies, identifying
alternate supply sources, inspecting critical functions, reporting operational
status, communicating with interdependent operations, and operating in
contingency mode until a return to normal.
18
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 5 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
No matters were submitted to the Company's shareholders during the
third quarter of 1999.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
4 Rights Agreement, dated November 1, 1999*
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
(i) The Company filed on September 23, 1999 a Current
Report on Form 8-K containing a press release
commenting on the Company's expected third quarter
and fiscal year 1999 results of operations.
----------------------------
* Incorporated by reference from Exhibit 1 to the
Form 8-A filed by the Company on November 15, 1999.
19
<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
Dated: November 15, 1999
BY: /S/ GARLAN BRAITHWAITE
--------------------------
Garlan Braithwaite, Vice President-Finance
(Principal Accounting Officer)
20
<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 June 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,725
<SECURITIES> 0
<RECEIVABLES> 171,576
<ALLOWANCES> 0
<INVENTORY> 343,912
<CURRENT-ASSETS> 552,273
<PP&E> 85,861
<DEPRECIATION> 0
<TOTAL-ASSETS> 759,653
<CURRENT-LIABILITIES> 324,866
<BONDS> 164,231
0
0
<COMMON> 15
<OTHER-SE> 264,157
<TOTAL-LIABILITY-AND-EQUITY> 759,653
<SALES> 526,460
<TOTAL-REVENUES> 526,460
<CGS> 400,317
<TOTAL-COSTS> 400,317
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,607
<INCOME-PRETAX> 38,856
<INCOME-TAX> 15,210
<INCOME-CONTINUING> 23,646
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,766
<EPS-BASIC> 1.83
<EPS-DILUTED> 1.79
</TABLE>
