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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO 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
MIAMI, FLORIDA 33122
(Address of principal executive offices) (Zip Code)
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: 12,640,391 shares
of common stock, $.001 par value per share, were outstanding as of May 7, 1999.
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,536 $ 1,303
Accounts receivable, net 115,974 150,947
Inventories 277,131 306,392
Deferred income taxes 5,932 5,717
Other current assets 16,416 18,265
-------- --------
Total current assets 425,989 482,624
-------- --------
EQUIPMENT ON LEASE, net 28,354 22,681
-------- --------
FIXED ASSETS, net 69,744 71,596
-------- --------
AMOUNTS DUE FROM RELATED PARTIES 2,204 2,180
-------- --------
OTHER ASSETS:
Goodwill, net 56,936 56,197
Deferred financing costs, net 8,104 7,734
Other assets 8,046 13,292
-------- --------
Total other assets 73,086 77,223
-------- --------
Total assets $599,377 $656,304
======== ========
(Continued)
1
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Continued)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
(Unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 50,931 $ 58,682
Accrued expenses 26,317 27,914
Current maturities of notes payable 4,908 4,898
Current maturities of capital lease obligations 84 84
Revolving loan 174,007 215,171
-------- --------
Total current liabilities 256,247 306,749
-------- --------
LONG-TERM LIABILITIES:
Senior subordinated notes 164,163 164,185
Notes payable, net of current portion 18,881 14,799
Capital lease obligations, net of current portion 4,133 4,094
Deferred income 1,371 1,203
Other long-term liabilities 284 291
-------- --------
Total long-term liabilities 188,832 184,572
-------- --------
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 12,622,422 shares
outstanding at December 31, 1998 and March 31,
1999, respectively 12 13
Additional paid-in capital 64,344 67,110
Retained earnings 89,942 97,860
-------- --------
Total stockholders' equity 154,298 164,983
-------- --------
Total liabilities and stockholders' equity $599,377 $656,304
======== ========
</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 SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1999
---------- ----------
<S> <C> <C>
OPERATING REVENUES:
Sales of products, net $ 80,281 $ 109,319
Services and other 21,893 68,639
--------- ---------
102,174 177,958
COST OF SALES AND SERVICES 76,900 136,803
--------- ---------
GROSS PROFIT 25,274 41,155
OPERATING EXPENSES 14,838 20,236
--------- ---------
INCOME FROM OPERATIONS 10,436 20,919
INTEREST EXPENSE 3,941 8,431
OTHER (INCOME) EXPENSE 7 258
--------- ---------
INCOME BEFORE INCOME TAXES, EQUITY INCOME OF
AFFILIATE AND EXTRAORDINARY ITEM 6,488 12,230
INCOME TAX EXPENSE 2,486 4,770
--------- ---------
INCOME BEFORE EQUITY INCOME OF AFFILIATE AND
EXTRAORDINARY ITEM 4,002 7,460
EQUITY INCOME OF AFFILIATE (345) (457)
--------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 4,347 7,917
EXTRAORDINARY ITEM, NET OF INCOME TAXES 599 --
--------- ---------
NET INCOME $ 3,748 $ 7,917
========= =========
BASIC EARNINGS PER SHARE:
Income before extraordinary item $ 0.35 $ 0.63
Extraordinary item, net of income taxes 0.05 --
========= =========
Net income $ 0.30 $ 0.63
========= =========
DILUTED EARNINGS PER SHARE:
Income before extraordinary item $ 0.35 $ 0.61
Extraordinary item, net of income taxes 0.05 --
========= =========
Net income $ 0.30 $ 0.61
========= =========
</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 THREE MONTHS ENDED
MARCH 31,
1998 1999
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,748 $ 7,917
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 2,163 3,481
Proceeds from sale of equipment on lease, net of gain -- 2,339
Provision for doubtful accounts 390 530
Equity in earnings of affiliate, net of taxes (345) (457)
Extraordinary item, net of income taxes 599 --
Deferred income taxes (208) 222
Increase in accounts receivable (6,737) (35,502)
Increase in inventories (31,725) (24,154)
Increase in other current assets (247) (1,849)
Increase in other assets (517) (4,408)
Increase (decrease) in accounts payable (664) 7,751
Increase (decrease) in accrued expenses (205) 1,596
Increase (decrease) in deferred income 278 (167)
Decrease in other liabilities (30) --
--------- ---------
Net cash used in operating activities (33,500) (42,701)
--------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash acquired (12,564) --
Purchases of fixed assets (4,443) (4,007)
Purchases of equipment on lease (2,020) (2,348)
Payments from related parties 537 24
--------- ---------
Net cash used in investing activities (18,490) (6,331)
--------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings under senior debt facilities 76,772 125,421
Payments under senior debt facilities (191,774) (87,987)
Payment on equipment loans -- (343)
Proceeds from issuance of senior subordinated notes 164,002 --
Proceeds from equipment loan 7,375 --
Stock options exercised 256 2,768
Payments on capital leases -- (60)
Payments of deferred financing costs (4,661) --
--------- ---------
Net cash provided by financing activities 51,970 39,799
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (20) (9,233)
--------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 6,237 10,536
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 6,217 $ 1,303
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 2,961 $ 10,773
========= =========
Income taxes paid $ 4,799 $ 4,884
========= =========
</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
MARCH 31, 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
(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 March 31, 1999 and
the results of its operations and cash flows for the three month periods ended
March 31, 1998 and 1999. The results of operations and cash flows for the three
month period ended March 31, 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("ACSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use". SOP 98-1 establishes criteria for determining
which costs of developing or obtaining internal use computer software should be
charged to expense and which should be capitalized. The Company adopted SOP 98-1
prospectively on January 1, 1999. The adoption of SOP 98-1 did not have a
material effect on the Company's financial position or results of operations.
In April 1998, the ACSEC issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities". SOP 98-5 establishes standards for the reporting and
disclosure of start-up costs, including organization costs. The Company adopted
SOP 98-5 effective on January 1, 1999. The adoption of SOP 98-5 did not have a
material effect on the Company's financial position or results of operations.
5
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
2. JOINT VENTURE:
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.
3. AQUISITIONS:
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING
In March 1998, the Company completed the acquisition of 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 completed the acquisition of 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 and the Company has posted an irrevocable letter of credit to
secure its obligations thereunder.
The Company's acquisitions of Caribe, AIDI and TIMCO 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 the date of acquisition.
The Company's unaudited pro forma condensed consolidated results of
operations for the three months ended March 31, 1998 assuming the Caribe, AIDI
and TIMCO acquisitions had occurred on January 1, 1998 are as follows:
Revenue $ 142,724
Income before extraordinary item $ 4,836
Net income $ 4,237
Diluted earnings per share before extraordinary item $ 0.33
The preliminary purchase price allocations during the three months
ended March 31, 1998 for business combinations accounted for under the purchase
method of accounting were as follows:
Accounts receivable................................... $ 4,140
Inventories........................................... 9,124
Deposits and other assets............................. 116
Fixed assets.......................................... 3,667
Goodwill.............................................. 9,588
Accounts payable...................................... (3,351)
Notes payable......................................... (5,000)
Common stock issued................................... (5,720)
-------
Cash used in acquisitions, net of cash acquired....... $12,564
=======
6
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
3. AQUISITIONS:--(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 three months
ended March 31, 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 $ 82,408
Whitehall 19,766
---------
$102,174
=========
Income before extraordinary item:
The Company $ 4,350
Whitehall (3)
---------
$ 4,347
=========
7
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
4. NOTES PAYABLE AND REVOLVING LOAN:
CREDIT FACILITY
In October 1997, the Company entered into a credit agreement with its
lenders. The credit facility (the "Credit Facility") consisted of: (a) term
loans of $55,600, and (b) a revolving loan and letter of credit facility of
$91,400. The term loan portion of the Credit Facility was repayable in quarterly
installments through July 31, 2002 and the revolving loan portion of the Credit
Facility was due and payable on July 31, 2002.
In February 1998, the Company repaid all amounts then outstanding under
the Credit Facility with the net proceeds from the Company's sale of $165,000 of
its senior subordinated notes (See Senior Subordinated Notes below). 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.
In September 1998, in connection with the acquisition of TIMCO, the
Company amended its Credit Facility to increase the revolving loan and letter of
credit facility to $200,000, up to $30,000 of which may be outstanding letters
of credit.
In November 1998, the Credit Facility was further amended to increase
the revolving loan and letter of credit facility to $250,000. See Note 7.
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 March 31, 1999, the margin was 0.5% for prime rate loans and 2.0%
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 or as a result of insufficient collateral to meet the
borrowing base requirements thereunder. At March 31, 1999 the Company was in
compliance with its financial covenants. At March 31, 1999, $6,701 was available
for borrowing under the Credit Facility and outstanding letters of credit
aggregated $22,600.
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 senior subordinated notes mature on February 15, 2008. Interest is
payable on February 15 and August 15 of each year, commencing August 15, 1998.
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.
8
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
4. NOTES PAYABLE AND REVOLVING LOAN--(CONTINUED):
SENIOR SUBORDINATED NOTES
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 March 31, 1999,
the Company's fixed charge coverage ratio for the last four fiscal quarters was
3.2 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,
limits 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.
9
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
4. NOTES PAYABLE AND REVOLVING LOAN--(CONTINUED):
OTHER LOANS
The Company has term loan agreements in the aggregate principal amount
of $17,700 to finance certain equipment and rotable parts on long-term leases
which secure the loans. These loans bear interest ranging from 7.40% to 8.21%
and are payable monthly through July 2003. These loans contain financial and
other covenants and mandatory prepayment events, as defined. At March 31, 1999,
the Company was in compliance with all covenants of these loans. See Note 7.
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%.
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.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION AND CLAIMS
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.
10
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
On June 4, 1998, Kenneth L. Harding filed an action against the Company
in the United States District Court of Oklahoma. Harding alleges that he had a
contract with AvEng Trading Partners, Inc. (which was subsequently acquired by
the Company) that he would receive a commission of 20% of the margin on all
aircraft parts sales to American Airlines prior to November 1997, in addition to
a $2 monthly retainer which he was paid prior to termination of the contract in
November 1997. Harding claims that James Stoecker, AvEng's principal (who
subsequently became employed by the Company), confirmed and ratified Harding's
claim when Mr. Stoecker was an employee of the Company. Mr. Stoecker and the
Company severed their relationship in November 1997. See Note 7.
On June 24, 1998, Zantop International Airlines, Inc. filed an action
against Aero Corp.-Macon, Inc., one of the Company's subsidiaries (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 the Company's financial
condition.
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 those properties. No estimate of any such costs to the Company is
available at this time.
In connection with the sale of Whitehall's electronics 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.
11
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES--(CONTINUED):
The Company has accrued $3.4 million towards potential obligations to
remediate the environmental matters described above of which $2.9 million of the
reserve is presently remaining.
Future information and developments will require the Company to
continually reassess the expected impact of the environmental matters discussed
above. Actual costs to be incurred in future periods may vary from the estimate,
given the inherent uncertainties in evaluating environmental exposures. These
uncertainties include the extent of required remediation based on testing and
evaluation not yet completed and the varying costs and effectiveness of
remediation methods.
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 development of the new facility has been financed by the trust
through a $35,500 loan facility provided by a syndicate of financial
institutions. 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.
12
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1999
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
6. 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,
----------------------------
1998 1999
---------- ----------
<S> <C> <C>
Weighted average shares outstanding used in
calculating basic earnings per share ...................... 12,293,023 12,568,669
Effect of dilutive options ................................ 283,413 414,179
---------- ----------
Weighted average common and common equivalent
shares used in calculating diluted earnings per share ..... 12,576,436 12,982,848
========== ==========
Options and warrants outstanding which are not
included in the calculation of diluted earnings per share
because their impact is antidilutive ...................... 19,500 10,000
========== ==========
</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.
7. SUBSEQUENT EVENTS:
On April 20, 1999, the Company filed two registration statements with
the Securities and Exchange Commission. The first registration statement relates
to the public sale of 3,500,000 shares of the Company's common stock, 2,600,000
shares to be sold by the Company and 900,000 shares to be sold by selling
stockholders. The second registration statement relates to the sale of $85,000
of the Company's 8 1/8% senior subordinated notes due 2008. The offerings are
not conditioned on one another. The proceeds of the offerings, if completed,
will be used to repay amounts outstanding under the Credit Facility. See Note 4.
On May 6, 1999, the Company settled its outstanding litigation with
Kenneth L. Harding for $50. See Note 5.
In April 1999, the Company repaid a term-loans aggregating $4,984 in
connection with the sale of certain equipment and rotable parts and the
associated long-term lease which secured the loan. See Note 4.
On May 11, 1999, the Credit Facility was further amended to increase
the revolving loan and letter of credit facility to $300,000. See Note 4.
13
<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, 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 April 20, 1999, the Company filed two registration statements, one
to register for sale in a public offering of 3,250,000 shares of its common
stock (2,600,000 shares to be sold by the Company and 650,000 shares to be sold
by selling stockholders), before exercise of the over-allotment option, and a
second to register for sale in a public offering of $85.0 million in principal
amount of the Company's 8 1/8% senior subordinated notes due 2008. The Company
intends to use the proceeds of these offerings, which are not conditioned on one
another, to repay amounts outstanding under the Revolving Credit Facility. There
can be no assurance that either one or both of these offerings will be
completed.
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 timeliness of customer aircraft in arriving for scheduled maintenance and
the mix of available aircraft spare parts contained, at any time, in the
Company's inventory. A large portion of the Company's operating expenses are
relatively fixed. Since the Company typically does not obtain long-term purchase
orders or commitments from its customers, it must anticipate the future volume
of orders based upon the historic purchasing patterns of its customers and upon
its discussions with its customers as to their future requirements.
Cancellations, reductions or delays in orders by a customer or group of
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
14
<PAGE>
The Company completed the following acquisitions during 1998:
DATE COMPANY ACQUIRED ACCOUNTING TREATMENT
September 1998 TIMCO Purchase
July 1998 Whitehall Corporation Pooling
March 1998 Caribe Aviation, Inc. Purchase
March 1998 Aircraft Interior Design, Inc. Purchase
Operating revenues for the three months ended March 31, 1999 increased
$75.8 million or 74.2% to $178.0 million, from $102.2 million for the same
period in 1998. Incremental revenues attributable to operations acquired in 1998
and accounted for under the purchase method of accounting were $50.8 million for
the three months ended March 31, 1999. Product and service revenues from period
to period also increased due to increased customer penetration, increased sales
from investments in additional inventories and improved capacity utilization of
the Company's MR&O facilities.
Gross profit increased $15.9 million or 62.8% to $41.2 million for the
1999 first quarter, compared with $25.3 million for the 1998 first quarter.
Gross profit margin for the three months ended March 31, 1999 decreased to 23.1%
from 24.7% for the same period in 1998. Margins were negatively impacted in 1999
by the sales mix of products sold during the quarter. Gross profit margin during
1999 was also negatively impacted by the increase in the proportion of total
revenues derived from the Company's MR&O operations, which generally operate at
lower gross profit margins than the Company's redistribution operations.
The Company's operating expenses increased $5.4 million, to $20.2
million for the three months ended March 31, 1999, compared with $14.8 million
for the same period in 1998. Operating expenses as a percentage of operating
revenues were 11.4% for 1999, compared to 14.5% for 1998. The improvement in
operating leverage is primarily due to economies of scale and improved operating
efficiencies. Additionally, the Company's MR&O operations, which are an
increased proportion of the Company's total revenues, operate at a lower
operating expense percentage than the Company's redistribution operations.
Further, 1998 first quarter operating expenses of the Company's airframe heavy
maintenance facilities acquired from Whitehall were higher than can be expected
in the future, due to inefficiencies in those operations which have since been
corrected.
Interest expense for the three months ended March 31, 1999 increased by
$4.5 million from period to period, due to increased borrowings during 1998 and
during the first quarter of 1999 to finance the acquisitions of Caribe, AIDI and
TIMCO, inventory acquisitions and equipment held for lease.
Other (income) expense for the three months ended 1999 primarily
includes the writedown of various miscellaneous assets.
As a result of the above factors income before income taxes, equity
income of affiliate and extraordinary item for the three months ended March 31,
1999 was $12.2 million, compared to $6.5 million in 1998.
Equity income of affiliate, net of income taxes increased from $0.3
million to $0.5 million in 1999, due to increased sales of aircraft noise
reduction kits.
In connection with the repayment of the term and acquisition loan
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 ($0.05 per diluted share).
After accounting for income taxes and the extraordinary item, net
income for the three months ended March 31, 1999 was $7.9 million ($0.61 per
diluted share), compared to net income of $3.7 million ($0.30 per diluted share)
for the three months ended March 31, 1998. Weighted average common and common
equivalent shares outstanding (diluted) were 13.0 million during the three
months ended March 31, 1999, compared to 12.6 million for the three months ended
March 31, 1998.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CASH
Net cash used in operating activities during the three months ended
March 31, 1998 and 1999 was $33.5 million and $42.7 million, respectively. Cash
used in investing activities during the three months ended March 31, 1998 and
1999 was $18.5 million and $6.3 million, respectively. The Company continues to
invest in spare parts inventories in order to support increased parts sales.
During the three months ended March 31, 1998 and 1999, the Company financed its
operating and investing activities primarily with its cash flow from financing
activities, amounting to $52.0 million and $39.8 million, respectively.
REVOLVING CREDIT FACILITY
On September 18, 1998, the Company entered into a Four Year Senior
Secured Revolving Credit Facility amending its previously existing Credit
Facility (the "Revolving 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 the Revolving Credit Facility was amended to increase
the revolving loan and letter of Credit Facility to $250.0 million and in May
1999, the Revolving Credit Facility was further amended to increase the facility
to $300.0 million. At May 7, 1999, the margin was 0.5% for prime rate loans and
2.0% for LIBOR rate loans and $239.6 million was outstanding under the Revolving
Credit Facility.
The Revolving Credit Facility contains certain financial covenants
regarding the financial performance of the Company and certain other covenants,
including limitations on the amount of annual capital expenditures and the
incurrence of additional debt, and provides for the suspension of the Revolving
Credit Facility and repayment of all debt in the event of a material adverse
change in the business or a change in control. In addition, the Revolving Credit
Facility requires mandatory repayments from the proceeds of a sale of assets or
an issuance of equity or debt securities or as a result of insufficient
collateral to meet the borrowing base requirements thereunder. Substantially all
of the Company's assets are pledged as collateral for amounts borrowed. The
Revolving Credit Facility will terminate on July 31, 2002. At March 31, 1999,
the Company was in compliance with all covenants of the Revolving Credit
Facility.
SENIOR SUBORDINATED NOTES
In February 1998 the Company completed the offering and sale of $165.0
million in senior subordinated notes (the "Notes") due in 2008 with a coupon
rate of 8.125% at a price of 99.395%. 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 Revolving Credit Facility
and under facilities which may replace the Revolving 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
Revolving 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
16
<PAGE>
March 31, 1999, the Company's fixed charge coverage ratio for the last four
fiscal quarters was 3.2 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 Revolving Credit
Facility, and are also effectively subordinated to all secured obligations of
Subsidiary Guarantors to the extent of the assets securing such obligations,
including the Revolving Credit Facility. Furthermore, the Indenture 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.
OTHER NOTES
The Company has term loan agreements in the aggregate principal amount
of $17.7 million to finance certain equipment and rotable parts on long-term
leases which secure the loans. These loans bear interest ranging from 7.40% to
8.21% and are payable monthly through July 2003. These loans contain financial
and other covenants and mandatory prepayment events, as defined. At March 31,
1999, the Company was in compliance with all covenants of these loans.
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 $1,250,000 was made during January 1999 and another payment of
$1,250,000 is due January 1, 2000. Interest on this note has been imputed at 8%.
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.
17
<PAGE>
CAPITAL EXPENDITURES
During the three month periods ended March 31, 1998 and 1999, the
Company incurred capital expenditures of approximately $4.4 million and $4.0
million, respectively, primarily to renovate MR&O 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
for new equipment for manufacturing operations, fixtures for its new
headquarters, new MIS systems and enhancements to existing MIS systems, as well
as ordinary course replacement of existing equipment.
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 lessor has financed the development of the new facility through a
$35.5 million loan from a syndicate of financial institutions. 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. Financing for such activities will be provided from operations and
from borrowings under the Revolving Credit Facility. The Company may also in the
future issue additional debt and/or equity securities in connection with
financing one or more of its activities. In that regard, the Company recently
filed two registration statements, one to register the sale of 3,500,000 shares
of its common stock for sale in a public offering (2,600,000 shares to be sold
by the Company and 900,000 shares to be sold by selling stockholders), before
exercise of an over-allotment option, and a second to register for public sale
of $85.0 million in principal amount of the Company's 8 1/8% Senior Subordinated
Notes due 2008. The proceeds of these offerings, which are not conditioned on
one another, will be used to repay indebtedness due under the Revolving Credit
Facility. There can be no assurance that either one or both of these offerings
will be completed. The Company believes that cash flow from operations and
borrowing availability under its Revolving Credit Facility will be sufficient to
satisfy the Company's anticipated working capital requirements over the next
twelve months. If the proposed public offering of additional debt and/or equity
securities is not completed, the Company will have less availability under the
Revolving Credit Facility and might have to curtail its rate of growth in order
to conserve cash required for its operations.
18
<PAGE>
ENVIRONMENTAL
The Company is taking remedial action pursuant to Environmental
Protection Agency and Florida Department of Environmental Protection ("FDEP")
regulations at the Company's heavy maintenance facility in Lake City, Florida
("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 $2.4 million. 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 $1.7 million 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 those properties. No estimate of any such costs to the Company is
available at this time.
In connection with the sale of Whitehall's electronics 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, has recently exercised its option of
requiring Whitehall to repurchase this property for $300,000.
The Company accrued $3.4 million towards potential obligations relating
to remediate the environmental matters described above of which $2.9 million of
the reserve is presently remaining.
Future information and developments will require the Company to
continually reassess the expected impact of the environmental matters discussed
above. Actual costs to be incurred in future periods may vary from the estimate,
given the inherent uncertainties in evaluating environmental exposures. These
uncertainties include the extent of required remediation based on testing and
evaluation not yet completed and the varying costs and effectiveness of
remediation methods.
IMPACT OF THE YEAR 2000
Since the fourth quarter of 1997, the Company has been implementing new
management information systems ("MIS") in order to both allow the Company's
computer systems to meet the Company's needs into the foreseeable future and to
mitigate the Year 2000 issues inherent in the Company's 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 the Company's own non-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.
19
<PAGE>
STATE OF READINESS
The Company has substantially completed an assessment of its internal
and external (third-party) IT systems and non-IT systems. At this point in the
Company's assessment, which the Company believes is approximately 90% complete
(in the aggregate), other than as described in this report, the Company is not
currently aware of any Year 2000 problems relating to its 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 the Company's efforts to avoid such problems, although there can be no
assurance of this fact. In addition, the Company believes that it is
approximately 50% complete (in the aggregate) with its Year 2000 remediation and
30% complete (in the aggregate) with its Year 2000 validation.
The Company's IT systems consist of software licensed from third
parties and hardware purchased or leased from third parties. The Company is
currently implementing new systems, which are primarily designed to service its
redistribution operations and manufacturing operations, including new software
and hardware, which the Company believes, once fully implemented, will be Year
2000 compliant and will meet the requirements of these operations into the
foreseeable future.
The Company has determined that the MIS system which the Company
currently uses in its redistribution operations is not Year 2000 compliant. In
order to give the Company the time to implement its new system for these
operations in an orderly fashion, the Company has engaged a vendor to remediate
the Company's existing system to make it Year 2000 compliant. The Company
believes that the remediation to its existing system will be completed by the
end of August 1999 at an estimated cost of $1.0 million, and that the Company
can validate the remediated system, as modified, for Year 2000 compliance by the
beginning of the fourth quarter of 1999. While the Company has been informed by
its vendor that the Company's existing system can be brought into Year 2000
compliance on a timely basis, there can be no assurance of this fact.
The Company has substantially remediated the MIS systems used by its
manufacturing operations for Year 2000 compliance. The Company has also
substantially remediated the MIS systems used by its maintenance and
repair operations for Year 2000 compliance.
The Company has substantially completed an assessment of the Year 2000
issues of its non-IT systems which the Company has 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 its
business, results of operations, or financial condition, without taking into
account the Company's efforts to avoid these problems.
The Company is reviewing the efforts of its 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 the Company's Year 2000 readiness. To date, the Company has
received responses from approximately 40% of these third parties, and
approximately 60% 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. There can be no assurance
that Year 2000 compliance plans of the Company's vendors and customers will be
completed on a timely manner.
A substantial majority of the aircraft spare parts in the Company's
inventory do not have date-sensitive technologies and, as a result, do not pose
Year 2000 compliance issues. For the small portion of the Company's aircraft
spare parts inventory that may pose Year 2000 compliance issues, the Company has
contacted its 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 its inventory, if any, will ultimately be the responsibility of
the manufacturers of such parts, although there can be no assurance 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 by
the Company.
20
<PAGE>
COSTS
The Company believes that the cost of the new MIS system (1) for the
Company's redistribution operations will be approximately $13.5 million, of
which approximately $4.8 million has been spent to date and approximately $8.7
million of which the Company believes will be expended during 1999 and (2) for
the Company's manufacturing operations will be approximately $2.1 million, of
which approximately $1.0 million has been spent to date and approximately $1.1
million will be expended during 1999. The costs incurred to date in connection
with the remediation of the Company's maintenance and repair operations for Year
2000 compliance have not been material. The Company is funding the costs of its
new systems from the Company's existing credit facility. The $5.8 million spent
to date has related substantially to the cost of the new systems and not to
bringing the Company's existing MIS systems into Year 2000 compliance. The
Company intends to replace these systems to meet the Company's future needs and
to incur the costs regardless of the Year 2000 compliance efforts. Such cost
estimates include both hardware and software costs, as well as the anticipated
costs of the use of consultant services, but do not include the Company's
internal costs associated with such efforts, which are not separately tracked
for Year 2000 compliance efforts. Such internal costs principally consists of
the payroll costs for the Company's employees working on such compliance
efforts.
The Company has decided to update the MIS system currently used in its
redistribution operations to make it Year 2000 compliant, so that such system
remains available for use in the Company's operations until the new system for
these operations becomes fully operational. The Company expects the cost of such
update to be approximately $1.0 million. The Company can not recover this cost
in connection with the development and implementation of its new system.
RISKS RELATING TO THE COMPANY'S 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 for the Company to operate its
business in the ordinary course and would likely cause the Company to lose
revenues, have increased operating costs and have business interruptions of a
material nature (which would likely not be covered by the Company's existing
business interruption insurance) until the Company fixes its systems. In
addition, the Company can not assure that the Year 2000 issues of other entities
will not materially adversely impact its systems or results of operations.
CONTINGENCY PLANS
The Company is currently considering what its contingency plans will be
in the event that it is not able to bring its IT and non-IT systems into Year
2000 compliance by the end of 1999. The Company plans to complete such
contingency plans by the end of July 1999.
21
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Notes 5 and 7 to the Company's Unaudited Condensed Consolidated
Financial Statements included in this filing.
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to the Company's shareholders during the
first quarter of 1999.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) EXHIBITS
EXHIBIT NO. DESCRIPTION
10.01 Amendment No. 6, Waiver and Consent dated as of
May 11, 1999, to the Third Amended and Restated
Credit Agreement
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Current Report on Form 8-K filed on February 7, 1999.
22
<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: May 14, 1999
BY: /s/ GARLAN BRAITHWAITE
--------------------------
Garlan Braithwaite, Vice President-Finance
(Principal Accounting Officer)
23
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.01 Amendment No. 6, Consent and Waiver dated as of May 11, 1999,
to the Third Amended and Restated Credit Agreement
27 Financial Data Schedule
EXHIBIT 10.01
AMENDMENT NO. 6, CONSENT AND WAIVER
Dated as of May 11, 1999
to
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of October 17, 1997
This Amendment No. 6, Consent and Waiver (the "Amendment") dated as of
May 11, 1999 is entered into among AVIATION SALES DISTRIBUTION SERVICES COMPANY,
a Delaware corporation ("ASOC"), AEROCELL STRUCTURES, INC., an Arkansas
corporation ("Aerocell"), AVS/KRATZ-WILDE MACHINE COMPANY, a Delaware
corporation ("Kratz-Wilde"), WHITEHALL CORPORATION, a Delaware corporation
("Whitehall"), TRIAD INTERNATIONAL MAINTENANCE CORPORATION, a Delaware
corporation ("TIMCO"), APEX MANUFACTURING, INC., an Arizona corporation
("Apex"), CARIBE AVIATION, INC., a Florida corporation ("Caribe"), AIRCRAFT
INTERIOR DESIGN, INC., a Florida corporation ("Design"), AVIATION SALES LEASING
COMPANY, a Delaware corporation ("Leasing"), AVIATION SALES COMPANY, a Delaware
corporation ("Parent"), and the "Lenders" (as defined in the Credit Agreement
identified below). Capitalized terms used herein without definition are used
herein as defined in the Credit Agreement.
PRELIMINARY STATEMENT:
WHEREAS, the Borrowers, Citicorp USA, Inc., as Agent, and certain
financial institutions, as Lenders and Issuing Banks, are parties to that
certain Third Amended and Restated Credit Agreement dated as of October 17,
1997, as heretofore amended (the "Credit Agreement");
WHEREAS, Parent has informed the Lenders of entering into a guarantee
of the performance by TIMCO under a certain Lease Agreement, Letter Agreement
and Assignment Agreement more particularly described in the Guaranty dated April
26, 1999, between Parent and US Airways, Inc., a copy of which has been provided
to the Agent and Lenders (the "North Carolina Lease Guaranty"), and requested
the waiver of the Requisite Lenders to its incurrence of the Accommodation
Obligations and indemnity obligations evidenced by such Guaranty in addition to
Indebtedness of the Parent otherwise permitted under SECTION 10.17(E) of the
Credit Agreement;
WHEREAS, Parent has further informed the Lenders of its intention to
(i) issue an additional $85,000,000 of 8 1/8% Senior Subordinated Notes due 2008
as more particularly described in its Form S-3 Registration Statement filed with
the Commission on April 20, 1999 and (ii) issue 2,600,000 (plus up to an
additional 525,000 to underwriters under certain circumstances) shares of its
common stock as more particularly described in its Form S-3 Registration
Statement filed with the Commission on April 20, 1999
<PAGE>
(such issuance of Indebtedness and Capital Stock of the Parent
being collectively referred to as the "Recapitalization");
WHEREAS, Parent has further informed the Lenders that the net cash
proceeds of the Recapitalization in the approximate amount of $192,000,000 will
be contributed to the Borrowers and used to reduce the Obligations without any
reduction in the Revolving Credit Commitments;
WHEREAS, the Borrowers have requested (i) an increase in the Revolving
Credit Commitments from $250,000,000 to a maximum of $300,000,000, (ii) an
extension of the time permitted for completion of Inventory appraisals, (iii)
modification of the financial covenants, (iv) modification of certain provisions
of SECTION 15.07 of the Credit Agreement, and (v) that the Credit Agreement be
amended to effect the foregoing; and
WHEREAS, the parties hereto have agreed to amend the Credit Agreement
as set forth below in SECTION 1, subject to the terms and conditions stated in
this Amendment;
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT. Effective as of May 11,
1999, subject to the satisfaction of the conditions precedent set forth in
SECTION 3 hereof, the Credit Agreement is hereby amended as follows:
1.1 SECTION 1.01 is amended to (a) delete the definitions of "Base Rate
Margin", "Eurodollar Rate Margin", "Interest Coverage Ratio", "Revolving Credit
Commitment", "Tangible Net Worth", and "Working Capital" in their entirety and
substitute the following definitions therefor:
"BASE RATE MARGIN" means, as of any date of determination, a per annum
rate equal to the rate set forth below opposite the then applicable
Performance Level set forth below:
PERFORMANCE LEVEL BASE RATE MARGIN
1 0.00%
2 0.00%
3 0.00%
4 0.25%
5 0.50%
6 0.75%
7 1.00%
PROVIDED, HOWEVER, THAT, notwithstanding the foregoing, the Base Rate
Margin shall be 0.75% at all times during the period commencing May 11,
1999 and ending on the date on
2
<PAGE>
which all of the net cash proceeds of the Recapitalization are remitted
to the Agent for application on the Obligations.
"EBITDA" means, for any Person for any period, the amount calculated,
without duplication, for such period as (i) Net Income of such Person,
PLUS (ii) depreciation and amortization expense of such Person and its
Subsidiaries, PLUS (iii) other non-cash expenses of such Person and its
Subsidiaries identified to the Agent, PLUS (iv) Cash Interest Expense
of such Person, PLUS (v) federal, state, and local income taxes
deducted from Net Income of such Person in accordance with GAAP, PLUS
(vi) extraordinary losses (and any unusual losses arising in or outside
of the ordinary course of business of such Person and its Subsidiaries
not included in extraordinary losses determined in accordance with
GAAP) which have been included in the determination of Net Income of
such Person MINUS extraordinary gains of such Person and its
Subsidiaries, including, without limitation, any unusual gains arising
in or outside of the ordinary course of business of such Person and its
Subsidiaries not included in extraordinary gains determined in
accordance with GAAP which have been included in the determination of
Net Income of such Person. For purposes of calculation of the Parent's
EBITDA for any period ending in 1999, all calculations shall be made on
a pro forma basis to include EBITDA of Triad International Maintenance
Corporation giving effect to the acquisition thereof as though it had
occurred on the first day of the four-fiscal-quarter period then
ending.
"EURODOLLAR RATE MARGIN" means, as of any date of determination, a per
annum rate equal to the rate set forth below opposite the then
applicable Performance Level set forth below:
PERFORMANCE LEVEL EURODOLLAR RATE MARGIN
1 1.125%
2 1.250%
3 1.500%
4 1.750%
5 2.000%
6 2.250%
7 2.500%
PROVIDED, HOWEVER, THAT, notwithstanding the foregoing, the Eurodollar
Rate Margin shall be 2.25% at all times during the period commencing
May 11, 1999 and ending on the date on which all of the net cash
proceeds of the Recapitalization are remitted to the Agent for
application on the Obligations.
3
<PAGE>
"INTEREST COVERAGE RATIO" means, for any period, the ratio of (i) the
EBITDA of the Parent and its Subsidiaries to (ii) the Cash Interest
Expense of the Parent and its Subsidiaries.
"REVOLVING CREDIT COMMITMENT" means, with respect to any Revolving
Lender, the obligation of such Lender to make Revolving Loans and to
participate in Letters of Credit pursuant to the terms and conditions
of this Agreement, in an aggregate amount at any time outstanding which
shall not exceed the principal amount set forth on SCHEDULE 1.01.9
attached hereto and made a part hereof under the heading "Revolving
Credit Commitment" thereon or on the signature page of the Assignment
and Acceptance by which it became a Lender, as modified from time to
time pursuant to the terms of this Agreement, or to give effect to any
applicable Assignment and Acceptance, and "REVOLVING CREDIT
COMMITMENTS" means the aggregate principal amount of the Revolving
Credit Commitments of all the Revolving Lenders, the maximum amount of
which shall be $300,000,000, as reduced from time to time pursuant to
SECTION 4.01.
"TANGIBLE NET WORTH" means the amount calculated as (i) the
consolidated net worth of the Parent and its Subsidiaries MINUS (ii)
the consolidated intangibles of the Parent and its Subsidiaries
including, without limitation, goodwill, trademarks, tradenames,
copyrights, patents, patent applications, licenses and rights in any
thereof and other items treated as intangibles in accordance with GAAP.
"WORKING CAPITAL" means, as at any date of determination, the excess,
if any, of (i) the Parent and its Subsidiaries' consolidated current
assets, except cash and Cash Equivalents, over (ii) the Parent and its
Subsidiaries' consolidated current liabilities, except current
maturities of long-term debt, and current maturities of the Revolving
Credit Obligations as of such date.
and (b) add the following definitions thereto:
"RATIO OF SENIOR DEBT TO EBITDA" means, for any period, the ratio of
(i) the amount equal to the Funded Debt of the Parent and its
Subsidiaries MINUS the principal amount outstanding under the Senior
Subordinated Notes calculated as of the last day of such period to (ii)
EBITDA of the Parent and its Subsidiaries for such period.
"RECAPITALIZATION" means the issuance by Parent of (i) an additional
$85,000,000 of 8 1/8% Senior Subordinated Notes due 2008 as more
particularly described in its Form S-3 Registration Statement filed
with the Commission on April 20, 1999 and (ii) 2,600,000 (plus up to an
additional
4
<PAGE>
525,000 to underwriters under certain circumstances) shares of its
common stock as more particularly described in its Form S-3
Registration Statement filed with the Commission on April 20, 1999.
"SUPER-MAJORITY LENDERS" means Lenders whose Pro Rata Shares, in the
aggregate, are at least seventy-five percent (75%); PROVIDED, HOWEVER,
that, in the event any of the Lenders shall have failed to fund its Pro
Rata Share of any Loan requested by the Borrowers which the Lenders are
obligated to fund under the terms of this Agreement and any such
failure has not been cured, then for so long as such failure continues,
"SUPER-MAJORITY LENDERS" means Lenders (excluding all Lenders whose
failure to fund their respective Pro Rata Shares of such Loans have not
been so cured) whose Pro Rata Shares represent at least seventy-five
percent (75%) of the aggregate Pro Rata Shares of such Lenders.
1.2 SECTION 5.04 is amended to delete the provisions thereof in their
entirety and substitute the following therefor:
5.04. DETERMINATION OF APPLICABLE BASE RATE MARGIN AND EURODOLLAR RATE
MARGIN. (a) The Base Rate Margin and Eurodollar Rate Margin applicable
from time to time during the period commencing on May 11, 1999 and
ending on the date on which all of the net cash proceeds of the
Recapitalization are remitted to the Agent for application on the
Obligations (the "Fixed Pricing Termination Date") shall be determined
as set forth in the definitions of "Base Rate Margin" and "Eurodollar
Rate Margin", respectively.
(b) The Base Rate Margin and Eurodollar Rate Margin applicable from
time to time during the period commencing on the day immediately
succeeding the Fixed Pricing Termination Date and ending on the last
day of the first fiscal month of the fiscal quarter next succeeding the
fiscal quarter in which the Fixed Pricing Termination Date occurs shall
be determined by reference to Borrowers' compliance with Performance
Levels 1 through 7 as of the end of the fiscal quarter most recently
ended prior to the Fixed Pricing Termination Date.
(c) The Base Rate Margin and Eurodollar Rate Margin applicable from
time to time thereafter shall be determined by reference to Borrowers'
compliance with Performance Levels 1 through 7 as of the date the
Financial Statements for each fiscal quarter of the Borrowers are due
pursuant to SECTION 8.01(B), commencing with the Financial Statements
for the fiscal quarter then most recently ended, and be effective
during the period commencing on the first day of the month in which
such Financial Statements for the
5
<PAGE>
preceding fiscal quarter are due and ending on the last day of the
first month of the next fiscal quarter for which such determination is
made.
1.3 SECTION 10.17(E) is amended to delete the provisions thereof in
their entirety and substitute the following therefor:
(e) incur any Indebtedness other than that identified on SCHEDULE
1.01.3, that described in CLAUSE (D)(I)(A) above, or unsecured
Accommodation Obligations incurred with respect to Indebtedness of the
Borrowers and their Subsidiaries permitted under the provisions of
SECTION 10.01 for (i) borrowed money, (ii) under Capital Leases or
(iii)Operating Leases.
1.4 ARTICLE XI is amended to delete the provisions thereof in their
entirety with respect to the periods referenced below and substitute the
following therefor:
ARTICLE XI
FINANCIAL COVENANTS
The Parent covenants and agrees that so long as any Revolving Credit
Commitments are outstanding and thereafter until payment in full of all of the
Obligations (other than indemnities not yet due):
11.01. INTEREST COVERAGE RATIO. The Parent shall maintain an Interest
Coverage Ratio, as determined as of the last day of each fiscal quarter of the
Parent (a) commencing with the fiscal quarter ending March 31, 1999 and ending
with the fiscal quarter ending December 31, 2000, for the four-fiscal-quarter
period then ending, of at least 2.5 to 1.0 and (b) commencing with the fiscal
quarter ending March 31, 2001 and ending with the fiscal quarter ending June 30,
2002, for the four-fiscal-quarter period then ending, of at least 3.0 to 1.0.
11.02. FIXED CHARGE COVERAGE RATIO. The Parent shall maintain a Fixed
Charge Coverage Ratio for the Parent and its Subsidiaries, as determined as of
the last day of each fiscal quarter of the Parent ending during the period set
forth below, for the four-fiscal-quarter period then ending, of at least the
level set forth below opposite such period:
PERIOD MINIMUM RATIO
March 31, 1999 - December 31, 1999 1.25 to 1.00
6
<PAGE>
March 31, 2000 - December 31, 2000 1.30 to 1.00
March 31, 2001 - December 31, 2001 1.40 to 1.00
March 31, 2002 - June 30, 2002 1.50 to 1.00
11.03. WORKING CAPITAL. Working Capital shall be maintained, at all
times during the term of this Agreement, at a minimum amount of $200,000,000.
11.04. CAPITAL EXPENDITURES. The Parent and its Subsidiaries shall not
make Capital Expenditures in excess of $25,000,000 in the aggregate during any
Fiscal Year of the Parent; (in each instance, the "Maximum Amount"); PROVIDED,
HOWEVER, to the extent the Parent and its Subsidiaries have not made Capital
Expenditures in the amount permitted above for any given period set forth above,
Capital Expenditures in an amount equal to 100% of the Maximum Amount of such
Capital Expenditures permitted but not made in such period may be made in the
immediately next succeeding Fiscal Year in addition to any amounts permitted
above for such Fiscal Year; PROVIDED THAT to the extent amounts carried forward
from one period to the next succeeding Fiscal Year are not expended in such
Fiscal Year, such surplus may not be carried forward to any other succeeding
year.
11.05. LEVERAGE RATIO. The Parent shall maintain a ratio of Funded Debt
of the Parent to EBITDA of the Parent, determined as of the end of each fiscal
quarter of the Parent ending on or after March 31, 1999, for the
four-fiscal-quarter period then ended, of not more than:
PERIOD MAXIMUM RATIO
March 31, 1999 - December 31, 2000 5.00 to 1.00
March 31, 2001 - June 30, 2002 4.50 to 1.00
11.06. RATIO OF SENIOR DEBT TO EBITDA. The Parent shall maintain a
Ratio of Senior Debt to EBITDA, determined as of the end of each fiscal quarter
of the Parent ending on or after March 31, 1999, for the four-fiscal-quarter
period then ended, of not more than:
PERIOD MAXIMUM RATIO
March 31, 1999 - December 31, 2000 3.00 to 1.00
March 31, 2001 - June 30, 2002 2.50 to 1.00
7
<PAGE>
11.07. MINIMUM TANGIBLE NET WORTH. The Parent shall maintain a Tangible
Net Worth of at least the amount set forth below for the fiscal quarter of the
Parent ending during the period set forth below opposite such amount.
PERIOD ENDING MINIMUM TANGIBLE NET WORTH
March 31, 1999 $ 95,000,000
June 30, 1999 $200,000,000
September 30, 1999 $210,000,000
December 31, 1999 $220,000,000
March 31, 2000 $220,000,000
June 30, 2000 $220,000,000
September 30, 2000 $220,000,000
December 31, 2000 $260,000,000
March 31, 2001 $260,000,000
June 30, 2001 $260,000,000
September 30, 2001 $260,000,000
December 31, 2001 $300,000,000
March 31, 2002 $300,000,000
June 30, 2002 $300,000,000
11.08. PARENT AND SUBSIDIARIES. For purposes of the covenants set forth
in this ARTICLE XI, references to Parent and its Subsidiaries shall be deemed to
mean Parent and its Subsidiaries on a consolidated basis.
1.5 SECTION 15.07 is amended to delete the provisions of CLAUSES (B)
and (C) thereof in their entirety and substitute the following therefor:
(b) AMENDMENTS, CONSENTS AND WAIVERS BY AFFECTED LENDERS AND
SUPER-MAJORITY LENDERS. (i) AFFECTED LENDERS. Any amendment, modification,
termination, waiver or consent with respect to any of the following provisions
of this Agreement shall be effective only by a written agreement, signed by each
Lender or Issuing Bank affected thereby as described below:
8
<PAGE>
(A) waiver of any of the conditions specified in SECTIONS 6.01 and 6.02
(except with respect to a condition based upon another provision of
this Agreement, the waiver of which requires only the concurrence of
the Requisite Lenders),
(B) increase in the amount of any of the Revolving Credit Commitment of
such Lender,
(C) reduction of the principal of, rate or amount of interest on the
Loans, the Reimbursement Obligations, or any fees or other amounts
payable to such Lender (other than by the payment or prepayment
thereof),
(D) postponement of the Revolving Credit Termination Date or any date
fixed for any payment of principal of, or interest on, the Loans, the
Reimbursement Obligations or any fees or other amounts payable to such
Lender,
(E) the orders of priority set forth in SECTION 4.01, in SECTION
4.02(B)(I), or in CLAUSES (D) through (I) of SECTION 4.02(B)(II), and
(F) change in the definitions of Revolving Credit Commitments,
Requisite Revolving Lenders, or any of Performance Levels 1 through 6.
(ii) SUPER-MAJORITY LENDERS. Any amendment, modification, termination, waiver or
consent with respect to any of the following provisions of this Agreement shall
be effective only by a written agreement, signed by the Super-Majority Lenders:
(A) change in the definitions of Borrowing Base (except to the extent
modified by the Agent as anticipated by the text of such definition set
forth in this Agreement with the consent of the Requisite Lenders) or
Borrowing Base Certificate (except to the extent modified by the Agent
as anticipated by the text of the definition of Borrowing Base set
forth in this Agreement), or
(B) change in any component of the Borrowing Base or Borrowing Base
Certificate, including, without limitation, the definitions of any
terms used in the Borrowing Base Certificate or the definition of
Borrowing Base (other than by inclusion of Eligibility Reserves
established by the Agent or Requisite Revolving Lenders).
(c) AMENDMENTS, CONSENTS AND WAIVERS BY ALL LENDERS. Any amendment,
modification, termination, waiver or consent with respect to any of the
following provisions of this Agreement shall be effective only by a
written agreement, signed by each Lender:
9
<PAGE>
(i) release of any Guarantor or all or a substantial portion of the
Collateral (except as provided in SECTION 13.09(C)),
(ii) change in the definitions of Maximum Revolving Credit Amount,
Requisite Lenders, or Super-Majority Lenders,
(iii) amendment of SECTION 15.01 or this SECTION 15.07,
(iv) assignment of any right or interest in or under this Agreement or
any of the other Loan Documents by any Borrower,
(v) waiver of any Event of Default described in SECTIONS 12.01(A), (F),
(G), (H), and (M), and
(vi) change in SECTION 10.08(D).
1.6 Schedule 1.01.9 to the Credit Agreement is deleted in its entirety
and the Schedule attached hereto is substituted therefor.
SECTION 2. CONSENT AND WAIVER.
2.1 The Borrowers having heretofore covenanted and agreed to obtain and
deliver an appraisal of each Borrower's and its respective Subsidiary's
Inventory prepared by an independent appraiser satisfactory to the Agent and on
the same basis as the Appraisal by May 19, 1999, and requested an extension of
the time permitted for such delivery, the Lenders hereby consent to the delivery
of such appraisal by no later than May 31, 1999.
2.2 The Lenders hereby waive any rights and remedies that might
otherwise arise under the terms of the Credit Agreement or other Loan Document
executed and delivered by the Parent with respect to Parent's incurrence of the
Accommodation Obligations and indemnity obligations evidenced by the North
Carolina Lease Guaranty in addition to Indebtedness otherwise permitted under
the terms of SECTION 10.17(E) of the Credit Agreement.
SECTION 3. CONDITIONS PRECEDENT TO EFFECTIVENESS OF THIS AMENDMENT.
This Amendment shall become effective as of May 11, 1999, if, and only if the
Agent shall have received
(a) a facsimile or original executed copy of this Amendment executed by
the Parent, each Borrower and each Lender,
(b) a Reaffirmation Agreement, in form and substance satisfactory to
the Agent, executed by each Borrower and Guarantor,
10
<PAGE>
(c) corporate resolutions and a secretary's certificate with respect
thereto for each of the Borrowers and Guarantors a party to this
Amendment or the aforesaid Reaffirmation Agreement authorizing the
execution and delivery of such agreements on behalf of such Persons,
(d) payment of a fee, for the account of each Lender executing and
delivering this Amendment, in the amount of one-eighth of one percent
(0.125%) of the respective Lenders' Revolving Credit Commitment
immediately prior to giving effect to this Amendment,
(e) payment of a fee, for the account of each Lender increasing its
Revolving Credit Commitment pursuant to the terms of this Amendment, in
the amount of three-eighths of one percent (0.375%) of the amount by
which such respective Lender's Revolving Credit Commitment is so
increased,
(f) copies of duly executed consents under, or amendments to, the
applicable TROL Documents, as may be required to permit the increase in
the Revolving Credit Commitments evidenced by this Amendment, the
resultant increase in Obligations incurred under the Credit Agreement,
and the obligations incurred by Parent under the North Carolina Lease
Guaranty, and the performance of the other terms and conditions of the
Credit Agreement as amended through the effective date of this
Amendment, without the occurrence of a resultant Event of Default under
SECTION 12.01(E)(IV) of the Credit Agreement, and
(g) an opinion of counsel to Parent and the Borrowers, in form and
substance satisfactory to the Agent, with respect to this Amendment,
the Reaffirmation Agreement referenced hereinabove, and no
contravention of the Senior Subordinated Notes or TROL Documents
arising with respect to the execution and delivery of the Loan
Documents.
SECTION 4. REPRESENTATIONS AND WARRANTIES; ACKNOWLEDGMENT. The
Borrowers hereby represent and warrant as follows:
4.1 This Amendment and the Credit Agreement as previously executed and
delivered and as amended hereby constitute legal, valid and binding obligations
of the Borrowers and are enforceable against the Borrowers in accordance with
their terms.
4.2 No Event of Default or Potential Event of Default exists, other
than that arising due to Parent's failure to comply with the restrictions on
Indebtedness set forth in SECTION 10.17(E) of the Credit Agreement as referenced
above, or would
11
<PAGE>
result from any of the transactions contemplated by this Amendment.
4.3 Upon the effectiveness of this Amendment, each Borrower hereby
reaffirms all covenants, representations and warranties made by it in the Credit
Agreement to the extent the same are not amended hereby and agree that all such
covenants, representations and warranties shall be deemed to have been remade as
of the date this Amendment becomes effective (unless a representation and
warranty is stated to be given on and as of a specific date, in which case such
representation and warranty shall be true, correct and complete as of such
date).
SECTION 5. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT.
5.1 Upon the effectiveness of this Amendment, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words
of like import shall mean and be a reference to the Credit Agreement, as amended
hereby, and each reference to the Credit Agreement in any other document,
instrument or agreement executed and/or delivered in connection with the Credit
Agreement shall mean and be a reference to the Credit Agreement as amended
hereby.
5.2 Except as specifically amended above, the Credit Agreement, the
Notes and all other Loan Documents shall remain in full force and effect and are
hereby ratified and confirmed.
5.3 The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of any Lender or Issuing
Bank or the Agent under the Credit Agreement, the Notes or any of the other Loan
Documents, nor constitute a waiver of any provision contained therein, except as
specifically set forth herein.
SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument. Delivery of an executed counterpart of this Amendment by
telecopier shall be effective as delivery of a manually executed counterpart of
this Amendment.
12
<PAGE>
SECTION 7. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 8. HEADINGS. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
AVIATION SALES DISTRIBUTION AEROCELL STRUCTURES, INC.
SERVICES COMPANY
By___________________________ By________________________
Name: Name:
Title: Title:
AVS/KRATZ-WILDE MACHINE COMPANY WHITEHALL CORPORATION
By___________________________ By________________________
Name: Name:
Title: Title:
TRIAD INTERNATIONAL MAINTENANCE APEX MANUFACTURING, INC.
CORPORATION
By___________________________ By________________________
Name: Name:
Title: Title:
13
<PAGE>
AIRCRAFT INTERIOR DESIGN, INC. CARIBE AVIATION, INC.
By___________________________ By________________________
Name: Name:
Title: Title:
AVIATION SALES COMPANY AVIATION SALES LEASING COMPANY
By__________________________ By________________________
Name: Name:
Title: Title:
14
<PAGE>
CITICORP USA, INC. HELLER FINANCIAL, INC.
By___________________________ By__________________________
Shapleigh B. Smith John Buff
Vice President Senior Vice President
CONGRESS FINANCIAL CORPORATION NATIONAL CITY COMMERCIAL
FINANCE, INC.
By____________________________ By__________________________
Name: Name:
Title: Title:
FIRST UNION COMMERCIAL CREDIT LYONNAIS, ATLANTA
CORPORATION AGENCY
By___________________________ By__________________________
Terri K. Lins David M. Cawrse
Vice President First Vice President &
Manager
IBJ WHITEHALL BUSINESS CREDIT BANKBOSTON, N.A.
CORPORATION
By__________________________ By__________________________
Robert R. Wallace Tony Zhang
Vice President Vice President
SUNTRUST BANK, MIAMI, N.A. BANKATLANTIC
By_________________________ By_________________________
Jennifer P. Harrelson Ana C. Bolduc
Vice President Senior Vice President
15
<PAGE>
THE INTERNATIONAL BANK OF NATIONAL BANK OF CANADA
MIAMI, N.A. A Canadian Chartered Bank
By_________________________ By_________________________
Caridad C. Errazquin Frank H. D'Alto
Vice President Vice President
Trade Finance Division
By_________________________
Michael S. Bloomenfeld
Vice President & Manager
MERCANTILE BUSINESS CREDIT, INC. CITIZENS BUSINESS CREDIT
COMPANY
By_________________________ By_________________________
Steven C. Gonzalez Ralph L. Letner
Assistant Vice President Vice President
AMSOUTH BANK PNC BANK NATIONAL ASSOCIATION
By__________________________ By_________________________
Name: Name:
Title: Title:
16
<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, 1999 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-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,303
<SECURITIES> 0
<RECEIVABLES> 150,947
<ALLOWANCES> 0
<INVENTORY> 306,392
<CURRENT-ASSETS> 482,624
<PP&E> 71,596
<DEPRECIATION> 0
<TOTAL-ASSETS> 656,304
<CURRENT-LIABILITIES> 306,749
<BONDS> 164,185
0
0
<COMMON> 13
<OTHER-SE> 164,970
<TOTAL-LIABILITY-AND-EQUITY> 656,304
<SALES> 177,958
<TOTAL-REVENUES> 177,958
<CGS> 136,803
<TOTAL-COSTS> 136,803
<OTHER-EXPENSES> 258
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,431
<INCOME-PRETAX> 12,230
<INCOME-TAX> 4,770
<INCOME-CONTINUING> 7,460
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,917
<EPS-PRIMARY> 0.63
<EPS-DILUTED> 0.61
</TABLE>
