UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 17,
2000.
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,439 $ 13,060
Accounts receivable, net 117,336 124,266
Inventories 109,358 55,330
Deferred income taxes 2,292 --
Other current assets 33,352 24,603
------------- -------------
Total current assets 281,777 217,259
------------- -------------
Equipment on lease, net 17,393 7,357
Fixed assets, net 64,058 65,465
Amounts due from related parties 2,099 2,032
OTHER ASSETS:
Goodwill, net 50,679 48,285
Deferred financing costs, net 7,953 12,418
Other assets 14,185 8,800
Net assets of discontinued operations 289,502 174,676
------------- -------------
Total other assets 362,319 244,179
------------- -------------
Total assets $ 727,646 $ 536,292
============= =============
</TABLE>
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, September 30,
1999 2000
------------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 28,224 $ 29,769
Accrued expenses 31,919 36,266
Current maturities of notes payable 2,636 15,500
Current maturities of capital lease obligations 84 178
Revolving loan 269,580 177,359
------------- -------------
Total current liabilities 332,443 259,072
------------- -------------
Senior subordinated notes 164,254 164,322
Notes payable, net of current portion 1,066 1,052
Capital lease obligations, net of current portion 4,093 3,896
Deferred income 1,113 937
Other long-term liabilities 6,155 2,194
------------- -------------
Total long-term liabilities 176,681 172,401
------------- -------------
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 September 30, 2000 15 15
Additional paid-in capital 150,288 151,735
Retained earnings (deficit) 68,219 (46,931)
------------- -------------
Total stockholders' equity 218,522 104,819
------------- -------------
Total liabilities and stockholders' equity $ 727,646 $ 536,292
============= =============
</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 Nine Months Ended
September 30,
--------------------------------------------------
1999 2000
------------------------------- -------------
As Reported,
With
As Adjustments
Reported (Note 2)
<S> <C> <C> <C>
Operating revenues:
Sales of products, net $ 5,519 $ 5,519 $ 1,203
Services and other 252,342 252,342 277,084
------------- ------------- -------------
257,861 257,861 278,287
Cost of sales 192,974 192,974 258,297
------------- ------------- -------------
Gross profit 64,887 64,887 19,990
Operating expenses 24,137 24,137 39,207
------------- ------------- -------------
Income (loss) from operations 40,750 40,750 (19,217)
Interest expense and other 14,595 14,595 16,781
------------- ------------- -------------
Income (loss) before income taxes, equity
income of affiliate and discontinued
operations 26,155 26,155 (35,998)
Income tax expense 10,144 10,144 3,823
------------- ------------- -------------
Income (loss) before equity income of affiliate
and discontinued operations 16,011 16,011 (39,821)
Equity income of affiliate 1,120 1,120 43
------------- ------------- -------------
Income (loss) from continuing operations 17,131 17,131 (39,778)
Discontinued operations:
Operations, net of income taxes 7,635 4,647 (23,432)
Loss on disposal, net of income taxes -- -- (51,940)
------------- ------------- -------------
Total discontinued operations 7,635 4,647 (75,372)
------------- ------------- -------------
Net income (loss) $ 24,766 $ 21,778 $ (115,150)
============= ============= =============
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 1.27 $ 1.27 $ (2.65)
Income (loss) from discontinued operations 0.56 0.34 (5.02)
------------- ------------- -------------
Net income (loss) $ 1.83 $ 1.61 $ (7.67)
============= ============= =============
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 1.24 $ 1.24 $ (2.65)
Income (loss) from discontinued operations 0.55 0.33 (5.02)
------------- ------------- -------------
Net income (loss) $ 1.79 $ 1.57 $ (7.67)
============= ============= =============
</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 Three Months Ended
September 30,
--------------------------------------------------
1999 2000
------------------------------- -------------
As Reported,
With
As Adjustments
Reported (Note 2)
<S> <C> <C> <C>
Operating revenues:
Sales of products, net $ 1,335 $ 1,335 $ --
Services and other 78,645 78,645 81,252
------------- ------------- -------------
79,980 79,980 81,252
Cost of sales 58,813 58,813 81,714
------------- ------------- -------------
Gross profit (loss) 21,167 21,167 (462)
Operating expenses 9,156 9,156 16,431
------------- ------------- -------------
Income (loss) from operations 12,011 12,011 (16,893)
Interest expense and other 4,743 4,743 4,980
------------- ------------- -------------
Income (loss) before income taxes, equity
income of affiliate and discontinued operations 7,268 7,268 (21,873)
Income tax expense 2,779 2,779 5,847
------------- ------------- -------------
Income (loss) before equity income of affiliate
and discontinued operations 4,489 4,489 (27,720)
Equity income of affiliate 270 270 --
------------- ------------- -------------
Income (loss) from continuing operations 4,759 4,759 (27,720)
Discontinued operations:
Operations, net of income taxes 2,586 1,941 (11,826)
Loss on disposal, net of income taxes -- -- (42,722)
------------- ------------- -------------
Total discontinued operations 2,586 1,941 (54,548)
------------- ------------- -------------
Net income (loss) $ 7,345 $ 6,700 $ (82,268)
============= ============= =============
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.32 $ 0.32 $ (1.85)
Income (loss) from discontinued operations 0.17 0.13 (3.63)
------------- ------------- -------------
Net income (loss) $ 0.49 $ 0.45 $ (5.48)
============= ============= =============
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.31 $ 0.31 $ (1.85)
Income (loss) from discontinued operations 0.17 0.13 (3.63)
------------- ------------- -------------
Net income (loss) $ 0.48 $ 0.44 $ (5.48)
============= ============= =============
</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 Nine Months Ended
September 30,
---------------------------------------------
1999 2000
---------------------------- -----------
As Reported,
As With Adjustments
Reported (Note 2)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 24,766 $ 21,778 $ (115,150)
Adjustments to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Loss on disposal of discontinued operations -- -- 51,940
Depreciation and amortization 8,227 8,227 10,789
Write-down of assets -- -- 4,871
Proceeds from sale of equipment on lease,
net of gain (448) (448) 885
Provision for doubtful accounts 480 480 1,593
Loss on sale of affiliate -- -- 859
Equity in earnings of affiliate, net of taxes (1,120) (1,120) (43)
Deferred income taxes 192 192 2,475
Increase in accounts receivable (25,604) (25,604) (14,722)
(Increase) decrease in inventories (35,057) (35,057) 51,123
(Increase) decrease in other current assets (3,820) (3,820) 9,117
(Increase) decrease in other assets (6,539) (6,539) 10,361
Increase (decrease) in accounts payable (6,497) (6,497) 1,544
Increase (decrease) in accrued expenses (3,711) (3,711) 4,892
Decrease in deferred income (367) (367) (176)
Decrease in other liabilities -- -- (3,961)
Net cash provided by (used in) discontinued
operations (69,251) (66,263) 36,000
----------- ----------- -----------
Net cash provided by (used in)
operating activities (118,749) (118,749) 52,397
----------- ----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash acquired (18,080) (18,080) --
Purchases of fixed assets (9,790) (9,790) (8,645)
Purchases of equipment on lease (9,086) (9,086) --
Payments from related parties 78 78 67
Investment in limited liability company -- -- (2,000)
Proceeds from sale of affiliate -- -- 1,455
Net proceeds from the sale of discontinued
operations -- -- 39,409
----------- ----------- -----------
Net cash provided by (used in) investing
activities (36,878) (36,878) 30,286
----------- ----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing under senior debt facilities 426,592 426,592 322,836
Payments under senior debt facilities (349,968) (349,968) (415,057)
Proceeds of term loan -- -- 15,500
Payments on equipment loans (624) (624) (145)
Payments on notes payable (2,779) (2,779) (2,411)
Proceeds from secondary public offering 79,890 79,890 --
Stock options exercised 5,218 5,218 --
Payments on capital leases (151) (151) (197)
Payments of deferred financing costs (1,430) (1,430) (9,588)
----------- ----------- -----------
Net cash provided by (used in) financing
activities 156,748 156,748 (89,062)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,121 1,121 (6,379)
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C> <C>
Cash and cash equivalents, beginning of period 6,954 6,954 19,439
----------- ----------- -----------
Cash and cash equivalents, end of period $ 8,075 $ 8,075 $ 13,060
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid (including that of
discontinued operations) $ 26,394 $ 26,394 $ 33,458
=========== =========== ===========
Income taxes paid $ 16,186 $ 16,186 $ 1,028
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
<PAGE>
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 completed sale of the
Company's manufacturing operations and the discontinuance of the Company's
distribution operations. After the disposition of the manufacturing and
distribution operations, the Company's primary continuing operations will be the
provision of maintenance, repair, and overhaul services.
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 Annual Report on 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 September 30, 2000,
the results of its operations for the three and nine month periods ended
September 30, 1999 and 2000 and its cash flows for the nine month periods ended
September 30, 1999 and 2000. The results of operations and cash flows for the
nine month period ended September 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 and distribution 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 estimated losses on disposal of
discontinued operations, 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
has historically assumed that the inventory would be offered for sale in the
normal course of business, which assumed inventory could be held for many years.
As discussed in Note 10, at September 30, 2000, the Company wrote the inventory
and other assets of its distribution operations down to the estimated value
expected to be realized from disposal of these operations.
7
<PAGE>
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. In June 2000 the SEC
issued SAB 101B to defer the effective date of implementation of SAB 101 until
the fourth quarter of 2000. The Company believes the impact of SAB 101 will not
have a material effect on the financial statements of the Company.
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 was effective for the Company during
the quarter ended 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, and that 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 did not 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 regard to these covenant violations and
other matters until May 31, 2000 at which time the Credit Facility was amended.
The Credit Facility was further modified effective June 25, 2000 and September
30, 2000. As a result of the covenant violations at March 31, 2000 and the
forbearance period described above, the Company's independent auditors stated in
their audit opinion, in relation to their audit 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 Note 10, in September 2000 the Company
completed the sale of its manufacturing operations for a total purchase price of
$41,000, excluding transaction expenses and possible post-closing adjustments,
and executed agreements relating to the sale of its redistribution operations.
In addition, during the quarter ended September 30, 2000, the Company completed
the sale of three of the A-300 aircraft which it owned for a total purchase
price of $36,000, less transaction 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 provision for deferred income taxes in
the period of change. The Company has recorded a charge of $13,007 to income tax
expense and increased the loss from discontinued operations by $30,149 during
the nine months ended September 30, 2000 to provide a full valuation allowance
for its deferred tax assets.
Income tax expense for the three months ended September 30, 2000 of
$5,847 is comprised of a valuation allowance provided on deferred tax assets of
$3,300 and state income tax accruals of $2,547.
RECLASSIFICATIONS
Certain 1999 account balances have been reclassified to conform with
current year presentation.
8
<PAGE>
2. 1999 THIRD 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 three
in the third 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 four in the
third 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. As discussed in Note 10,
the results of operations of the Company's redistribution operation are
reflected as discontinued operations in the accompanying condensed consolidated
financial statements and the effect of these transactions is set forth in the
discontinued operations line in the results as reported with adjustments. In the
aggregate, the transactions affecting the third quarter of 1999 represented
$7,271 of revenues and $1,076 of gross profit, representing approximately 4.5%
and 2.7%, respectively, of the Company's revenues and gross profit (including
the revenues and gross profit of the Company's discontinued operations for this
period). These transactions, combined with the transactions arising through the
second quarter of 1999, represented $24,120 of revenues and $4,980 of gross
profit, representing 4.8% and 4.1%, 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
nine months ended September 30, 1999 as reported and as reported 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
accounted 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 invested an additional $2,000 in the venture, and during
the nine months ended September 30, 2000, the Company invested an additional
$507 in the form of services. The Company accounts for its investment in this
venture 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 nine months ended September 30,
2000, purchase credits of $1,328 were utilized by Kitty Hawk and $572 in
purchase credits remain outstanding at September 30, 2000. In April 2000, Kitty
Hawk filed for Chapter 11 bankruptcy protection. As a result of the bankruptcy
filing, Kitty Hawk terminated its three-year airframe and engine services
agreement with the Company. Although the customer has continued to make payments
during the quarter ended September 30, 2000, the Company recorded a non cash
charge of $4,403 to provide a reserve for the estimated recovery of pre-petition
accounts receivable balances. 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:
9
<PAGE>
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") with a group of financial institutions. As of September 30,
2000, the commitment under the Credit Facility was $208,491. 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 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. 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
renewed and the Company paid bank fees of $3.8 million. 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. The Credit Agreement was further amended effective June
25, 2000 and September 30, 2000. In connection with the amendment to the Credit
Agreement which became effective June 25, 2000, the Company paid fees of $2,154,
which are being amortized between July 1, 2000 and June 30, 2002. The Company is
also commiteed to pay an additional bank fee of $2,000 in 2001 in $1,000
increments if the Credit Facility is not refinanced by certain dates. At
September 30, 2000, $13,919 was available for borrowing under the Credit
Facility and outstanding letters of credit aggregated $24,768.
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 lender
has not required the Company to repurchase any warrants through September 30,
2000. 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.
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 cap rate 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.
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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 September 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%.
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In connection with the acquisition of Caribe and Aircraft Interior
Design, 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 in March 1999 and the second payment
of $2,500 was made in 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 have now been consolidated into a
single lawsuit. The consolidated complaint, as amended in March 2000 and
September 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 Company's June 1999 public
offering and one consisting of purchasers of the Company's common stock during
the period between April 30, 1997 and April 14, 2000. During May 2000, the
Company filed a motion to dismiss the claims in the amended consolidated
complaint filed in March 2000, and the Company is presently preparing a motion
to dismiss the amended complaint filed in September 2000. 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 and the case is expected to be tried in
late November 2000. 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 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
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<PAGE>
monitoring the remediation, which will extend into the future. To
comply with the financial assurances required by the FDEP with respect to this
remediation and monitoring, 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 the Company
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 September 30, 2000 condensed
consolidated balance sheet includes $1,354 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 one of its MR&O operations 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. 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. The lease was further
amended effective June 25, 2000 and September 30, 2000.
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 once this
property is sold, which is expected to occur in the near future.
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.
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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 For the Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
1999 2000 1999 2000
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding
used in calculating basic earnings per share 15,013 15,015 13,532 15,015
Effect of dilutive options 255 -- 340 --
------------- ------------ ------------- ------------
Weighted average common and common
equivalent shares outstanding used in
calculating diluted earnings per share 15,268 15,015 13,872 15,015
============= ============ ============= ============
Options outstanding which are not included in
the calculation of diluted earnings per share
because their impact is antidilutive 218 1,773 38 1,773
============= ============ ============= ============
</TABLE>
9. LEASING OPERATIONS
The Company has recorded a charge of $4,871 in cost of sales and
services during the three months ended September 30, 2000 to reduce inventory
and equipment on lease (including the carrying value of the A-300 aircraft still
owned by the Company) to their net realizable values of $3,398 and $7,357,
respectively. For the nine months ended September 30, 2000, the Company recorded
charges of $11,509 in cost of sales and services, including the $4,871 charge
described above and a $6,638 charge recorded during the second quarter of 2000
in connection with the sale of the three A-300 aircraft as described in Note 1.
10. DISCONTINUED OPERATIONS
On September 7, 2000, the Company completed the sale of substantially
all of the assets of its manufacturing operations for $41,000, excluding
transaction expenses and possible post-closing adjustments. The proceeds of the
sale were used to repay senior debt outstanding under the Credit Facility.
During the nine months ended September 30, 2000, we recorded a charge of $9,823
to reduce the carrying value of our investment in the manufacturing operations
to its estimated net realizable value.
On September 20, 2000, the Company entered into a series of agreements
which are intended to constitute a single transaction (the "Transaction") in
which the Company will sell substantially all of the assets of its
redistribution business. Under the Transaction, the Company and the buyer of its
redistribution business will form a 50/50 joint venture, KAV Inventory, LLC
("KAV"), which will acquire all of the Company's redistribution operations'
inventory for total consideration equal to 89% of the adjusted closing date book
value of the inventory. Additionally, under the Transaction, the buyer will
acquire the operating business of the Company's redistribution operations
including a significant portion of its remaining net assets, excluding
inventory, fixed assets and certain trade accounts receivable net of certain
trade accounts payable, for consideration equal to the closing date net book
value of the net acquired assets. In addition, the Company expects to lease the
fixed assets of the redistribution business to the buyer for a period of up to
12 months and to sublease its corporate headquarters and redistribution
warehouse facility to the buyer for a period in excess of the remaining lease
term. During the quarter ended September 30, 2000, we recorded a charge of
$36,338 to reduce the carrying value of our investment in our redistribution
operation to its estimated net realizable value. The Transaction is expected to
close by the end of November 2000.
In September 2000, the Board of Directors made a decision to sell
Aviation Sales Bearings Company ("Dixie"), a wholly-owned new parts distribution
subsidiary. In accordance with the decision by the Company's Board of Directors
to sell Dixie, the Company has reclassified the results of operations of Dixie
to discontinued operations during the quarter ended September 30, 2000 and has
recorded a charge of $5,779 to loss on disposal of discontinued operations to
adjust the carrying value of the net assets of Dixie to estimated net realizable
values. Although a binding agreement has not yet been entered into, the Company
expects to complete a sale of this operation by the end of 2000.
The net income (loss) of these operations prior to September 30, 2000
is included in the condensed consolidated statements of income under
"discontinued operations". Revenues from such operations were $268,599 and
$217,828, respectively, for the nine months ended September 30, 1999 and 2000.
The aggregate results of
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operations of the manufacturing and distribution operations, net of income tax
of $5,065 and $0, were $7,635 ($4,647, with adjustments) and ($23,432),
respectively, for the nine month periods ended September 30, 1999 and 2000.
The provision for loss on disposal of discontinued operations reflected
in the condensed consolidated statement of income includes the write-down of the
assets of the manufacturing and distribution operations to estimated net
realizable values, impairments of retained assets as a result of a transfer of
control over such assets, the estimated costs of disposing of these operations
and the estimated results of their operations through their disposition date. No
expected tax benefit has been recorded relating to the provision for loss on
disposition, as the Company provides a full valuation allowance on its deferred
tax assets.
A summary of the net assets of the Company's discontinued operations is
as follows:
December 31, September 30,
1999 2000
------------ -------------
(Unaudited)
Current assets $ 296,735 $ 188,581
Non-current assets 43,911 8,782
------------ -------------
Total assets 340,646 197,363
------------ -------------
Current liabilities 51,144 22,579
Non-current liabilities -- 108
------------ -------------
Total liabilities 51,144 22,687
------------ -------------
Net assets of discontinued operations $ 289,502 $ 174,676
============ =============
11. SUBSEQUENT EVENT
The Company had a purchase commitment to an airline whereby, pursuant
to such agreement, the Company was committed to purchase certain aircraft. Such
commitment, which totaled approximately $60,040 as of December 31, 1999, was to
be fulfilled over the next three years. On October 25, 2000, the agreement was
cancelled and the Company forfeited $1,589 of its deposit (and was refunded the
remaining balance). A one-time, non-cash charge of $1,589 relating to this
contract cancellation is included in discontinued operations in the accompanying
condensed consolidated statements of income for the nine and three month periods
ended September 30, 2000.
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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 BUSINESS 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
In September 2000, our Board of Directors made the decision to dispose
of our Dixie Bearings new parts distribution operation. During the quarter
ended September 30, 2000, we recorded a charge of $5,779 to reduce the carrying
value of our investment in Dixie to its estimated net realizable value. Such
disposition is expected to occur by the end of 2000.
On September 20, 2000, we entered into a series of agreements which are
intended to constitute a single transaction (the "Transaction") in which we will
sell substantially all of the assets of our redistribution business. Under the
Transaction, Aviation Sales Company and the buyer of our redistribution business
will form a 50/50 joint venture, KAV Inventory, LLC ("KAV"), which will acquire
all of our redistribution operations' inventory for total consideration equal to
89% of the adjusted closing date book value of the inventory. Additionally,
under the Transaction, the buyer will acquire the operating business of our
redistribution operations including a significant portion of the remaining net
assets, excluding inventory, fixed assets and certain trade accounts receivable
net of certain trade accounts payable, for consideration equal to the closing
date net book value of the net acquired assets. In addition, we expect to lease
the fixed assets of the redistribution business to the buyer for a period of up
to 12 months and to sublease our corporate headquarters and redistribution
warehouse facility to the buyer for a period in excess of the remaining lease
term. During the quarter ended September 30, 2000, we recorded a charge of
$36,338 to reduce the carrying value of our investment in our redistribution
operation to its estimated net realizable value. The Transaction is expected to
close by the end of November 2000.
On September 7, 2000, we completed the sale of substantially all of the
assets of our manufacturing operations for $41,000, excluding transaction
expenses and possible post-closing adjustments. The proceeds of the
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<PAGE>
sale were used to repay debt. During the nine months ended September 30, 2000,
we recorded a charge of $9,823 to reduce the carrying value of our investment in
the manufacturing operations to its estimated net realizable value.
In July 2000, we executed agreements to sell three of the A-300
aircraft which we owned for $12,000 each. The sales closed on August 15, 2000
(with respect to the first aircraft), September 15, 2000 (with respect to the
second aircraft) and September 30, 2000 (with respect to the third aircraft).
During the quarter ended June 30, 2000, we recorded a charge to cost of goods
sold of $6,638 in connection with the sale of these 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. Effective May 31, 2000, the Credit
Facility was amended and was further modified effective June 25, 2000 and
September 30, 2000. As of September 30, 2000, we have a $208,491 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 MR&O 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. Although the customer has continued to make payments, during the
quarter ended September 30, 2000 we recorded a non cash charge of $4,403 to
provide a reserve for the estimated recovery of pre-petition accounts receivable
balances. This charge is reflected in operating expenses in the accompanying
condensed consolidated statements of income for the three and nine month periods
ended September 30, 2000. 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.
RESULTS OF OPERATIONS
Operating revenues consist primarily of service revenues and sales of
materials consumed while providing services, net of allowances for returns. Cost
of sales and services consists primarily of labor, materials, freight charges
and commissions to outside sales representatives.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future. Many factors affect our operating results,
including:
o decisions made regarding sales of our assets to reduce our
debt,
o timing of repair orders and payments from large customers,
o the timing of expenditures to purchase inventory in
anticipation of future needs,
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, and
o the timeliness of customer aircraft arriving for scheduled
maintenance.
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
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<PAGE>
committee retained outside professionals to conduct an in-depth review and
investigation of these matters, which has now been concluded.
We have concluded that seven 1999 transactions (including three in the
third 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 (including four in the third
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. As discussed in Note 10, the results
of operations of our redistribution operation are reflected as discontinued
operations in the attached condensed consolidated financial statements, and the
effect of these transactions is set forth in the discontinued operations lines
as reported and as reported with adjustments for the potential effect of these
transactions. In the aggregate, the transactions affecting the third quarter of
1999 represented $7,271 of revenues and $1,076 of gross profit, representing
approximately 4.5% and 2.7%, respectively, of our revenues and gross profit
(including the revenues and gross profit of our discontinued operations for this
period). These transactions, combined with the transactions arising through the
second quarter of 1999, represented $24,119 of revenues and $4,950 of gross
profit, representing 4.8% and 4.1%, respectively, of our revenue and gross
profit (including the revenues and gross profit of our discontinued operations
for this period). For comparative purposes, the financial statements included in
this Form 10-Q present both our results for the three and nine months ended
September 30, 1999 as reported and with adjustments.
In this Form 10-Q operating results from continuing operations reflect
the results of operations of our MR&O and leasing operations. Operating revenues
for the nine months ended September 30, 2000 increased $20.4 million or 7.9% to
$278.3 million, from $257.9 million for the same period in 1999. The increase in
our revenues was primarily the result of 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 airframe maintenance facility in
Winston-Salem, North Carolina and expanded our airframe maintenance facilities
in Greensboro, North Carolina. For the same reason, operating revenues for the
three months ended September 30, 2000 increased $1.3 million, or 1.6% to $81.3
million, from $80.0 million for the three months ended September 30, 1999.
Gross profit decreased $44.9 million, or 69.2%, to $20.0 million for
the nine months ended September 30, 2000, compared with $64.9 million for the
nine months ended September 30, 1999. Gross profit decreased $21.7 million, or
102.4% to a loss of $0.5 million for the three months ended September 30, 2000,
compared with gross profit of $21.2 million for the three months ended September
30, 1999. Gross profit for the nine months ended September 30, 2000 was
negatively impacted by a charge recorded in the second quarter of 2000 of $6.6
million relating to the disposition of the three A-300 aircraft which were sold
during August and September 2000. Additionally, due to our continuing efforts to
reduce our debt through sales of our assets, we recorded a charge of $4.9
million in the quarter ended September 30, 2000 to reduce the carrying value of
certain equipment on lease and inventory (including the A-300 aircraft we
continue to own) to an amount estimated to be recovered through the sale of such
assets. We further recorded a charge of $1.6 million in the quarter ended
September 30, 2000 relating to inventory which was scrapped in connection with
the move of a significant portion of one of our MR&O operations, Aircraft
Interior Design, from Florida to Texas. We also experienced 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. Finally, gross profit for the quarter and nine
months ended September 30, 2000 was negatively impacted by inefficiencies and
reductions in gross profits realized as a result of delays in the timing of
orders being placed into service, a reduced volume of orders received from
existing customers due to concerns which existed primarily during the second
quarter over the status of our credit facility and a reduction in market
opportunities caused by the airlines' effort to reduce costs due to higher fuel
prices and interest rates and excess capacity in our airframe maintenance
facilities which, due to our primarily fixed cost structure, resulted in reduced
realization and gross profit. While we lost no significant customers, our
operating results for the nine and three month periods ended September 30, 2000
were significantly adversely affected by these factors. While there can be no
assurances, we believe these concerns have been reduced as a result of the
execution of an amended Credit Facility on May 31, 2000 and the previously
announced transactions and plans involving sales of our assets to reduce our
debt as described above. Gross profit as a percentage of operating revenues
decreased to 7.2% for the nine months ended September 30, 2000, from 25.2% for
the nine months ended September 30, 1999. Gross profit as a percentage of
operating revenues decreased to (0.1)% for the three months ended September 30,
2000, from 26.5% for the three months ended September 30, 1999.
Operating expenses increased $15.1 million or 62.4% to $39.2 million
for the nine months ended September 30, 2000, compared with $24.1 million for
the nine months ended September 30, 1999. Operating expenses as a percentage of
operating revenues were 14.1% for the nine months ended September 30, 2000,
compared to 9.4% for the nine months ended September 30, 1999. Operating
expenses increased $7.3 million or 79.5% to $16.4 million for the three months
ended September 30, 2000, compared with $9.2 million for the three months ended
September 30, 1999. Operating expenses as a percentage of operating revenues
were 20.2% for the three months ended September 30, 2000, compared to 11.4% for
the three months ended September 30, 1999.
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Operating expenses in 2000 were affected by costs associated with the
operation of new facilities opened during 1999. It was also affected by a $3.6
million increase in professional fees during 2000 compared to 1999, relating
primarily to the completion of our 1999 audit and the refinancing and amendments
to our Credit Facility, and a charge of $4.4 million relating to reserves
recorded against certain accounts receivable of a major customer which filed for
bankruptcy protection in 2000. Operating expenses were also negatively impacted
by the costs associated with the move to new facilities during the third quarter
of 2000 of two of our MR&O operations, Caribe Aviation and Aircraft Interior
Design.
Interest expense and other for the nine months ended September 30, 2000
increased by $2.2 million or 15.0% to $16.8 million, from $14.6 million for the
nine months ended September 30, 1999. Interest expense and other for the three
months ended September 30, 2000 increased by $0.3 million or 5.0% to $5.0
million, from $4.7 million for the three months ended September 30, 1999. The
increase was primarily the result of our recording a loss of $0.9 million in
connection with the disposition of the AvAero joint venture and $0.5 million of
lease termination costs relating to the move of our Caribe Aviation and Aircraft
Interior Design operations during the nine months ended September 30, 2000.
Additionally, the Company paid bank fees of $9.6 million during the nine months
ended September 30, 2000. Total amortization of bank fees, including
discontinued operations, for the nine month period ended September 30, 2000 was
$6.9 million.
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 were 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, and we
committed to pay an additional $2.0 million in fees in 2001 if the credit
agreement has not been refinanced by that date. In connection with the amendment
to the Credit Facility which became effective June 25, 2000, we paid fees of
$2.2 million, which are being amortized between July 1, 2000 and June 30, 2002.
As a result of the above factors, income (loss) before income taxes,
equity income of affiliate and discontinued operations for the nine months ended
September 30, 2000 was a loss of $36.0 million, compared to income of $26.2
million for the nine months ended September 30, 1999. As a result of the above
factors, income (loss) before income taxes, equity income of affiliate and
discontinued operations for the three months ended September 30, 2000 was a loss
of $21.9 million, compared to income of $7.3 million for the three months ended
September 30, 1999.
Equity income of affiliate, net of income taxes, decreased $1.0 million
for the nine months ended September 30, 2000 to $0.1 million, from $1.1 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 liquidated resulting in a $0.9
million charge, which is included in interest expense and other.
For the reasons set forth above, income (loss) from continuing
operations for the nine months ended September 30, 2000 was a loss of $39.8
million ($2.65 per diluted share), compared to income of $17.1 million ($1.24
per diluted share) for the nine months ended September 30, 1999. Income (loss)
for the three months ended September 30, 2000 was a loss of $27.7 million ($1.85
per diluted share), compared to net income of $4.8 million ($0.31 per diluted
share) for the three months ended September 30, 1999. Weighted average common
and common equivalent shares outstanding (diluted) were 15.0 million during the
three and nine months ended September 30, 2000, compared to 15.3 million for the
three months ended September 30, 1999 and 13.9 million for the nine months ended
September 30, 1999.
Income (loss) from discontinued operations for the nine months ended
September 30, 2000 was a loss of $23.4 million, or $1.56 per diluted share,
compared to income of $7.6 million or $0.55 per diluted share ($4.6 million or
$0.33 per diluted share, as adjusted), for the nine months ended September 30,
1999. Income (loss) from discontinued operations for the three months ended
September 30, 2000 was a loss of $11.8 million or $0.79 per diluted share
compared to income of $2.6 million or $0.17 per diluted share ($1.9 million or
$0.13 per diluted share, as adjusted) for the three months ended September 30,
1999. Revenues and gross margin in our redistribution operations decreased
during 2000 as a result of 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 from
such inventory reduction to repay debt). Redistribution inventory decreased from
$214.1 million as of December 31, 1999 to $182.4 million as of September 30,
2000. Operating revenues were also negatively impacted during 2000 by customer
concerns regarding our financial condition.
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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. During the latter portion of the first quarter of 2000, we
restructured our redistribution operations and reduced headcount in that
business. Additionally, the redistribution operations experienced an increase in
interest primarily attributable to the increased average debt outstanding.
Results from discontinued operations also includes losses on the
disposal and contemplated disposal of the discontinued operations of $51.9
million (or $3.46 per diluted share) for the nine months ended September 30,
2000 and $42.7 million (or $2.84 per diluted share) for the three months ended
September 30, 2000. During the second quarter of 2000, we recognized a $9.2
million loss relating to the sale of our discontinued manufacturing operations.
During the third quarter of 2000 we recorded an additional $0.6 million loss
relating to the disposition of our manufacturing operations, a loss of $5.8
million relating to the anticipated disposition of our Dixie Bearings operation
and a loss of $36.3 million relating to the anticipated disposition of our
redistribution business.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As noted above, during the third quarter of 2000 we executed agreements
and closed on the sale of our manufacturing operations and three of the A-300
aircraft which we owned. The net proceeds from these sales of $74,509 was used
to reduce our senior debt under the credit facility. Additionally, we have
executed agreements to sell substantially all of the assets of our
redistribution operation and we have made the decision to dispose 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.
As of September 30, 2000, we had outstanding indebtedness of
approximately $362.3 million (excluding letters of credit), of which $192.9
million was senior debt and $169.4 million was other indebtedness. In addition,
as of September 30, 2000, we had received the proceeds of the sale of the third
A-300 aircraft of $12.0 million which we reported as cash and cash equivalents
in the accompanying condensed consolidated balance sheet as of September 30,
2000 and subsequently used to repay senior debt. Including these proceeds, total
outstanding indebtedness at September 30, 2000 would have been $350.3 million of
which $180.9 million was senior debt. As of December 31, 1999, we had $441.7
million 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:
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.
We believe that after completion of the above discussed dispositions of
assets, our working capital will be obtained from borrowing under the credit
Facility. 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.
CASH
Cash and cash equivalents decreased from $19.4 million as of December
31, 1999 to $13.1 million as of September 30, 2000. Net cash provided by (used
in) operating activities during the nine months ended September 30, 2000 and
1999 was $52.4 million and $(118.7) 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 including the
sales of the A-300 aircraft and repay debt. Inventory decreased $51.1 million
during the nine months ended September 30, 2000, compared to an increase in
inventory of $35.1 million during the nine months ended September 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 September 30, 2000. Cash provided by (used in) investing
activities during the nine months ended September 30, 2000 and 1999 was $30.3
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million and $(36.9) million, respectively. The cash provided by investing
activities for the nine months ended September 30, 2000 resulted primarily from
the sale of the manufacturing operations and was partially offset by cash used
in investing activities primarily related to capital expenditures associated
with tooling investments, equipment purchases and leasehold improvements
relating to the moves of Caribe Aviation and Aircraft Interior Design. Cash
provided by (used in) financing activities for the nine months ended September
30, 2000 and 1999 was $(89.1) million and $156.7 million, respectively. Cash
used in financing activities for the nine months ended September 30, 2000 is
primarily comprised of repayments of outstanding notes payable and outstanding
indebtedness and deferred financing fees under our Credit Facility, net of the
proceeds of a $15.5 million term loan obtained 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 $300.0 million 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 $285.0 million. Following the liquidation of the AvAero joint
venture, the sale of the three A-300 aircraft and the sale of the manufacturing
operations described above, the commitment was reduced to $208.5 million. The
Credit Facility expires in July 2002. The Credit Facility was further amended on
June 25, 2000 and September 30, 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 nine months ended September 30, 2000 and 1999, the weighted average interest
rate on the Credit Facility was 12.4% and 8.2%, respectively. During the three
months ended September 30, 2000 and 1999, the weighted average interest rate on
the Credit Facility was 13.1% and 8.1%, respectively. As of September 30, 2000,
June 30, 2000, March 31, 2000 and December 31, 1999, the outstanding balance on
the Credit Facility (including consideration of the application of proceeds from
the sale of the third A-300 which was sold on September 30, 2000) was $165.4
million, $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 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 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 obtained 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. 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
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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 September 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 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 one of our MR&O
operations, Caribe Aviation, into the new facility during October 2000. In
conjunction with the sale of our redistribution operations, we expect to
sublease our corporate headquarters and the redistribution warehouse facility to
the buyer.
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The lessor has financed the development of the new facility through a
$43.0 million loan from a financial institution. 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 and September 30, 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
third quarter of 2000.
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) EXHIBITS
10.1 - Amendment No. 2 dated as of November 14, 2000 to Fourth
Amended and Restated Credit Agreement dated as of May 31,
2000
10.2 - Amendment Agreement No. 4 for Lease Agreement and Certain
Other Operative Agreements
27.1 - Financial Data Schedule - September 30, 2000
(b) REPORTS ON FORM 8-K
1. The Company filed on March 27, 2000 a report on Form 8-K,
dated February 18, 2000, addressing the amendments to the
Credit Facility and TROL, the standstill agreement with
Harbor, an amendment to the rights plan, the term loan note
and a press release of the 1999 results.
2. The Company filed on June 13, 2000 a report on Form 8-K dated
May 31, 2000, addressing the amendments to the Credit
Facility and TROL.
3. The Company filed on September 22, 2000 a report on Form 8-K,
addressing the completion of the sale of the Company's
manufacturing operations and the execution of agreements to
sell the Company's redistribution operations.
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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: November 20, 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. 2 dated as of November 14, 2000 to Fourth
Amended and Restated Credit Agreement dated as of May 31, 2000
10.2 Amendment Agreement No. 4 for Lease Agreement and Certain
Other Operative Agreements
27.1 Financial Data Schedule - September 30, 2000
26
