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 JUNE 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 1-11775
AVIATION SALES COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 65-0665658
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3701 FLAMINGO ROAD 33027
MIRAMAR, FLORIDA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (954) 538-2000
Indicate by checkmark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: 15,015,317 shares
of common stock, $.001 par value per share, were outstanding as of August 10,
2000.
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, June 30,
1999 2000
------------ ----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,439 $ 3,337
Accounts receivable, net 156,327 175,445
Inventories 338,942 302,331
Deferred income taxes 2,292 --
Other currents assets 40,730 31,633
-------- --------
Total current assets 557,730 512,746
-------- --------
Equipment on lease, net 17,393 10,355
-------- --------
Fixed assets, net 73,120 77,603
-------- --------
Amounts due from related parties 2,099 2,052
-------- --------
OTHER ASSETS:
Goodwill, net 50,679 48,779
Deferred financing costs, net 7,953 11,755
Other assets 14,428 10,466
Net assets of discontinued operations 50,954 41,042
-------- --------
Total other assets 124,014 112,042
-------- --------
Total assets $774,356 $714,798
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Continued)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ --------
(Unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 74,935 $ 58,062
Accrued expenses 31,918 41,073
Current maturities of notes payable 2,636 15,500
Current maturities of capital lease obligations 84 178
Revolving loan 269,580 240,311
-------- --------
Total current liabilities 379,153 355,124
-------- --------
Senior subordinated notes 164,254 164,300
Notes payable, net of current portion 1,066 1,102
Capital lease obligations, net of current portion 4,093 4,023
Deferred income 1,113 936
Other long-term liabilities 6,155 2,592
-------- --------
Total long-term liabilities 176,681 172,953
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
outstanding, 15,000 shares designated Series A Junior
Participating -- --
Common stock, $.001 par value, 30,000,000 shares authorized,
15,015,317 shares issued and outstanding at December 31,
1999 and June 30, 2000 15 15
Additional paid-in capital 150,288 151,368
Retained earnings 68,219 35,338
-------- --------
Total stockholders' equity 218,522 186,721
-------- --------
Total liabilities and stockholders' equity $774,356 $714,798
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
-------------------------------------
1999 2000
------------------------- ---------
As Reported,
With
As Adjustments
Reported (Note 2)
<S> <C> <C> <C>
Operating revenues:
Sales of products, net $ 89,211 $ 78,963 $ 76,808
Services and other 77,628 77,628 87,899
--------- --------- ---------
166,839 156,591 164,707
Cost of sales 125,772 117,729 149,602
--------- --------- ---------
Gross profit 41,067 38,862 15,105
Operating expenses 19,329 19,329 23,303
--------- --------- ---------
Income (loss) from operations 21,738 19,533 (8,198)
Interest expense and other 8,447 8,447 15,227
--------- --------- ---------
Income (loss) before income taxes, equity
income of affiliate and discontinued
operations 13,291 11,086 (23,425)
Income tax expense (benefit) 5,201 4,319 (1,108)
--------- --------- ---------
Income (loss) before equity income of affiliate
and discontinued operations 8,090 6,767 (22,317)
Equity income of affiliate 393 393 --
--------- --------- ---------
Income (loss) from continuing operations 8,483 7,160 (22,317)
Discontinued operations:
Operations, net of income taxes 1,020 1,020 260
Loss on disposal -- -- (9,218)
--------- --------- ---------
Net income (loss) $ 9,503 $ 8,180 $ (31,275)
========= ========= =========
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.65 $ 0.55 $ (1.48)
Income (loss) from discontinued operations 0.08 0.08 (0.60)
--------- --------- ---------
Net income (loss) $ 0.73 $ 0.63 $ (2.08)
========= ========= =========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.64 $ 0.54 $ (1.48)
Income (loss) from discontinued operations 0.07 0.07 (0.60)
--------- --------- ---------
Net income (loss) $ 0.71 $ 0.61 $ (2.08)
========= ========= =========
</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 INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-------------------------------------
1999 2000
------------------------- ---------
As Reported,
With
As Adjustments
Reported (Note 2)
<S> <C> <C> <C>
Operating revenues:
Sales of products, net $ 187,077 $ 170,229 $ 158,735
Services and other 146,266 146,266 180,426
--------- --------- ---------
333,343 316,495 339,161
Cost of sales 253,740 240,797 291,436
--------- --------- ---------
Gross profit 79,603 75,698 47,725
Operating expenses 37,970 37,970 46,406
--------- --------- ---------
Income from operations 41,633 37,728 1,319
Interest expense and other 17,135 17,135 28,612
--------- --------- ---------
Income (loss) before income taxes, equity
income of affiliate and discontinued operations 24,498 20,593 (27,293)
Income tax expense (benefit) 9,571 8,010 (2,666)
--------- --------- ---------
Income (loss) before equity income of affiliate
and discontinued operations 14,927 12,583 (24,627)
Equity income of affiliate 850 850 43
--------- --------- ---------
Income (loss) from continuing operations 15,777 13,433 (24,584)
Discontinued operations:
Operations, net of income taxes 1,644 1,644 921
Loss on disposal -- -- (9,218)
--------- --------- ---------
Net income (loss) $ 17,421 $ 15,077 $ (32,881)
========= ========= =========
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 1.22 $ 1.04 $ (1.64)
Income (loss) from discontinued operations 0.13 0.13 (0.55)
--------- --------- ---------
Net income (loss) $ 1.35 $ 1.17 $ (2.19)
========= ========= =========
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 1.19 $ 1.01 $ (1.64)
Income (loss) from discontinuing operations 0.12 0.12 (0.55)
--------- --------- ---------
Net income (loss) $ 1.31 $ 1.13 $ (2.19)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
---------------------------------------
1999 2000
---------------------------- ---------
As Reported,
As With Adjustments
Reported (Note 2)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 17,421 $ 15,077 $ (32,881)
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 6,743 6,743 11,350
Proceeds from sale of equipment on lease,
net of gain 1,088 1,088 1,054
Provision for doubtful accounts 922 922 1,411
Loss on disposition of affiliate -- -- 859
Equity in earnings of affiliate, net of taxes (850) (850) (43)
Deferred income taxes (329) (329) 2,292
Increase in accounts receivable (39,099) (22,251) (20,529)
(Increase) decrease in inventories (76,981) (89,924) 41,945
(Increase) decrease in other current assets (8,441) (8,441) 9,098
(Increase) decrease in other assets (8,260) (8,260) 14,243
Increase (decrease) in accounts payable 6,377 6,377 (16,875)
Increase in accrued expenses 15,737 14,176 9,699
Increase (decrease) in deferred income 3,959 3,959 (176)
Increase (decrease) in other liabilities 15 15 (3,562)
--------- --------- ---------
Net cash (used in) provided by
operating activities (81,698) (81,698) 17,885
--------- --------- ---------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of fixed assets (10,465) (10,465) (9,656)
Payments from related parties 66 66 47
Investment in limited liability company -- -- (2,000)
Proceeds from disposition of affiliate -- -- 1,455
--------- --------- ---------
Net cash used in investing activities (10,399) (10,399) (10,154)
--------- --------- ---------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing under senior debt facilities 272,850 272,850 183,156
Payments under senior debt facilities (259,119) (259,119) (212,425)
Proceeds of term loan -- -- 15,500
Payments on equipment loans (610) (610) (95)
Payments on notes payable (2,779) (2,779) (2,411)
Proceeds from secondary public offering 80,318 80,318 --
Stock options exercised 4,676 4,676 --
Payments on capital leases (60) (60) (170)
Payments of deferred financing costs (1,160) (1,160) (7,388)
--------- --------- ---------
Net cash provided by (used in) financing
activities 94,116 94,116 (23,833)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 2,019 2,019 (16,102)
Cash and cash equivalents, beginning of period 6,954 6,954 19,439
--------- --------- ---------
Cash and cash equivalents, end of period $ 8,973 $ 8,973 $ 3,337
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 14,365 $ 14,365 $ 20,505
========= ========= =========
Income taxes paid $ 14,375 $ 14,375 $ 954
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Aviation Sales Company ("ASC" or the "Company") is a Delaware
corporation. ASC is a leading provider of aviation inventory and maintenance,
repair and overhaul services. The Company sells aircraft spare parts and
provides aircraft maintenance, repair and overhaul services to commercial
passenger airlines, air cargo carriers, maintenance and repair facilities and
other redistributors throughout the world. The Company also manufactures various
aircraft parts for sale to original equipment manufacturers, including precision
engine parts. See Note 10 for discussion regarding the discontinuance of the
Company's manufacturing operations.
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 December 31, 1999 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 June 30, 2000 and the
results of its operations for the three and six month periods ended June 30,
1999 and 2000 and cash flows for the six month periods ended June 30, 1999 and
2000. The results of operations and cash flows for the six month period ended
June 30, 2000 are not necessarily indicative of the results of operations or
cash flows which may be reported for the year ending December 31, 2000.
As discussed in Note 10, Discontinued Operations, the Company's
manufacturing operations have been accounted for as discontinued operations and
the accompanying unaudited condensed consolidated financial statements presented
herein have been restated to report separately the net assets and operating
results of these discontinued operations.
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. Principal
estimates made by the Company include the allowance to reduce inventory to the
lower of cost or net realizable value, the estimated profit recognized as
aircraft maintenance, design and construction services are performed, the
allowance for doubtful accounts receivable, the reserve for sales returns,
medical benefit accruals and the allowances for litigation and environmental
costs. In determining the inventory allowance for its aircraft spare parts, the
Company assumes the inventory will be offered for sale in the normal course of
business which assumes inventory could be held for many years.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), is effective for
fiscal years ended after June 15, 2000. The Company adopted SFAS 133 effective
June 30, 2000, however, the Company did not have any derivative or hedging-type
investment as defined by SFAS 133 as of that date.
In January 2000, Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No.101 regarding revenue recognition was issued. SAB 101
clarifies issues relating to revenue recognition in financial statements
including income statement presentation and disclosure. SAB 101 is effective for
fiscal quarters
6
<PAGE>
beginning after September 15, 2000. The Company is currently assessing the
impact of the future adoption of SAB 101.
In May 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue No. 00-14, "Accounting for Certain
Sales Incentives", ("EITF Issue No. 00-14") which addresses the recognition,
measurement and income statement classification for sales incentives offered by
vendors to customers. EITF Issue No. 00-14 will be effective for the Company
during the quarter ending September 30, 2000. Sales incentives within the scope
of this issue include offers that can be used by a customer to receive a
reduction in the price of a product or service at the point of sale. The
consensus states that the cost of the sales incentive should be recognized at
the latter of the date at which the related revenue is recorded or the date at
which the sales incentive is offered. The consensus also states that when
recognized the reduction in or refund of the selling price should be classified
as a reduction of revenue. However, if the sales incentive is a free product or
service delivered at the time of sale the cost should be classified as an
expense. The adoption of EITF Issue No. 00-14 is not expected to have a material
effect on the financial statements of the Company.
COMPREHENSIVE INCOME
For all periods presented comprehensive income (loss) is equal to net
income (loss).
LIQUIDITY
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. As discussed in
Notes 5 and 6, the Company was not in compliance at March 31, 2000 with certain
financial covenants contained in the Company's credit agreement with its senior
lenders and certain of the lease agreements to which the Company is a party.
These third parties agreed to forbear in regards to these covenant violations
and other matters until May 31, 2000 at which point in time the Credit Facility
was amended. The Credit Facility was further modified effective June 25, 2000.
As a result of this forbearance period, the Company's liquidity position at
December 31, 1999 and the covenant violations discussed above, the Company's
independent accountants stated in their audit opinion, in relation to their
examination of the Company's consolidated financial statements for the year
ended December 31, 1999, that these matters raised substantial doubt about the
Company's ability to continue as a going concern. The Company is currently
taking actions designed to reduce its debt through sales of assets. As discussed
in Notes 10 and 11, the Company has executed agreements relating to the sales of
its manufacturing operations and three of the A-300 aircraft which it owns. The
total purchase price for these sales is $77,000, less expenses.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax assets or liabilities are computed based
upon the difference between the financial statement and income tax basis of
assets and liabilities using the enacted marginal tax rate applicable when the
related asset or liability is expected to be realized or settled. Deferred
income tax expenses or benefits are based on the changes in the asset or
liability from period to period. If available evidence suggests that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized, a valuation allowance is required to reduce the deferred tax assets to
the amount that is more likely than not to be realized. Future changes in such
valuation allowance would be included in the provision for deferred income taxes
in the period of change. The Company has recorded a charge of $7,888 to income
tax expense and increased the loss from discontinued operations by $3,687 during
the three months ended June 30, 2000 to provide a full valuation allowance for
its deferred tax assets.
RECLASSIFICATIONS
Certain 1999 account balances have been reclassified to conform with
current year presentation.
2. 1999 SECOND QUARTER AND YEAR TO DATE RESULTS
In connection with the preparation of its consolidated financial
statements for the year ended December 31, 1999, the Company identified several
transactions which, after review, should not have been recorded as revenues in
its books and records. Based upon these findings, in early February 2000, the
Company's Board of Directors organized a special committee to review certain
matters relating to the Company's accounting and sales practices. The committee
retained outside professionals to conduct an in-depth review and investigation
of these matters, which has now been concluded.
The Company has concluded that seven 1999 transactions (including one
in the first quarter and four in the second quarter) arising in its
redistribution operation should have been accounted for as exchange transactions
rather than as sales. The Company has also concluded that seven additional 1999
transactions (including two in the first quarter and four in the second quarter)
arising in its redistribution operation should not have been recorded as sales
due to certain contingencies associated with the transactions that had not been
resolved at the date of the sales. In the aggregate, the transactions affecting
the second quarter of 1999 represented $10,248 of revenues and $2,205 of gross
profit, representing approximately 5.7% and 5.0%, respectively, of the Company's
revenues and gross profit (including the revenues and gross profit of its
discontinued operations) for this period. These transactions, combined with the
transactions arising in the first quarter of 1999, represented $16,848 of
revenues and $3,905 of gross profit or approximately 4.7% and 4.6%,
respectively, of the Company's revenue and gross profit (including the revenues
and gross profit of its discontinued operations) for this period. For
comparative purposes, the financial statements included in this Form 10-Q
present both the Company's results for the three and six months ended June 30,
1999 as reported and with adjustments for the potential effect of these
transactions.
3. INVESTMENTS IN AFFILIATES
During 1994, Whitehall Corporation, which was acquired by the Company
in 1998 in a transaction accounted for under the pooling of interests method,
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 was evidenced by a
promissory note which accrued interest at a maximum rate of 5% per annum.
Principal and accrued interest became due on January 5, 1999. During February
2000, the Company converted the outstanding note and accrued interest balance
into a capital contribution. During May 2000, the Company liquidated its
investment in the joint venture. In connection with the disposition of the joint
venture, the Company recorded a charge of $859, which is included in interest
expense and other.
In August 1999, the Company obtained a 50% interest in a limited
liability corporation that designs, manufactures and installs an FAA approved
conversion kit which converts certain Boeing 727 aircraft from passenger
configuration to cargo configuration. The initial investment was $2,500. In
March 2000, the Company
7
<PAGE>
invested an additional $2,000 in the venture, and during the three months ended
June 30, 2000, the Company invested an additional $479 in the form of services.
The Company accounts for this investment under the equity method.
4. BUSINESS COMBINATIONS
In August 1999, the Company completed the acquisition of the assets of
Kitty Hawk, Inc.'s airframe and JT8D engine maintenance operations located in
Oscoda, Michigan and entered into agreements to provide heavy airframe and
engine maintenance services to Kitty Hawk for a three year period. Under the
terms of the acquisition agreement, the Company paid $18,080 in cash and $3,500
in purchase credits to Kitty Hawk. During the six months ended June 30, 2000,
purchase credits of $592 were utilized by Kitty Hawk and $1,308 in purchase
credits remain outstanding at June 30, 2000. The pre-acquisition operations of
Kitty Hawk, Inc.'s airframe and JT8D engine maintenance operations were not
material to the operations of the Company. The acquisition was accounted for
under the purchase method of accounting. The purchase price allocation for the
acquisition was as follows:
Inventories $ 3,535
Other assets 1,000
Fixed assets 2,322
Goodwill 14,723
Accrued expenses (3,500)
--------
Cash used in acquisitions, net of cash acquired $ 18,080
--------
5. NOTES PAYABLE AND REVOLVING LOAN
The Company has a revolving loan and letter of credit facility (the
"Credit Facility") of $283,000 with a group of financial institutions.
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. The Credit Facility expires in July
2002. Interest under the Credit Facility is, at the option of the Company, (a)
prime plus 3.0%, or (b) LIBOR plus 4.5%.
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. A default under the Credit Facility could
potentially result in a default under other agreements to which the Company is a
party including its lease agreements. In addition, the Credit Facility requires
mandatory repayments and a corresponding reduction in the total committment
under the Credit Facility 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 December 31, 1999 and March 31,
2000, the Company was not in compliance with certain of the financial covenants
contained in the Credit Facility. The financial institutions which are party to
the Credit Facility agreed to forbear in regards to these covenant violations
and other matters until May 31, 2000 at which point in time the Credit Facility
was amended. The Credit Agreement was further modified effective June 25, 2000.
The Company was required to pay fees of $3,000 in relation to the standstill
agreement associated with the forbearance which were amortized over the period
from February 1, 2000 through May 31, 2000. In connection with the June 25, 2000
amendment, the Company paid fees of $2,154, which are to be amortized between
July 1, 2000 and July 31, 2002. At June 30, 2000, $14,764 was available for
borrowing under the Credit Facility and outstanding letters of credit aggregated
$24,793.
In February 2000, the Company executed a $15,500 term loan with the
financial institution that is the agent under the Credit Facility. The term loan
matures in February 2001, bears interest at 12% and contains financial covenants
which are consistent with the Credit Facility. Under the term loan agreement,
the Company also granted the lender common stock purchase warrants to purchase
129,000 shares of the Company's common stock exercisable for nominal
consideration at any time until December 31, 2005. If the term loan is not
repaid in full, the warrants entitle the holder to require the Company,
subsequent to July 31, 2000 and subject to a vesting schedule, to repurchase the
warrants or common shares issued upon prior exercise of the warrants. The
Company has recorded the value of these warrants ($1,080) as additional paid-in
capital as of the date of grant and is amortizing this amount to expense over
the term of the loan.
8
<PAGE>
SENIOR SUBORDINATED NOTES
In February 1998, the Company sold $165,000 of senior subordinated
notes 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 Credit Facility
and to fund the cash requirements related to certain acquisitions. The senior
subordinated notes mature on February 15, 2008. Interest is payable on February
15 and August 15 of each year. The senior subordinated notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior debt, including indebtedness outstanding under the
Credit Facility and under facilities which may replace the Credit Facility in
the future. In addition, the senior subordinated notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including the Credit Facility.
The indenture pursuant to which the senior subordinated notes have been
issued permits the Company and its subsidiaries to incur substantial additional
indebtedness, including additional senior debt. Under the indenture, the Company
may borrow unlimited additional amounts so long as after incurring such debt it
meets a fixed charge coverage ratio for the most recent four fiscal quarters.
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 Company did not meet the
fixed charge coverage ratio for the one-year period ended June 30, 2000.
Accordingly, its ability to incur additional debt is limited under its
indenture. The senior subordinated notes are also effectively subordinated in
right of payment to all existing and future liabilities of any of its
subsidiaries which do not guarantee the senior subordinated notes.
The senior subordinated notes are fully and unconditionally guaranteed,
on a senior subordinated basis, by substantially all of the Company's existing
subsidiaries and each subsidiary that will be organized in the future by the
Company unless such subsidiary is designated as an unrestricted subsidiary.
Subsidiary guarantees are joint and several, full and unconditional, general
unsecured obligations of the subsidiary guarantors. Subsidiary guarantees are
subordinated in right of payment to all existing and future senior debt of
subsidiary guarantors, including the Credit Facility, and are also effectively
subordinated to all secured obligations of subsidiary guarantors to the extent
of the assets securing their obligations, including the Credit Facility.
Furthermore, the indenture permits subsidiary guarantors to incur additional
indebtedness, including senior debt, subject to certain limitations. The Company
has not presented separate financial statements and other disclosures concerning
each of the subsidiary guarantors because management has determined that such
information is not material to investors.
The senior subordinated notes are redeemable, at the Company's option,
in whole or in part, at any time after February 15, 2003, at the following
redemption prices, plus accrued and unpaid interest and liquidated damages, if
any, to the redemption date: (i) 2003--104.063%; (ii) 2004--102.708%; (iii)
2005--101.354%; and (iv) 2006 and thereafter -- 100%. In addition, on or prior
to February 15, 2001, the Company may redeem up to 35% of the aggregate
principal amount of the senior subordinated notes at a redemption price of
108.125% of the principal amount thereof, plus accrued and unpaid interest and
liquidated damages, if any, thereon to the redemption date with the net proceeds
of a public offering of common stock of the Company; provided, that at least 65%
of the aggregate principal amount of the senior subordinated notes originally
issued remains outstanding immediately after the occurrence of this redemption.
Upon the occurrence of a change of control, the Company will be
required to make an offer to repurchase all or any part of each holder's senior
subordinated notes at a repurchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest and liquidated damages, if any,
thereon to the repurchase date. There can be no assurance that the Company will
have the financial resources necessary to purchase the senior subordinated notes
upon a change of control or that such repurchase will then be permitted under
the Credit Facility.
The indenture contains certain covenants that, among other things,
limit the Company's ability and that of its subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, make investments, dispose of assets, issue capital stock of
subsidiaries, create certain liens securing indebtedness, enter into certain
transactions with affiliates, sell assets or enter into certain mergers and
consolidations or sell all or substantially all of the Company's assets.
OTHER LOANS
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 $2,500 (discounted to $2,200). A payment of
$1,250 was made during January 1999 and the final payment of $1,250 was made
during January 2000. Interest on this note was imputed at 8%.
9
<PAGE>
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 was payable over
a two year period with an interest rate of 8% per annum. The first payment of
$2,500 was made during March 1999 and the second payment of $2,500 was made
during March 2000.
6. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
Several lawsuits have been filed against the Company and certain of its
officers and directors, and its auditors, in the United States District Court
for the Southern District of Florida, which has now been consolidated into a
single lawsuit. The consolidated complaint, as amended in March 2000, alleges
violations of Sections 11 and 15 of the Securities Act of 1933 and Sections
10(b) and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act of 1934.
Among other matters, the amended consolidated complaint alleges that the
Company's reported financial results were materially misleading and violated
generally accepted accounting principles. The amended consolidated complaint
seeks damages and certification of two classes, one consisting of purchasers of
the Company's common stock in the June 1999 public offering and one consisting
of purchasers of the Company's common stock during the period between March 26,
1998 and January 28, 2000. During May 2000, the Company filed a motion to
dismiss the claims set forth in the amended consolidated complaint. The Company
believes that the allegations contained in the amended consolidated complaint
are without merit and intends to vigorously defend these and any related
actions. Nevertheless, unfavorable resolution of these lawsuits could have a
material adverse effect on the Company in one or more future periods.
The U.S. Securities and Exchange Commission is conducting an informal
inquiry into the Company's accounting for certain transactions. The Company is
cooperating with the SEC in its inquiry.
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 available facts, the Company believes that the ultimate
outcome of this matter will not have a material adverse effect upon its
financial condition.
On June 24, 1998, Zantop International Airlines, Inc. filed an action
against Aero Corp.-Macon, Inc., one of the Company's subsidiaries (which is now
part of TIMCO), in the Superior Court of Bibb County, Georgia. The suit was for
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 involved a contractual dispute relative to certain
purchase price adjustments and inventory purchases. The Company settled the suit
for $225 during July 2000.
The Company is also involved in various lawsuits and other
contingencies arising out of its 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 $1,400. 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
10
<PAGE>
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 $1,400 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 Whitehall
and other parties are jointly and severally liable and are responsible for the
remediation of those properties. No estimate of any such costs to the Company is
available at this time.
The Company owns a parcel of real estate on which Whitehall previously
operated an electronics business. The Company is currently assessing
environmental issues with respect to this property. When the Company acquired
Whitehall, its environmental consultants estimated that remediation costs
relating to this property could be up to $1,000.
Accrued expenses in the accompanying June 30, 2000 condensed
consolidated balance sheet includes $1,411 related to obligations to remediate
the environmental matters described above. Future information and developments
will require the Company to continually reassess the expected impact of the
environmental matters discussed above. Actual costs to be incurred in future
periods may vary from the estimates, given the inherent uncertainties in
evaluating environmental exposures. These uncertainties include the extent of
required remediation based on testing and evaluation not yet completed and the
varying costs and effectiveness of remediation methods.
LEASE FOR NEW FACILITY
On December 17, 1998, the Company entered into an operating lease for
its build-to-suit corporate headquarters and warehouse facility with First
Security Bank, National Association, as trustee of a newly created trust, as
lessor. The lease has an initial term of five years and is a triple net lease
with annual rent as provided in the lease. The lease contains financial
covenants regarding the Company's financial performance and certain other
affirmative and negative covenants which it will be obligated to comply with
during the term of the lease. Substantially all of the Company's subsidiaries
have guaranteed its obligations under the lease. Additionally, the Company has
an option to acquire the new facility at the end of the lease for an option
price as determined in the lease. Alternatively, if the Company does not
purchase the new facility at the end of the lease, it will be obligated to pay
certain amounts as provided in the lease. The Company moved its corporate
headquarters and redistribution operation into the new facility in April 2000
and anticipates that one of its MR&O operations will move into the facility in
October 2000.
The development of the new facility has been financed by the trust
through a $43,000 loan facility provided by a financial institution. Pursuant to
the agreements entered into in connection with this financing, the Company is
obligated to develop the new facility on behalf of the trust and is responsible
for the timely completion thereof within an established construction budget. The
Company and substantially all of its subsidiaries have guaranteed the repayment
of $37,840 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 $12,000 to secure both its obligations
under the lease and the trust's obligations under the loan agreement.
The Company was not in compliance at March 31, 2000 with certain of the
financial covenants contained in the lease agreement. The lessor and its lenders
agreed to forbear in regards to these covenant violations and other matters
until May 31, 2000. Effective May 31, 2000, the lease agreement was amended, in
conjunction with the amendment of the Credit Facility. It was subsequently
amended effective June 25, 2000.
OTHER MATTERS
The Company's lease for its previous corporate headquarters calls for
annual lease payments in the amount of $893 and expires on December 2, 2014.
Management believes that the Company will be relieved of its remaining
obligations under the lease for its previous corporate headquarters.
The Company has a commitment with a vendor to convert two Airbus
aircraft from passenger configuration to cargo configuration. The terms of
agreement specify that the Company has the right to terminate the agreement;
however, the Company could be subject to a termination fee. The termination fee
would be calculated as the unused costs incurred by the vendor plus a fee equal
to 10% of such unused costs.
11
<PAGE>
7. EQUITY OFFERING
On June 16, 1999, the Company closed a public offering of 2,000,000
shares of common stock and on June 24, 1999 the Company's underwriters exercised
their option to purchase an additional 300,000 shares of common stock. The net
proceeds of the offering, $79,862, were used to repay amounts outstanding under
the Credit Facility. The Company also filed a separate registration statement
with respect to the public offering of $85,000 of the Company's senior
subordinated notes due 2008, but has not sold any of these new notes to date.
8. EARNINGS PER SHARE
The computation of weighted average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months
June 30, Ended June 30,
------------------------------ ------------------------------
1999 2000 1999 2000
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding
used in calculating basic earnings per share 12,987 15,015 12,885 15,015
Effect of dilutive options 353 -- 397 --
------------- ------------ ------------- ------------
Weighted average common and common
equivalent shares outstanding used in
calculating diluted earnings per share 13,340 15,015 13,282 15,015
============= ============ ============= ============
Option outstanding which are not included in the
calculation of diluted earnings per share
because their impact is antidilutive 13 1,773 10 1,773
============= ============ ============= ============
</TABLE>
9. SEGMENT INFORMATION
The Company operates in one business segment, airline services.
However, the Company has determined to provide information regarding the
following components of its business segment: Distribution ("Distribution") and
Maintenance, Repair and Overhaul ("MR&O"). The Company's businesses are managed
together and sell primarily to the same customers. The Company also previously
operated a manufacturing component within its airline services business. As
discussed in Note 10, the Company is in the process of disposing of its
manufacturing operations.
Distribution's operations encompass redistribution and new parts
distribution, inventory sales, brokering and exchanging of aircraft parts. In
addition, Distribution provides inventory management services, including
consignment, repair management, aircraft disassembly, warehouse management,
purchasing services and leasing. MR&O provides heavy airframe maintenance,
modification and repair services for commercial, military and freighter aircraft
and for a wide range of aircraft components. Manufacturing manufactures various
aircraft parts for sale to original equipment manufacturers, including precision
engine parts.
The Company's business is conducted on a global basis with
manufacturing, service and sales undertaken in various locations throughout the
world. Substantially all of the Company's operating profits and identifiable
assets are sourced from or located in the United States. Segment operating
income is total segment revenue reduced by operating expenses identifiable with
that business segment. Corporate includes general corporate administrative
costs.
The Company evaluates performance and allocates resources based on
operating income. The accounting policies of each component of the Company's
business segment are the same as those described in the summary of significant
accounting policies contained in the Company's consolidated financial statements
and notes thereto included in its Form 10-K for the year ended December 31,
1999.
12
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
June 30,
---------------------------------------------------------
1999 2000
-------------------------------------- --------------
As Reported,
As With Adjustments
Reported (Note 2)
<S> <C> <C> <C>
Operating Revenues:
Distribution $ 78,039 $ 67,791 $ 70,553
MR&O 96,875 96,875 103,874
Accounting eliminations (8,075) (8,075) (9,720)
-------------- ------------------- --------------
Total Operating Revenues $ 166,839 $ 156,591 $ 164,707
============== =================== ==============
Income (Loss) from Operations:
Distribution $ 9,077 $ 6,872 $ (5,116)
MR&O 15,817 15,817 2,032
Accounting eliminations (1,313) (1,313) (200)
Corporate general & administrative expenses (1,843) (1,843) (4,914)
-------------- ------------------- --------------
Total Income (Loss) from Operations $ 21,738 $ 19,533 $ (8,198)
============== =================== ==============
<CAPTION>
For the Six Months Ended
June 30,
---------------------------------------------------------
1999 2000
-------------------------------------- --------------
As Reported,
As With Adjustments
Reported (Note 2)
<S> <C> <C> <C>
Operating Revenues:
Distribution $ 163,842 $ 146,994 $ 145,162
MR&O 183,940 183,940 213,917
Accounting eliminations (14,439) (14,439) (19,918)
-------------- ------------------- --------------
Total Operating Revenues $ 333,343 $ 316,495 $ 339,161
============== =================== ==============
Income from Operations:
Distribution $ 19,817 $ 15,912 $ (1,373)
MR&O 28,118 28,118 12,562
Accounting eliminations (1,715) (1,715) (600)
Corporate general & administrative expenses (4,587) (4,587) (9,270)
-------------- ------------------- --------------
Total Income from Operations $ 41,633 $ 37,728 $ 1,319
============== =================== ==============
<CAPTION>
December 31, June 30,
1999 2000
------------------- --------------
<S> <C> <C>
Assets:
Distribution $ 376,005 $ 358,841
MR&O 300,019 320,865
Corporate 98,332 35,092
------------------- --------------
Total assets $ 774,356 $ 714,798
=================== ==============
</TABLE>
13
<PAGE>
10. DISCONTINUED OPERATIONS
On August 3, 2000, the Company executed an agreement to sell
substantially all of the assets of its manufacturing operations. Such sale is
expected to close in the third quarter of 2000. The net income of these
operations prior to June 30, 2000 is included in the consolidated statements of
income under "discontinued operations". Revenues from such operations were
$23,903 and $23,049 for the six months ended June 30, 1999 and 2000,
respectively. The results of operations of the manufacturing operations, net of
income taxes of $1,066 and $641, were $1,644 and $921 for the six month periods
ended June 30, 1999 and 2000, respectively.
The provision for loss on disposal of discontinued operations reflected
in the consolidated statement of income includes the write-down of the assets of
the manufacturing operations to estimated net realizable values, the estimated
costs of disposing of these operations and the estimated results of their
operations through their disposition date.
A summary of the net assets of the Company's discontinued manufacturing
operations is as follows:
December 31, June 30,
1999 2000
------------ --------
(Unaudited)
Current assets $20,781 $21,893
Non-current assets 34,606 23,500
------- -------
Total assets 55,387 45,393
------- -------
Current liabilities 3,183 4,351
Non-current liabilities 1,250 --
------- -------
Total liabilities 4,433 4,351
------- -------
Net assets of discontinued operations $50,954 $41,042
======= =======
11. SUBSEQUENT EVENTS
In July 2000, the Company executed agreements to sell three of the
A-300 aircraft which it owns. Under the terms of the agreements, the Company
will sell the three aircraft for $12,000 each. The purchaser has placed $3,000
in escrow, which is non-refundable except under limited circumstances. The sale
with respect to the first aircraft closed on August 14, 2000 and the remaining
sales are expected to close on September 15, 2000 (with respect to the second
aircraft) and September 30, 2000 (with respect to the third aircraft). The
Company has recorded a charge of $6,638 in cost of sales and services for the
quarter ended June 30, 2000 in connection with the sale of the three aircraft.
On July 28, 2000, the Company entered into two separate agreements
which provide that the LIBOR interest rate component on $10,000 and $55,000 of
the Credit Facility is capped at 7.75%. In exchange for the rate cap on the
$10,000, the Company paid an up-front fee of $30, which will be amortized over
the life of the agreement. This rate cap expires July 28, 2002. In exchange for
the interest rate cap on the $55,000, the Company paid an up-front fee of $44
and will pay a monthly fee of $14 through the expiration date of the agreement,
which is July 28, 2002. The up-front fee will be amortized over the life of the
agreement and the monthly fee will be expensed as incurred.
14
<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 OUR GROWTH STRATEGY AND
ANTICIPATED TRENDS IN THE INDUSTRY IN WHICH WE OPERATE. THESE FORWARD-LOOKING
STATEMENTS ARE BASED ON OUR CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF
RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATING TO OUR 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 OUR ANNUAL REPORT ON FORM 10-K, AS AMENDED, FOR THE YEAR ENDED DECEMBER 31,
1999, UNCERTAINTIES WITH RESPECT TO AVAILABLE CAPITAL TO CONTINUE TO SUPPORT OUR
CURRENT OPERATIONS AND FUTURE GROWTH, OUR MAINTAINING GOOD WORKING RELATIONSHIPS
WITH OUR VENDORS AND CUSTOMERS, OUR ABILITY TO REDUCE OUR INDEBTEDNESS FROM ITS
CURRENT LEVELS THROUGH SALES OF OUR ASSETS, OUR ABILITY TO ACQUIRE ADEQUATE
INVENTORY AND TO OBTAIN FAVORABLE PRICING FOR SUCH INVENTORY, COMPETITIVE
PRICING FOR OUR PRODUCTS AND SERVICES, INCREASED COMPETITION IN THE AIRCRAFT
SPARE PARTS REDISTRIBUTION AND MAINTENANCE, REPAIR AND OVERHAUL ("MR&O")
MARKETS, OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL IN OUR
BUSINESSES, OUR ABILITY TO CONSUMMATE SUITABLE ACQUISITIONS AND/OR TO CONTINUE
TO DEVELOP OUR BUSINESS INTERNALLY, UTILIZATION RATES FOR OUR MR&O FACILITIES,
OUR ABILITY TO EFFECTIVELY INTEGRATE ACQUISITIONS, OUR ABILITY TO EFFECTIVELY
MANAGE THE GROWTH OF OUR BUSINESS, ECONOMIC FACTORS WHICH AFFECT THE AIRLINE
INDUSTRY AND CHANGES IN GOVERNMENT REGULATIONS. 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 US IN THIS QUARTERLY REPORT ON
FORM 10-Q. WE DO 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 our Annual Report on Form
10-K, as amended, for the year ended December 31, 1999 (the "Form 10-K").
RECENT DEVELOPMENTS
On August 3, 2000, we executed an agreement to sell substantially all
of the assets of our manufacturing operations. The sale is expected to close in
the third quarter of 2000. During the quarter ended June 30, 2000, We recorded a
pre-tax charge of $9,218 to reduce the carrying value of our investment in the
manufacturing operations to its net realizable value of $41,042. Net income for
the manufacturing operations prior to June 30, 2000 is now included in our
consolidated statements of income under "discontinued operations".
In July 2000, we executed agreements to sell three of the A-300
aircraft which we own. Under the terms of the agreements, we will sell the three
aircraft for $12,000 each. The purchaser has placed $3,000 in escrow, which is
non-refundable except under limited circumstances. The sale with respect to the
first aircraft closed on August 14, 2000 and the remaining sales are expected to
close on September 15, 2000 (with respect to the second aircraft) and September
30, 2000 (with respect to the third aircraft). We have recorded (in costs of
goods sold) a charge of $6,638 for the quarter ended June 30, 2000 in connection
with the sale of the aircraft.
We were not in compliance at December 31, 1999 and March 31, 2000 with
certain of the financial covenants contained in our Credit Facility. Our lenders
agreed to forbear in regards to these covenant violations and other matters
until May 31, 2000 and increased the interest rate that we are paying on our
senior borrowings by 2% during this period. As a result of this forbearance
period, our liquidity position at December 31, 1999 and the covenant violations
discussed above, our independent accountants stated in their audit opinion, in
relation to their examination of our consolidated financial statements for the
year ended December 31, 1999, that these matters raised substantial doubt about
our ability to continue as a going concern. We are currently taking actions
designed to reduce our debt through sales of assets. As discussed in notes 10
and 11 we have executed agreements relating to the sales of our manufacturing
operations and three of the A-300 aircraft which we own. The total purchase
price for these sales is $77,000, less estimated expenses. Although there can be
no assurance, both sales are anticipated to close in their entirety in the third
quarter. Effective May 31, 2000 and June 25, 2000, the Credit Facility was
amended. As a result, we now have a $283,000 revolving loan and letter of credit
facility which expires in July 2002. The Credit Facility bears interest, at our
option, at the prime rate plus 3.0% or LIBOR plus 4.5%.
In April 2000, one of our MR&O customers that represents a significant
portion of the operations at one of our facilities filed bankruptcy. We are
currently in possession of a significant amount of inventory and other assets
owned by the customer that we have either repaired or are in the process of
repairing. The customer has continued to make payments on amounts due us. We
intend to work with the customer and, although there can be no
15
<PAGE>
assurance, we do not anticipate that this customer's bankruptcy will have a
material impact on our financial position or results of operations.
RESULTS OF OPERATIONS
Operating revenues consist primarily of gross sales of products and
service revenues, net of allowances for returns. Cost of sales and services
consists primarily of product costs, labor, freight charges, commissions to
outside sales representatives and changes in the provision for slow moving
inventory. Product costs consist of the acquisition cost of the products and any
costs associated with repairs, overhaul or certification.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future. Many factors affect our operating results,
including:
/bullet/ timing of orders and payments from large customers,
/bullet/ the timing of expenditures to purchase inventory in
anticipation of future sales,
/bullet/ the timing of bulk inventory purchases,
/bullet/ the number of airline customers seeking repair services at any
time,
/bullet/ our ability to fully utilize from period to period our hangar
space dedicated to maintenance and repair services,
/bullet/ our ability to attract and retain a sufficient number of
mechanics to perform the maintenance, overhaul and repair
services requested by our customers,
/bullet/ the timeliness of customer aircraft arriving for scheduled
maintenance, and
/bullet/ the mix of available aircraft spare parts contained, at any
time, in our inventory.
Large portions of our operating expenses are relatively fixed. Since we
typically do not obtain long-term purchase orders or commitments from our
customers, we must anticipate the future volume of orders based upon the
historic purchasing patterns of our customers and upon discussions with our
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 our business, financial condition and results of operations.
In connection with the preparation of our consolidated financial
statements for the year ended December 31, 1999, we identified several
transactions which, after review, should not have been recorded as revenues in
our books and records. Based upon these findings, in early February 2000, our
Board of Directors organized a special committee to review certain matters
relating to our accounting and sales practices. The committee retained outside
professionals to conduct an in-depth review and investigation of these matters,
which has now been concluded.
We concluded that seven 1999 transactions (including one in the first
quarter and four in the second quarter) arising in our redistribution operation
should have been accounted for as exchange transactions rather than as sales. We
also concluded that seven additional 1999 transactions (including two in the
first quarter and four in the second quarter) arising in our redistribution
operation should not have been recorded as sales due to certain contingencies
associated with the transactions that had not been resolved at the date of the
sales. In the aggregate, the transactions affecting the second quarter of 1999
represented $10,248 of revenues and $2,205 of gross profit, representing
approximately 5.7% and 5.0%, respectively, of our revenues and gross profit
(including those of our discontinued operations for the second quarter of 1999).
These transactions, combined with the transactions arising in the first quarter
of 1999, represented $16,848 of revenues and $3,905 of gross profit or
approximately 4.7% and 4.6%, respectively, of revenue and gross profit
(including those of our discontinued operations for the six months ended June
30, 1999). For comparative purposes, the financial statements included in this
Form 10-Q present both our results for the three and six months ended June 30,
1999 as reported and with adjustments for the potential effect of these
transactions.
Operating revenues for the six months ended June 30, 2000 increased
$5.8 million or 1.7% to $339.1 million, from $333.3 for the same period in 1999
($22.7 million or 7.2%, with adjustments). The increase in our revenues was
primarily the result of an increase in revenues from our heavy airframe
maintenance operations. Revenues in 2000 were positively impacted by revenues
from MR&O facilities in which we made investments during 1999.
16
<PAGE>
During 1999, we acquired the assets of Kitty Hawk, Inc.'s airframe and JT8D
engine maintenance operations located in Oscoda, Michigan. We also developed a
new MR&O facility in Winston-Salem, North Carolina and expanded our MR&O
facilities in Greensboro, North Carolina. Operating revenues for the three
months ended June 30, 2000 decreased $2.1 million, or 1.3% to $164.7 million,
from $166.8 million (increased $8.1 million or 5.2% from $156.6 million, with
adjustments) for the three months ended June 30, 1999. Revenues of our MR&O
facilities increased from period to period, offset by decreased revenues in our
redistribution operations. Decreased revenues in our redistribution operations
were caused by our decision to limit purchases of spare aircraft parts
commencing at the end of the first quarter of 2000 and our initiative to reduce
inventory in our redistribution operations (and use the proceeds to repay debt).
Redistribution inventory decreased from approximately $214.1 million as of
December 31, 1999 to approximately $184.9 million as of June 30, 2000. Operating
revenues during the three months ended June 30, 2000 were also negatively
impacted by customer decisions to defer utilizing the services of our MR&O
facilities until we completed our May 31, 2000 Credit Facility amendment.
In July 2000, we executed agreements to sell three A-300 aircraft. As
discussed above, we recorded a charge of $6.6 million in cost of goods sold
during the second quarter of 2000 in connection with the sale of the aircraft.
For comparative purposes, the results of operations discussed below do not
include the effect of this one time event.
Gross profit decreased $25.2 million, or 31.7% ($21.3 million or 28.1%,
with adjustments), to $54.4 million for the six months ended June 30, 2000,
compared with $79.6 million ($75.7 million, with adjustments) for the six months
ended June 30, 1999. Gross profit decreased $19.4 million, or 47.2% ($17.2
million or 44.2%, with adjustments), to $21.7 million for the three months ended
June 30, 2000, compared with $41.1 million ($38.9 million, with adjustments) for
the three months ended June 30, 1999. This decrease is partially attributable to
the continued shift in our operations whereby a higher percentage of our sales
are derived from MR&O operations, which generally operate at lower gross profit
margins but higher operating income margins than our other operations, our
initiative to reduce the inventory levels in our redistribution operations
(which has resulted in sales of certain assets at gross margins slightly below
historical levels and sales of other assets immediately following the purchase
of the assets to generate immediate positive cash flow but at slightly lower
gross margin), and a decrease in gross profit from our leasing operations, due
to a reduction in our investment in leased assets and sales of leased assets in
the first two quarters of 1999, which did not recur in 2000. Gross profit for
the second quarter of 2000 was also negatively impacted by inefficiencies and
reductions in profits realized in our MR&O operations caused by delays in the
timing of orders being placed into service and a reduced volume of orders
received from existing customers due to concerns which existed over our lack of
a long-term Credit Facility prior to May 31, 2000. While we lost no significant
customers as a result of these concerns, our operating results for the three and
six month periods ended June 30, 2000 were significantly affected by these
factors. While there can be no assurances, we believe these concerns have been
reduced as a result of the execution of the amended Credit Facility on May 31,
2000. Gross profit as a percentage of operating revenues decreased to 16.0% for
the six months ended June 30, 2000, from 23.9% for the six months ended June 30,
1999. Gross profit as a percentage of operating revenues decreased to 13.2% for
the three months ended June 30, 2000, from 24.6% for the three months ended June
30, 1999.
Operating expenses increased $8.4 million or 22.2% to $46.4 million for
the six months ended June 30, 2000, compared with $38.0 million for the six
months ended June 30, 1999. Operating expenses as a percentage of operating
revenues were 13.7% for the six months ended June 30, 2000, compared to 11.4%
(12.0%, with adjustments) for the six months ended June 30, 1999. Operating
expenses increased $4.0 million or 20.7% to $23.3 million for the three months
ended June 30, 2000, compared with $19.3 million for the three months ended June
30, 1999. Operating expenses as a percentage of operating revenues were 14.2%
for the three months ended June 30, 2000, compared to 11.6% (12.3%, with
adjustments) for the three months ended June 30, 1999. Operating expenses in
2000 were affected by a $3.6 million increase in professional fees during the
first six months of 2000 compared to the first quarter of 1999, relating
primarily to the completion of our 1999 audit and the refinancing of our Credit
Facility. Operating expenses relating to redistribution operations also
increased as a result of our strategy during 1999 and the beginning of 2000 to
continue to grow these operations. Operating expenses in our redistribution
operations increased from 15.1% (17.1%, with adjustments) of operating revenues
for the six months ended June 30, 1999 to 17.1% of operating revenues for the
six months ended June 30, 2000. Operating expenses in our redistribution
operations decreased from 17.0% (20.1%, with adjustments) of operating revenues
for the three months ended June 30, 1999 to 17.6% of operating revenues for the
three months ended June 30, 2000. During the latter portion of the first quarter
of 2000, we restructured our redistribution operations and reduced headcount in
this business. Operating expenses as a percent of revenues relating to the MR&O
operations increased from 5.0% for the six months ended June 30, 1999 to 5.7%
for the six months ended June 30, 2000. This increase was primarily the result
of lower than anticipated revenues during the second quarter of 2000 resulting
from the customer issues described above.
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Interest expense and other for the six months ended June 30, 2000
increased by $11.5 million or 67.3% to $28.6 million, from $17.1 million for the
six months ended June 30, 1999. Interest expense and other for the three months
ended June 30, 2000 increased by $6.8 million or 81.0% to $15.2 million, from
$8.4 million for the three months ended June 30, 1999. This increase is
primarily attributable to the increased debt outstanding, as our Credit Facility
increased during these periods from $187.7 million as of June 30, 1999 to $240.3
million as of June 30, 2000. Additionally, the three and six month results of
2000 included a loss of $859 on the disposition of our affiliate joint venture.
In addition, as discussed above, we were not in compliance with the financial
covenants under our Credit Facility as of December 31, 1999 and March 31, 2000.
As a result, during the first quarter of 2000, we entered into a standstill
agreement with our lenders under which they agreed to forbear in regards to
these covenant violations and other matters. Under the terms of the standstill
agreements, our interest rate was increased by 2%. We were also required to pay
substantial financing fees ($1.5 million) that were expensed over the term of
the original standstill agreement which expired on March 31, 2000 and an
additional $1.5 million that related to a further extension of the standstill
agreement through May 31, 2000 which was expensed during the second quarter of
2000. In connection with the May 31, 2000 amendment of the Credit Facility, we
paid additional bank fees of $3.8 million which are being amortized over the
term of the facility which expires in July 2002. The weighted average interest
rate on our senior credit facility was approximately 11.1% for the six months
ended June 30, 2000 (excluding amortization of bank financing fees of $4.7
million), compared to 8.7% for the six months ended June 30, 1999. The weighted
average interest rate on our senior credit facility was approximately 10.5% for
the three months ended June 30, 2000 (excluding amortization of bank financing
fees of $2.1 million), compared to 7.3% for the three months ended June 30,
1999. The increase in debt outstanding during these periods is primarily
attributable to increased net borrowings during 1999 to finance the acquisition
of the assets of Kitty Hawk, Inc.'s airframe and JT8D engine facilities,
redistribution inventory acquisitions and additional investments which were made
in our MR&O facilities and computer systems during 1999. As discussed above and
below, we are currently working to reduce the outstanding debt under our Credit
Facility. As a result of these initiatives, our debt outstanding under the
senior Credit Facility has decreased from $269.0 million as of December 31, 1999
to $240.3 million as of June 30, 2000.
As a result of the above factors, excluding the charge relating to the
sale of the A-300 aircraft, income (loss) before income taxes, equity income of
affiliate and discontinued operations for the six months ended June 30, 2000 was
a loss of $20.7 million, compared to income of $24.5 million ($20.6 million,
with adjustments) for the six months ended June 30, 1999. As a result of the
above factors, excluding the charge relating to the sale of the A-300 aircraft,
income (loss) before income taxes, equity income of affiliate and discontinued
operations for the three months ended June 30, 2000 was a loss of $16.8 million,
compared to income of $13.3 million ($11.1 million, with adjustments) for the
three months ended June 30, 1999.
Equity income of affiliate, net of income taxes, decreased $0.8 million
for the six months ended June 30, 2000 to $0.1 million, from $0.9 million for
the same period in 1999. The decrease was attributable to the winding down in
the operations of the affiliate. During the second quarter of 2000, our
remaining investment in the affiliate was disposed of resulting in a $859
charge, which is included in interest expense and other.
Income (loss) from continuing operations including the charge relating
to the sale of the A-300 aircraft for the six months ended June 30, 2000 was a
loss of $24.6 million ($1.64 per diluted share), compared to income of $15.8
million, or $1.19 per diluted share ($13.4 million, or $1.01 per diluted share,
with adjustments) for the six months ended June 30, 1999. Income (loss) for the
three months ended June 30, 2000 was a loss of $22.3 million ($1.48 per diluted
share), compared to income of $8.5 million, or $0.64 per diluted share ($7.2
million, or $0.54 per diluted share, with adjustments) for the three months
ended June 30, 1999. Weighted average common and common equivalent shares
outstanding (diluted) were 15.0 million during the three and six months ended
June 30, 2000, compared to 13.3 million for the three and six months ended June
30, 1999.
Income (loss) from discontinued operations for the six months ended
June 30, 2000 was a loss of $8.3 million, or $0.55 per diluted share, compared
to income of $1.6 million or $0.12 per diluted share, for the six months ended
June 30, 1999. Income (loss) from discontinued operations for the three months
ended June 30, 2000 was a loss of $9.0 million or $0.60 per diluted share
compared to income of $1.0 million, or $0.07 per diluted share for the three
months ended June 30, 1999. During the second quarter of 2000, we recognized a
$9.2 million loss relating to the sale of our discontinued manufacturing
operations.
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LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As noted above, we have executed agreements relating to the sales of
our manufacturing operations and three A-300 aircraft which we own. The total
purchase price for these sales is $77.0 million, less estimated expenses.
Although there can be no assurance, both sales are anticipated to close in the
third quarter of 2000. We are currently pursuing the following actions designed
to reduce our debt:
/bullet/ continuing to reduce the inventory levels at our
redistribution operations, and
/bullet/ sales of other assets, including the potential sale of our
Dixie Bearings new parts distribution operation.
There can be no assurance that we will successfully execute these
transactions or as to the timing of any potential transactions. During April
2000, we collected $16.4 million of our federal income taxes recoverable from
taxes paid in previous years. We believe that our available capital resources
will be sufficient to satisfy our working capital requirements for our existing
businesses over the next 12 months. We may also consider selling additional
equity and/or debt securities in the future to meet working capital requirements
of our current business and to continue the further development of our business.
As of June 30, 2000, we had outstanding indebtedness of approximately
$425.4 million (excluding letters of credit), of which $255.8 million was senior
debt and $169.6 million was other indebtedness. As of March 31, 2000, we had
$453.1 of outstanding indebtedness. Our ability to make payments of principal
and interest will depend upon our future operating performance, which will be
subject to economic, financial, competitive and other factors beyond our
control. The level of our indebtedness is also important due to:
/bullet/ our vulnerability to adverse general economic and industry
conditions,
/bullet/ our ability to obtain additional financing for future working
capital expenditures, general corporate and other purposes,
and
/bullet/ the dedication of a substantial portion of our future cash
flow from operations to the payment of principal and interest
on indebtedness, thereby reducing the funds available for
operations and future business opportunities.
In prior years, we relied primarily upon significant borrowings under
our credit facility, and sales of our securities, including our previously
issued senior subordinated notes, to satisfy our funding requirements relating
to our acquisitions of several businesses and to finance the growth of our
business. We cannot assure you that financing alternatives will be available to
us in the future to support our continued growth.
CASH
Cash and cash equivalents decreased from $19.4 million as of December
31, 1999 to $3.3 million as of June 30, 2000. Net cash provided by (used in)
operating activities during the six months ended June 30, 2000 and 1999 was
$17.9 million and $(81.7) million, respectively. The increase in cash provided
was primarily the result of a reduction in inventory which, as discussed above,
relates to our initiative to reduce inventory levels in our redistribution
operation. Inventory decreased $41.9 million during the six months ended June
30, 2000, compared to an increase in inventory of $77.0 million ($89.9 million,
with adjustments) during the six months ended June 30, 1999. Cash used in
operating activities was, in part, negatively impacted by the timing of
collections on open accounts receivable which, in certain instances, were
deferred until after June 30, 2000. Cash used in investing activities during the
six months ended June 30, 2000 and 1999 was $10.2 million and $10.4 million,
respectively. The cash used in investing activities for the six months ended
June 30, 2000 primarily related to capital expenditures associated with tooling
investments in our MR&O operations and equipment purchases relating to the move
of our headquarters and redistribution operation which occurred in April 2000.
Cash provided by (used in) financing activities for the six months ended June
30, 2000 and 1999 was $(23.8) million and $94.1 million, respectively. Cash used
in financing activities for the six months ended June 30, 2000 is primarily
comprised of payments of outstanding notes payable and outstanding indebtedness
and deferred financing fees under our senior credit facility, net of the
proceeds of a $15.5 million term loan executed in February 2000.
CREDIT FACILITY
Prior to May 31, 2000, the Company had a revolving loan and letter of
credit facility (the "Credit Facility") of $300,000 with a group of financial
institutions. 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. Effective May 31,
2000, the Credit Facility was amended and the commitment was reduced to
$285,000. Following the liquidation of the joint venture described above, the
commitment was reduced to
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$283,000. The Credit Facility expires in July 2002. The Credit Facility was also
amended on June 25, 2000. Interest under the Credit Facility is, at the option
of the Company, (a) prime plus 3.0%, or (b) LIBOR plus 4.5%. During the six
months ended June 30, 2000 and 1999, the weighted average interest rate on the
Credit Facility was 11.1% and 8.7%, respectively. During the three months ended
June 30, 2000 and 1999, the weighted average interest rate on the Credit
Facility was 10.5% and 7.3%, respectively. As of June 30, 2000, March 31, 2000
and December 31, 1999, the outstanding balance on the Credit Facility was $240.3
million, $268.0 million and $269.6 million, respectively.
The Credit Facility contains certain financial covenants regarding our
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 the Credit Facility and repayment of all debt in
the event of a material adverse change in the business or a change in control.
In addition, the Credit Facility requires mandatory repayments and a
corresponding reduction in the total commitment under the Credit Facility 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.
We were not in compliance at December 31, 1999 or March 31, 2000 with
certain of the financial covenants contained in the Credit Facility. Our lenders
agreed to forbear in regards to these covenant violations and other matters
until May 31, 2000 at which point in time the Credit Facility was amended. We
were also required to pay substantial fees in relation to the standstill
agreement associated with the period of forbearance and the May 31, 2000 amended
Credit Facility.
In February 2000, we executed a $15.5 million term loan with the
financial institution that is agent for the Credit Facility. The proceeds from
the term loan were used to repay debt outstanding under the Credit Facility. The
term loan matures in February 2001, bears interest at 12% and contains financial
covenants that are consistent with the Credit Facility. Under the term loan
agreement, we also granted warrants to the lender to purchase 129,000 shares of
our common stock exercisable for nominal consideration at any time until
December 31, 2005. If the term loan is not repaid in full, the warrants entitle
the holder to require us, subsequent to July 31, 2000 and subject to a vesting
schedule, to repurchase the warrants or common shares issued upon prior exercise
of the warrants.
SENIOR SUBORDINATED NOTES
In February 1998, we sold $165.0 million in senior subordinated notes
(the "Notes") due in 2008 with a coupon rate of 8.125% at a price of 99.395%.
The Notes mature on February 15, 2008. Interest is payable on February 15 and
August 15 of each year. The Notes are general unsecured obligations,
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
Notes are effectively subordinated to all secured obligations to the extent of
the assets securing such obligations, including the Credit Facility.
The indenture pursuant to which the Notes have been issued (the
"Indenture") permits us and our subsidiaries to incur substantial additional
indebtedness, including senior debt. Under the Indenture, we may borrow
unlimited additional amounts so long as after incurring such debt we meet a
fixed charge coverage ratio for the most recent four fiscal quarters.
Additionally, the Indenture allows us to borrow and have outstanding additional
amounts of indebtedness (even if we do not meet the required fixed charge
coverage ratios), up to enumerated limits. The Company did not meet the fixed
charge coverage ratio for the one-year period ended June 30, 2000. Accordingly,
our ability to incur additional debt is limited under the indenture. The Notes
are also effectively subordinated in right of payment to all existing and future
liabilities of any of our subsidiaries that do not guarantee the Notes.
The Notes are unconditionally guaranteed, on a senior subordinated
basis, by substantially all of our existing subsidiaries and each subsidiary
that we organize in the future, unless such subsidiary is designated as an
unrestricted subsidiary (the "Subsidiary Guarantors"). Subsidiary Guarantees are
joint and several, full and unconditional, general unsecured obligations of the
Subsidiary Guarantors. Subsidiary Guarantees are subordinated in right of
payment to all existing and future senior debt of Subsidiary Guarantors,
including the Credit Facility, and are also effectively subordinated to all
secured obligations of Subsidiary Guarantors to the extent of the assets
securing such obligations, including the Credit Facility. Furthermore, the
Indenture permits Subsidiary Guarantors to incur additional indebtedness,
including senior debt, subject to certain limitations.
The Notes are redeemable, at our 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, we may redeem
up to 35% of the aggregate principal amount of the Notes
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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 our common stock; 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, we 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 we will have the financial resources necessary to purchase the
Notes upon a change of control or that such repurchase will be permitted under
the Credit Facility.
The Indenture contains certain covenants that, among other things, will
limit (as described above) our ability and the ability of our 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 our assets.
OTHER NOTES
In connection with the acquisition of Kratz-Wilde Machine Company, one
of our subsidiaries delivered a non-interest-bearing promissory note (guaranteed
by us) to the sellers in the original principal amount of $2.5 million
(discounted to $2.2 million). A payment of $1.2 million was made during January
1999 and the remaining principal balance of $1.3 million was paid in January
2000. Interest on this note has been imputed at 8%.
In connection with the acquisition of Caribe and AIDI, one of our
subsidiaries delivered to the sellers a promissory note in the original
principal amount of $5.0 million, which was guaranteed by us. The note was
payable over a two year period with an interest rate of 8% per annum. The first
payment of $2.5 million was made during March 1999 and the final payment was
paid in March 2000.
LEASE FOR NEW FACILITY
In 1998, we decided to move to a new corporate headquarters and
warehouse facility. On December 17, 1998, we entered into an operating lease for
the new 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 our
financial performance and other affirmative and negative covenants.
Substantially all of our subsidiaries have guaranteed our obligations under the
lease. Additionally, we have an option to acquire the new facility at the end of
the lease and if we do not purchase the new facility at the end of the lease, we
will be obligated to pay a fee. We moved our corporate headquarters and
redistribution operation into the new facility in April 2000 and expect to move
one of our MR&O operations into the new facility during October 2000.
The lessor has financed the development of the new facility through a
$43.0 million loan from a financial institution. We are obligated to develop the
new facility on behalf of the lessor and are responsible for the timely
completion of the facility within an established construction budget. We and
substantially all of our subsidiaries have guaranteed the repayment of $37.8
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, we have posted an irrevocable letter of credit in
favor of the lessor in the amount of approximately $12.0 million to secure both
our obligations under the lease and the lessor's obligations under the loan
agreement.
We were not in compliance at December 31, 1999 or March 31, 2000 with
certain of the financial covenants contained in the lease agreement. The lessor
and its lenders agreed to forbear in regards to these covenant violations and
other matters until May 31, 2000. Effective May 31, 2000, the lease agreement
was amended in conjunction with the amendment of the Credit Facility. It was
subsequently amended effective June 25, 2000.
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PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 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
second quarter of 2000.
Item 5. OTHER INFORMATION
Amendment to Senior Credit Facility
On August 14, 2000, the Company entered into an agreement,
effective June 25, 2000 amending its senior credit facility pursuant to
the terms of Amendment No.1 to the Fourth Amended and Restated Credit
Agreement dated May 31, 2000. Reference is made to the more detailed
information contained in such document, which is attached to this Form
10-Q as Exhibit 10.1.
Amendment No. 3 to TROL Financing
On August 14, 2000, the Company entered into an agreement,
effective June 25, 2000 amending its existing tax retention operating
lease financing pursuant to the terms of Amendment No.3 to the Lease
Agreement and Certain Other Operative Agreements. Reference is made to
the more detailed information contained in such document, which is
attached to this Form 10-Q as Exhibit 10.2.
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) EXHIBITS
10.1 - Amendment No. 1, dated as of August 14, 2000, to the
Fourth Amended and Restated Credit Agreement, dated as
of May 31, 2000
10.2 - Amendment Agreement No. 3 for Lease Agreement and
Certain Other Operative Agreements.
27.1 - Financial Data Schedule - June 30, 2000
(b) REPORTS ON FORM 8-K
1. The Company filed on June 13, 2000 a report on Form
8-K dated May 31, 2000 under Item 5.
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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: August 14, 2000
BY: /S/ MICHAEL C. BRANT
--------------------------------------------
Michael C. Brant
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
10.1 Amendment No. 1, dated as of August 14, 2000, to the
Fourth Amended and Restated Credit Agreement, dated as
of May 31, 2000
10.2 Amendment Agreement No. 3 for Lease Agreement and
Certain Other Operative Agreements.
27.1 Financial Data Schedule - June 30, 2000
