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, 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 May 12, 2000.
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, March 31,
1999 2000
------------ ---------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,431 $ 9,504
Accounts receivable, net 163,318 189,926
Inventories 350,610 342,925
Deferred income taxes 2,292 5,122
Other current assets 40,861 46,368
---------- ----------
Total current assets 578,512 593,845
---------- ----------
Equipment on lease, net 17,393 15,401
---------- ----------
Fixed assets, net 91,080 94,972
---------- ----------
Amounts due from related parties 2,099 2,072
---------- ----------
OTHER ASSETS:
Goodwill, net 66,994 66,144
Deferred financing costs, net 7,953 9,050
Other assets 14,761 11,941
---------- ----------
Total other assets 89,708 87,135
---------- ----------
Total assets $ 778,792 $ 793,425
========== ==========
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, March 31,
1999 2000
------------ ---------
(Unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 77,101 $ 77,224
Accrued expenses 32,937 38,837
Current maturities of notes payable 3,887 15,716
Current maturities of capital lease obligations 84 84
Revolving loan 269,580 268,013
----------- -----------
Total current liabilities 383,589 399,874
----------- -----------
Senior subordinated notes 164,254 164,277
Notes payable, net of current portion 1,066 960
Capital lease obligations, net of current portion 4,093 4,069
Deferred income 1,113 1,138
Other long-term liabilities 6,155 5,111
----------- -----------
Total long-term liabilities 176,681 175,555
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 5)
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 outstanding at
December 31, 1999 and March 31, 2000 15 15
Additional paid-in capital 150,288 151,368
Retained earnings 68,219 66,613
----------- -----------
Total stockholders' equity 218,522 217,996
----------- -----------
Total liabilities and stockholders' equity $ 778,792 $ 793,425
=========== ===========
</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
March 31,
-------------------------------------------------
1999 2000
----------------------------- ----------
As Reported,
As With Adjustments
Reported (Note 2)
<S> <C> <C> <C>
Operating revenues:
Sales of products, net $ 109,319 $ 102,719 $ 93,457
Services and other 68,639 68,639 92,527
---------- ---------- ----------
177,958 171,358 185,984
Cost of sales and services 136,803 131,903 150,937
---------- ---------- ----------
Gross profit 41,155 39,455 35,047
Operating expenses 20,236 20,236 24,506
---------- ---------- ----------
Income from operations 20,919 19,219 10,541
Interest expense and other 8,689 8,689 13,372
---------- ---------- ----------
Income (loss) before income taxes and equity income of affiliate 12,230 10,530 (2,831)
Income tax expense (benefit) 4,770 4,090 (1,131)
---------- ---------- ----------
Income (loss) before equity income of affiliate 7,460 6,440 (1,700)
Equity income of affiliate 457 457 94
---------- ---------- ----------
Net income (loss) $ 7,917 $ 6,897 $ (1,606)
========== ========== ==========
Basic earnings (loss) per share $ 0.63 $ 0.55 $ (0.11)
========== ========== ==========
Diluted earnings (loss) per share $ 0.61 $ 0.53 $ (0.11)
========== ========== ==========
</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,
--------------------------------------------------
1999 2000
------------------------------- -----------
As Reported,
As With Adjustments
Reported (Note 2)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,917 $ 6,897 $ (1,606)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization 3,481 3,481 6,520
Proceeds from sale of equipment on lease, net of gain 2,339 2,339 877
Provision for doubtful accounts 530 530 1,002
Equity in earnings of affiliate, net of taxes (457) (457) (94)
Deferred income taxes 222 222 251
Increase in accounts receivable (35,502) (28,902) (27,587)
(Increase) decrease in inventories (24,154) (29,054) 8,528
Increase in other current assets (1,849) (1,849) (5,507)
(Increase) decrease in other assets (4,408) (4,408) 2,532
Increase in accounts payable 7,751 7,751 126
Increase in accrued expenses 1,596 916 2,724
Decrease in deferred income (167) (167) --
Decrease in other liabilities -- -- (1,044)
---------- ---------- ----------
Net cash used in operating activities (42,701) (42,701) (13,278)
---------- ---------- ----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of fixed assets (4,007) (4,007) (7,003)
Purchases of equipment on lease (2,348) (2,348) --
Payments from related parties 24 24 26
---------- ---------- ----------
Net cash used in investing activities (6,331) (6,331) (6,977)
---------- ---------- ----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings under senior debt facilities 125,421 125,421 --
Payments under senior debt facilities (87,987) (87,987) (1,566)
Proceeds of term loan -- -- 15,500
Payments on equipment loans (343) (343) (48)
Payments on notes payable -- -- (3,450)
Stock options exercised 2,768 2,768 --
Payments on capital leases (60) (60) (23)
Payments of deferred financing costs -- -- (2,085)
---------- ---------- ----------
Net cash provided by financing activities 39,799 39,799 8,328
---------- ---------- ----------
Net decrease in cash and cash equivalents (9,233) (9,233) (11,927)
Cash and cash equivalents, beginning of period 10,536 10,536 21,431
---------- ---------- ----------
Cash and cash equivalents, end of period $ 1,303 $ 1,303 $ 9,504
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 10,773 $ 10,773 $ 12,869
========== ========== ==========
Income taxes paid $ 4,884 $ 4,884 $ 253
========== ========== ==========
</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, 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.
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 March 31, 2000 and
the results of its operations and cash flows for the three month periods ended
March 31, 1999 and 2000. The results of operations and cash flows for the three
month period ended March 31, 2000 are not necessarily indicative of the results
of operations or cash flows which may be reported for the year ending December
31, 2000.
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
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 beginning after March 15, 2000. The Company is currently
assessing the impact of the future adoption of SAB 101.
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 have agreed to forbear in regards to these covenant
violations and other matters until May 31, 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 in the process of pursuing a new
credit facility with its lenders. In addition, the Company is currently taking
actions designed to reduce its debt through possible sales of assets, including
the potential sale of its manufacturing operations. The Company is also
continuing its efforts to sell or lease the four A-300 aircraft which it owns.
5
<PAGE>
2. 1999 FIRST QUARTER 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 (one in the
first 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 (two in the first
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 three
transactions affecting the first quarter of 1999 represented $6,600 of revenues
and $1,700 of gross profit, representing approximately 3.7% and 4.1%,
respectively, of the Company's revenues and gross profit for the first quarter
of 1999. For comparative purposes, the financial statements included in this
Form 10-Q present both the Company's results for the three months ended March
31, 1999 as reported and with adjustments for the potential effect of these
three 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, management elected to convert the then outstanding note and accrued
interest balance into a capital contribution.
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 convert certain Boeing 727 aircraft from passenger
configuration to cargo configuration. The initial investment was $2,500. In
March 2000, the Company invested an additional $2,000. The Company accounts for
the 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 will
deliver $3,500 in purchase credits to Kitty Hawk during future periods. During
the three months ended March 31, 2000 purchase credits of $392 were utilized by
Kitty Hawk and $1,508 in purchase credits remain outstanding at March 31, 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 $300,000. Borrowings under the Credit Facility are secured
by a lien on substantially all of the Company's assets and the borrowing base
consists of substantially all of the Company's receivables and inventory.
Interest under the Credit Facility is, at the option of the Company, (a) prime
plus a margin, or (b) LIBOR plus a margin, where the respective margin
determination is made based 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, 2000, the margin
was 0.75% for prime rate loans and 2.25% for LIBOR rate loans.
The Credit Facility contains certain financial covenants regarding the
Company's financial performance and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the suspension of borrowing and repayment of
all debt in the event of a material adverse change in the business of the
Company or a change in control. 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 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 have agreed to forbear in regards to these covenant
violations and other matters until May 31, 2000 and they have increased the
interest rate on the Credit Facility by 2%. In addition, the Company was also
required to pay fees of $3,000 in relation to the standstill agreement
associated with the forbearance which are being amortized over the period from
February 1, 2000 through May 31, 2000. During this period, the Company intends
to pursue a new credit facility with its lenders. There can be no assurance that
the Company will successfully execute a new credit facility during this period
and failure of the Company to obtain a new Credit Facility would likely have a
material adverse effect upon the Company. At March 31, 2000, $6,058 was
available for borrowing under the Credit Facility and outstanding letters of
credit aggregated $23,592.
In February 2000, the Company executed a $15,500 term loan with the
financial institution which is the agent to 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 warrants to purchase 129,000 shares of 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
6
<PAGE>
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.
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 March 31, 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%.
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.
7
<PAGE>
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 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 complaint alleges that the Company's reported financial
results were materially misleading and violated generally accepted accounting
principles. The amended 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 in the consolidated
lawsuit. The Company believes that the allegations contained in the complaints
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
intends to cooperate 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 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
available facts, the Company believes that the ultimate outcome of this matter
will not have a material adverse effect upon its financial condition.
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 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 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.
8
<PAGE>
Accrued expenses in the accompanying March 31, 2000 condensed
consolidated balance sheet includes $1,611 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
June 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 these agreements.
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
have agreed to forbear in regards to these covenant violations and other matters
until May 31, 2000. During this period, the Company intends to pursue a
replacement of the Credit Facility with its senior lenders. Upon execution of a
new credit facility, the covenants and other terms of the lease may be amended.
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.
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
MARCH 31,
-------------------------------
1999 2000
------------- --------------
<S> <C> <C>
Weighted average common shares outstanding used in calculating basic
earnings per share 12,569 15,015
Effect of dilutive options 414 -
------------- --------------
Weighted average common and common equivalent shares outstanding
used in calculating diluted earnings per share 12,983 15,015
============= ==============
Options outstanding which are not included in the calculation of
diluted earnings per share because their impact is antidilutive 10 1,952
============= ==============
</TABLE>
9
<PAGE>
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"),
Maintenance, Repair and Overhaul ("MR&O") and Manufacturing ("Manufacturing").
The Company's businesses are managed together and sell primarily to the same
customers.
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.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31,
-------------------------------------------------
1999 2000
---------------------------------- -------------
As Reported,
As With Adjustments
Reported (Note 2)
<S> <C> <C> <C>
Operating Revenues:
Distribution $ 85,804 $ 79,204 $ 74,681
MR&O 87,066 87,066 110,043
Manufacturing 11,453 11,453 11,615
Accounting eliminations (6,365) (6,365) (10,355)
--------- --------- ---------
Total Operating Revenues $177,958 $171,358 $185,984
========= ========= =========
Income from Operations:
Distribution $ 10,464 $ 8,764 $ 3,816
MR&O 12,301 12,301 10,530
Manufacturing 1,023 1,023 1,108
Accounting eliminations (401) (401) (557)
Corporate general &
administrative expenses (2,468) (2,468) (4,356)
--------- --------- ---------
Total Income from Operations $ 20,919 $ 19,219 $ 10,541
========= ========= =========
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
--------------- -------------
Assets:
Distribution $376,005 $361,560
MR&O 300,019 326,497
Manufacturing 65,825 66,463
Corporate 36,943 38,905
-------- --------
Total assets $778,792 $793,425
======== ========
</TABLE>
10
<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 MARKETS
("MR&O"), 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
We were not in compliance at December 31, 1999 and March 31, 2000 with
certain of the financial covenants contained in the Company's credit facility.
Our lenders have agreed to forbear in regards to these covenant violations and
other matters until May 31, 2000 and they have 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 pursuing a new credit facility with our senior lenders. There can be
no assurance that we will successfully execute a new credit facility during this
period and failure of this to occur would likely have a material adverse effect
upon us. Once a new credit facility is executed, we intend to work with our
independent accountants toward the reissuance of their opinion on our 1999
consolidated financial statements and the removal of their comments relating to
our ability to continue as a going concern. There can be no assurance that this
will occur.
We are currently taking actions designed to reduce our debt through
possible sales of our assets, including the potential sale of our manufacturing
operations and/or other assets. We are also continuing our efforts to sell or
lease the four A-300 aircraft that we own and reduce our debt through that
process. There can be no assurance that we will successfully reduce our debt
through this process or as to the occurrence or timing of any such asset sales.
In April 2000, one of our large 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 assurance, we do
not anticipate that this customer's bankruptcy will have a material impact on
our financial position or results of operations.
11
<PAGE>
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:
o the timing of orders and payments from large customers,
o the timing of expenditures to purchase inventory in
anticipation of future sales,
o the timing of bulk inventory purchases,
o the number of airline customers seeking repair services at any
time,
o our ability to fully utilize from period to period our hangar
space dedicated to maintenance and repair services,
o our ability to attract and retain a sufficient number of
mechanics to perform the maintenance, overhaul and repair
services requested by our customers,
o the timeliness of customer aircraft arriving for scheduled
maintenance, and
o 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 (one in the first quarter)
arising in our redistribution operation should have been accounted for as
exchange transactions rather than as sales. We have also concluded that seven
additional 1999 transactions (two in the first 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 three transactions affecting the first
quarter of 1999 represented $6,600 of revenues and $1,700 of gross profit,
representing approximately 3.7% and 4.1%, respectively, of our revenues and
gross profit for the first quarter of 1999. For comparative purposes, the
financial statements included in this Form 10-Q present both our results for the
three months ended March 31, 1999 as reported and with adjustments for the
potential effect of these three transactions.
12
<PAGE>
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
Operating revenues for the three months ended March 31, 2000 increased
$8.0 million, or 4.5% ($14.6 million or 8.5%, with adjustments) to a record
$186.0 million, from $178.0 million ($171.4 million, with adjustments) for the
three months ended March 31, 1999. This increase is due primarily to an increase
in revenues from our heavy airframe maintenance operations. Illustrating this
increase in revenue is the growth of our labor force at these operations, which
grew from approximately 2,450 as of March 31, 1999 to approximately 3,050 as of
March 31, 2000. First quarter 2000 revenues were positively impacted by revenues
from facilities in which we made investments during 1999. 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. This increase was partially offset by a decrease in revenues in
our redistribution operations caused by a decrease in purchases of spare
aircraft parts and our initiative to reduce inventory in our redistribution
operations, which began during the first quarter of 2000. Redistribution
inventory decreased from approximately $214.1 million as of December 31, 1999 to
approximately $196.2 million as of March 31, 2000.
Gross profit decreased $6.2 million, or 15.0% ($4.5 million or 11.4%,
with adjustments), to $35.0 million for the three months ended March 31, 2000,
compared with $41.2 million ($39.5 million, with adjustments) for the three
months ended March 31, 1999. This decrease is primarily 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 quarter of 1999, which did not recur in 2000. Gross profit as a
percentage of operating revenues decreased to 18.8% for the three months ended
March 31, 2000, from 23.1% for the three months ended March 31, 1999.
Operating expenses increased $4.3 million or 21.1% to $24.5 million for
the three months ended March 31, 2000, compared with $20.2 million for the three
months ended March 31, 1999. Operating expenses as a percentage of operating
revenues were 13.2% for the three months ended March 31, 2000, compared to 11.4%
(11.8%, with adjustments) for the three months ended March 31, 1999. Operating
expenses in 2000 were affected by a $1.2 million increase in professional fees
during the first quarter of 2000 as compared to the first quarter of 1999,
relating primarily to the completion of our 1999 audit. 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 13.3% (14.7%,
with adjustments) of operating revenues for the three months ended March 31,
1999 to 16.6% of operating revenues for the three months
13
<PAGE>
ended March 31, 2000. During the latter portion of the first quarter of 2000, we
restructured our redistribution operations and reduced headcount in this
business from approximately 420 as of December 31, 1999 to approximately 320 as
of April 30, 2000.
Interest expense and other for the three months ended March 31, 2000
increased by $4.7 million or 53.9% to $13.4 million, from $8.7 million for the
three months ended March 31, 1999. This increase is primarily attributable to
the increased debt outstanding relating to our senior credit facility during
these periods that increased from $215.2 million as of March 31, 1999 to $268.0
million as of March 31, 2000. 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 will be
expensed during the second quarter of 2000. The weighted average interest rate
on our senior credit facility was approximately 10.6% for the three months ended
March 31, 2000 (excluding amortization of bank financing fees of $2.1 million),
compared to 7.3% for the three months ended March 31, 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, we are currently working
to reduce the outstanding debt under our senior credit facility.
As a result of the above factors, income (loss) before income taxes and
equity income of affiliate for the three months ended March 31, 2000 was a loss
of $2.8 million, compared to income of $12.2 million ($10.5 million, with
adjustments) for the three months ended March 31, 1999.
Equity income of affiliate, net of income taxes, decreased $0.4 million
for the three months ended March 31, 2000 to $0.1 million, from $0.5 million for
the same period in 1999. The decrease was attributable to the winding down in
the operations of the affiliate as the date for compliance with noise reduction
requirements has passed and therefore sales of aircraft noise reduction kits
have been decreased significantly.
Net (loss) income for the three months ended March 31, 2000 was a loss
of $1.6 million ($0.11 per diluted share), compared to net income of $7.9
million, or $0.61 per diluted share ($6.9 million, or $0.53 per diluted share,
with adjustments) for the three months ended March 31, 1999. Weighted average
common and common equivalent shares outstanding (diluted) were 15.0 million
during the three months ended March 31, 2000, compared to 13.0 million for the
three months ended March 31, 1999.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
We are currently pursuing the following actions designed to reduce our
debt:
o sales or leases of the A-300 aircraft we currently own,
o reducing inventory levels at our redistribution operations,
and
o sales of our assets, including the potential sale of our
manufacturing operations or other assets.
There can be no assurance that we will successfully execute these
transactions or as to the timing of any potential transactions. During the first
week of April, collections on open accounts receivable for our MR&O and
distribution operations were approximately $20.3 million. Additionally, 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, assuming that we are able to successfully execute a new credit
facility with our senior lenders, will be sufficient to satisfy our working
capital requirements for our existing businesses over the next 12 months.
However, there can be no assurance that we will successfully execute a new
credit facility during this period and failure of this to occur would likely
have a material adverse effect upon us.
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 March 31, 2000, we had outstanding indebtedness of approximately
$453.1 million (excluding letters of credit), of which $283.5 million was senior
debt and $169.6 million was other indebtedness. As of April 30, 2000, we had
approximately $418.9 million of outstanding indebtedness, of which $249.4
million was senior debt and $169.5 million was other indebtedness. Our ability
to make payments of principal and interest on, or to refinance our debt, 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:
o our vulnerability to adverse general economic and industry
conditions,
o our ability to obtain additional financing for future working
capital expenditures, general corporate and other purposes,
and
o 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 $21.4 million as of December
31, 1999 to $9.5 million as of March 31, 2000. Net cash used in operating
activities during the three months ended March 31, 2000 and 1999 was $13.3
million and $42.7 million, respectively. The decrease 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
$8.5 million during the three months ended March 31, 2000, compared to an
increase in inventory of $24.2 million ($29.1 million, with adjustments) during
the three months ended March 31, 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 March 31,
2000. Cash used in investing activities during the three months ended March 31,
2000 and 1999 was $7.0 million and $6.3 million, respectively. The cash used in
investing activities for the three months ended March 31, 2000 primarily related
to capital expenditures associated with tooling investments in our MR&O
operations and equipment purchases relating to the move of the Company's
headquarters and redistribution operation which occurred in April 2000. Cash
provided by financing activities for the three months ended March 31, 2000 and
1999 was $8.3 million and $39.8 million, respectively. Cash provided by
financing activities for the three months ended March 31, 2000 is primarily
comprised of the proceeds of a $15.5 million term loan executed in February
2000, net of repayments of outstanding notes payable and outstanding
indebtedness under our senior credit facility.
CREDIT FACILITY
On September 18, 1998, we entered into a four year Senior Secured
Revolving Credit Facility (the "Credit Facility") which provided us with a
$200.0 million revolving line of credit, including a $30.0 million letter of
credit sublimit, with the imposition of
15
<PAGE>
certain borrowing criteria based on the satisfaction of certain debt ratios. The
eligible borrowing base includes certain receivables and inventories. The
interest rate on the Credit Facility is, at our option, (a) prime plus a margin,
or (b) LIBOR plus a margin, where the respective margin determination is made
upon our 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). As discussed below, during the period of forbearance with our lenders
of February 1, 2000 through May 31, 2000, the interest rate margin has been
increased an additional two percent.
In November 1998 and May 1999, the Credit Facility was amended to
increase the revolving loan and letter of credit facility to $250.0 and $300.0
million, respectively. During the three months ended March 31, 2000 and 1999,
the weighted average interest rate on the Credit Facility was 10.6% and 7.3%,
respectively. As of March 31, 2000 and December 31, 1999, the outstanding
balance on the Credit Facility was $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 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 our assets are pledged as collateral for amounts borrowed.
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
have agreed to forbear in regards to these covenant violations and other matters
until May 31, 2000 and they have increased the interest rate which we are paying
on our senior borrowings by 2% during this period. We were also required to pay
substantial fees in relation to the standstill agreement associated with the
period of forbearance. We are currently pursuing a new credit facility with our
senior lenders. There can be no assurance that we will successfully execute a
new credit facility during this period and failure of this to occur would likely
have a material adverse effect upon us.
In February 2000, we executed a $15.5 million term loan with the
financial institution that is the agent to 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 March 31, 2000. Accordingly,
its ability to incur additional debt is limited under its 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 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,
16
<PAGE>
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 June 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 have agreed to forbear in regards to these covenant violations
and other matters until May 31, 2000. During this period, we intend to pursue a
replacement of the Credit Facility with our senior lenders, including the lender
which has financed construction of our new facility. Upon execution of a new
Credit Facility, the covenants and other terms of the lease agreement will
likely be amended consistent with the new Credit Facility. There can be no
assurance that these defaults will be resolved to the satisfaction of the lessor
and the lenders. The failure to resolve these issues would likely have a
material adverse effect upon us.
COMPUTER SYSTEMS AND IMPACT OF THE YEAR 2000
Prior to December 31, 1999, we completed an assessment of internal and
external Information Technology ("IT") systems and non-IT systems. We also
substantially completed the implementation of new Management Information Systems
("MIS") in our MR&O and manufacturing operations. During 1999, we were in the
process of implementing a new MIS system in our distribution operations.
However, that system was not expected to be fully implemented until sometime in
2000. In order to continue our operations, during the third and fourth quarters
of 1999, we remediated the MIS system historically used in our distribution
operations, and such system was Year 2000 compliant prior to December 31, 1999.
Total costs associated with Year 2000 remediation incurred during the year ended
December 31, 1999 were approximately $2.0 million, which were expensed as
incurred. As discussed below, we have decided to not complete the implementation
of the new MIS system for our distribution operations, and we are seeking at
this time to acquire a new MIS system for our distribution operations.
As a result of the procedures performed in regards to the Year 2000
issue as described above, we did not incur any significant effect from the Year
2000 issue. In addition, although there can be no assurance, we are not
currently aware of any Year 2000 problems relating to our systems or the systems
operated by third parties which would materially adversely affect our business,
results of operations or financial condition.
As noted above, since 1998, we had been implementing a new MIS system
in our distribution operations. The finance component of the system was
successfully implemented and is currently being utilized in our operations. As
of December 31, 1999, management made the decision to discontinue implementation
of the components of the system intended to support all other areas of the
distribution operations, excluding finance, and has begun to review alternatives
to the finance component for which the licensing agreement expires in September
2000.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 5 to the Company's Unaudited Condensed Consolidated Financial
Statements included in this filing.
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to the Company's shareholders during the
first quarter of 2000.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) EXHIBITS
27.1 - Financial Data Schedule - March 31, 2000
(b) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K, reporting certain
events under item 5, on March 27, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AVIATION SALES COMPANY
Dated: May 22, 2000
BY: /S/ MICHAEL C. BRANT
-------------------------------------
Michael C. Brant, Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
19
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
27.1 Financial Data Schedule - March 31, 2000
<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, 2000 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,504
<SECURITIES> 0
<RECEIVABLES> 208,012
<ALLOWANCES> 18,086
<INVENTORY> 342,925
<CURRENT-ASSETS> 593,845
<PP&E> 94,972<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 793,425
<CURRENT-LIABILITIES> 399,874
<BONDS> 164,277
0
0
<COMMON> 15
<OTHER-SE> 217,996
<TOTAL-LIABILITY-AND-EQUITY> 793,425
<SALES> 185,984
<TOTAL-REVENUES> 185,984
<CGS> 150,937
<TOTAL-COSTS> 150,937
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,372
<INCOME-PRETAX> (2,831)
<INCOME-TAX> (1,131)
<INCOME-CONTINUING> (1,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,606)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
<FN>
<F1>Net of depreciation.
</FN>
</TABLE>
