<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report
(Date of earliest event reported)
May 14, 1996
AVIALL, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-12380 65-0433083
(State of incorporation) (Commission File Number) (I.R.S. Employer
Identification No.)
2055 DIPLOMAT DRIVE
DALLAS, TEXAS 75234
(Address of principal executive offices) (Zip Code)
</TABLE>
(214) 956-5000
(Registrant's telephone number, including area code)
================================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS.
As previously reported in its Current Report on Form 8-K, dated April 19,
1996, Aviall, Inc. ("Aviall") and its wholly owned subsidiary, Aviall Services,
Inc. ("Aviall Services") have entered into an Agreement of Purchase and Sale,
dated April 19, 1996 (the "Greenwich Agreement"), with Greenwich Air Services,
Inc. ("Greenwich") and its wholly owned subsidiary, GASI Engine Services
Corporation ("GASI"), pursuant to which (i) Aviall Services will sell to GASI
the assets associated with its commercial aircraft engine repair and overhaul
businesses in Dallas and Ft. Worth, Texas and its component repair services
business in McAllen, Texas, and (ii) Aviall will sell to GASI all of the stock
of its wholly owned subsidiary, Aviall Limited, which is located in Prestwick,
Scotland. Closing of the sale is subject to certain conditions, including
completion of debt and equity financing by Greenwich. Subject to the
satisfaction of such conditions, the sale is expected to be completed in 1996.
In connection with this proposed sale, Aviall caused to be prepared (i)
unaudited combined financial statements of Aviall's commercial engine services
business at March 31, 1996 and for the three-month periods ended March 31, 1995
and 1996 (the "Unaudited Engine Services Financial Statements") and (ii)
audited consolidated financial statements of Aviall Limited at and for the
years ended November 30, 1994 and 1995 (the "Aviall Limited Audited Financial
Statements"). Aviall has provided these financial statements to Greenwich as
well as audited combined financial statements for Aviall's engine services
business at December 31, 1994 and 1995 and for each of the years in the
three-year period ended December 31, 1995. A copy of the audited financial
statements for the commercial engine services business were filed as an
exhibit to Aviall's Current Report on Form 8-K, dated April 19, 1996. Copies
of the Unaudited Engine Services Financial Statements and the Aviall Limited
Audited Financial Statements have been filed as exhibits to this report and are
incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(c) Exhibits
2.1 -- Agreement of Purchase and Sale among Aviall, Aviall Services,
GASI and Greenwich, dated April 19, 1996, incorporated herein
by reference to Aviall's Current Report on Form 8-K, dated
April 19, 1996. (In accordance with Item 601 of Regulation
S-K, this copy of the Greenwich Agreement does not include the
schedules or exhibits thereto, which schedules and exhibits
are listed in the table of contents to the Greenwich
Agreement. Aviall agrees to furnish supplementally to the
Securities and Exchange Commission a copy of such schedules
and exhibits.)
23.1 -- Consent of Price Waterhouse.
99.1 -- Unaudited Combined Financial Statements of the Aviall, Inc.
Engine Services Division.
99.2 -- Consolidated Financial Statements of Aviall Limited.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AVIALL, INC.
By: /s/ Jacqueline K. Collier
-----------------------------------
Jacqueline K. Collier
Vice President and Controller
May 14, 1996
-3-
<PAGE> 4
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
- ----------- -------------------
<S> <C>
2.1 -- Agreement of Purchase and Sale among Aviall, Aviall Services, GASI and Greenwich, dated April 19, 1996,
incorporated herein by reference to Aviall's Current Report on Form 8-K, dated April 19, 1996. (In
accordance with Item 601 of Regulation S-K, this copy of the Greenwich Agreement does not include the
schedules or exhibits thereto, which schedules and exhibits are listed in the table of contents to the
Greenwich Agreement. Aviall agrees to furnish supplementally to the Securities and Exchange Commission
a copy of such schedules and exhibits.)
23.1 -- Consent of Price Waterhouse.
99.1 -- Unaudited Combined Financial Statements of the Aviall, Inc. Engine Services Division.
99.2 -- Consolidated Financial Statements of Aviall Limited.
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 33-72602, 33-72600, 33-72598, 33-90722 and
33-90724) of Aviall, Inc. and its subsidiaries of our report dated May 14, 1996
on the consolidated financial statements of Aviall Limited appearing on page 2
of Exhibit 99.2 in this Form 8-K.
Price Waterhouse
Chartered Accountants
Glasgow, Scotland
May 14, 1996
<PAGE> 1
Exhibit 99.1
AVIALL, INC.
ENGINE SERVICES DIVISION
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN AVIALL INVESTMENT
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------
1995 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $120,572 134,745
Cost of sales 106,734 126,863
- --------------------------------------------------------------------------------------------------------------
Gross profit 13,838 7,882
Operating and other expenses:
Selling and administrative expenses 7,597 8,792
Restructuring costs - 39,567
Interest expense 5,415 4,283
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 826 (44,760)
Provision for income taxes 463 243
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 363 (45,003)
==============================================================================================================
Aviall investment:
Aviall investment at beginning of period $390,888 347,786
Net earnings (loss) 363 (45,003)
Other changes in Aviall investment (26,045) (1,954)
- --------------------------------------------------------------------------------------------------------------
Aviall investment at end of period $365,206 300,829
==============================================================================================================
</TABLE>
See accompanying notes to combined financial statements.
1
<PAGE> 2
AVIALL, INC.
ENGINE SERVICES DIVISION
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 32 30
Receivables 96,082 109,249
Inventories 160,842 151,739
Prepaid expenses and other current assets 4,012 3,729
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 260,968 264,747
- -----------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 123,946 120,040
Intangible assets 66,712 65,454
Other assets 10,956 12,797
Deferred income taxes 755 -
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $463,337 463,038
=============================================================================================================================
LIABILITIES AND AVIALL INVESTMENT
Current liabilities:
Current portion of long-term debt $ 10,117 10,701
Accounts payable 50,713 58,529
Accrued expenses 23,942 23,619
Accrued restructuring costs - 39,567
Deferred income taxes 760 -
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 85,532 132,416
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt 7,392 7,253
Other liabilities 10,741 10,649
Deferred income taxes 11,886 11,891
Aviall investment 347,786 300,829
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and Aviall investment $463,337 463,038
=============================================================================================================================
</TABLE>
See accompanying notes to combined financial statements.
2
<PAGE> 3
AVIALL, INC.
ENGINE SERVICES DIVISION
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1995 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 363 (45,003)
Restructuring costs - 39,567
Depreciation and amortization 4,741 5,123
Changes in:
Receivables 14,947 (8,865)
Inventories (198) 5,431
Accounts payable (4,400) (2,291)
Accrued expenses 4,198 (323)
Other, net (4,745) (1,647)
- ------------------------------------------------------------------------------------------------------------------------------
14,906 (8,008)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,093) (1,444)
Sales of property, plant and equipment 187 77
Other, net (294) (2)
- ------------------------------------------------------------------------------------------------------------------------------
(4,200) (1,369)
- ------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Aviall investment (10,328) 8,930
Net change in foreign revolving credit facility 3,330 445
- ------------------------------------------------------------------------------------------------------------------------------
(6,998) 9,375
- ------------------------------------------------------------------------------------------------------------------------------
Change in cash 3,708 (2)
Cash, beginning of period 1,369 32
- ------------------------------------------------------------------------------------------------------------------------------
Cash, end of period $ 5,077 30
==============================================================================================================================
</TABLE>
See accompanying notes to combined financial statements.
3
<PAGE> 4
AVIALL, INC.
ENGINE SERVICES DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with Article 10 of Regulation S-X. Accordingly, these
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with Aviall, Inc. Engine Services
Division combined financial statements and notes thereto for the year ended
December 31, 1995. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three-month period
ended March 31, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996.
NOTE 2 - RESTRUCTURING COSTS
Based on a decision by the Aviall, Inc. ("Aviall") Board of Directors on
January 24, 1996, Aviall signed a definitive agreement on April 19, 1996 to
sell the engine services division ("Division") to Greenwich Air Services, Inc.
and expects to complete the sale in 1996. Accordingly, income taxes have been
calculated on a discrete period basis. In accordance with Accounting
Principles Board Opinion No. 30, Aviall recorded in its consolidated financial
statements a "discontinued operations" charge of $212.5 million as of December
31, 1995 to reflect its estimate of the loss it will incur upon sale of the
discontinued operations, primarily related to the Division. These costs were
not recorded in the separate Division 1995 financial statements since this
discontinued operations treatment is not appropriate at the Division level.
Restructuring costs approximating $55 million, incurred by Aviall on behalf of
the Division, will be reflected in the Division's financial statements in 1996.
The combined financial statements for the three months ended March 31, 1996
include $39.6 million of such expenses.
NOTE 3 - INVENTORIES
<TABLE>
<CAPTION>
December 31, March 31,
(In thousands) 1995 1996
(Unaudited)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Repair parts $134,099 123,723
Work-in-process 34,068 37,121
- -----------------------------------------------------------------------------------------------
Reserves for excess and 168,167 160,844
obsolete inventories (7,325) (9,105)
- -----------------------------------------------------------------------------------------------
$160,842 151,739
===============================================================================================
</TABLE>
4
<PAGE> 1
EXHIBIT 99.2
AVIALL LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
1
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholder of Aviall Limited
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of shareholder's equity and of
cash flows present fairly, in all material respects, the financial position of
Aviall Limited and its subsidiaries (the "Company") at November 30, 1994 and
1995, and the results of their operations and their cash flows for the years
then ended, in conformity with United States generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the United Kingdom and
the United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
Chartered Accountants
Glasgow, Scotland
May 14, 1996
2
<PAGE> 3
AVIALL LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended November 30,
------------------------
1994 1995
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Net sales $204,505 217,120
Cost of sales 178,224 193,736
- -----------------------------------------------------------------------------------------------------------
Gross profit 26,281 23,384
Operating and other expenses:
Selling and administrative expenses 12,099 9,784
Interest expense 6,080 7,143
- -----------------------------------------------------------------------------------------------------------
18,179 16,927
- -----------------------------------------------------------------------------------------------------------
Earnings before income taxes 8,102 6,457
Provision for income taxes 2,825 2,714
- -----------------------------------------------------------------------------------------------------------
Net earnings $ 5,277 3,743
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
AVIALL LIMITED
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
November 30,
---------------------
1994 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,755 359
Receivables 49,069 63,815
Inventories 87,306 74,049
Prepaid expenses and other current assets 982 1,313
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 139,112 139,536
- -----------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 48,572 51,650
Intangible assets 21,310 20,649
- -----------------------------------------------------------------------------------------------------------------------
Total assets $208,994 211,835
=======================================================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt $ 6,596 10,117
Accounts payable 33,971 46,198
Accrued expenses 6,782 6,866
- -----------------------------------------------------------------------------------------------------------------------
Total current liabilities 47,349 63,181
- -----------------------------------------------------------------------------------------------------------------------
Long-term debt 13,135 7,392
Due to Aviall 51,625 39,454
Deferred income taxes 10,706 11,886
Shareholder's equity (includes A Ordinary Shares of L.1.00 par value with shares outstanding
at November 30, 1994 and 1995 - 1,000,000 and B Ordinary Shares of $1.00 par value with
shares outstanding at November 30, 1994 and 1995 - 22,069,272) 86,179 89,922
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $208,994 211,835
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
AVIALL LIMITED
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Additional
Common paid-in Retained
stock capital earnings Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
At November 30, 1993 $23,632 30,399 26,871 80,902
Net earnings - - 5,277 5,277
- --------------------------------------------------------------------------------------------------------
At November 30, 1994 23,632 30,399 32,148 86,179
Net earnings - - 3,743 3,743
- --------------------------------------------------------------------------------------------------------
At November 30, 1995 $23,632 30,399 35,891 89,922
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
AVIALL LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended November 30,
------------------------
1994 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 5,277 3,743
Depreciation and amortization 5,435 5,634
Deferred income taxes 240 (52)
Changes in:
Receivables (7,351) (14,746)
Inventories (7,233) 13,257
Accounts payable 5,331 12,228
Accrued expenses 5,231 1,568
Other, net 181 (661)
- ----------------------------------------------------------------------------------------------------------
7,111 20,971
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,821) (8,092)
Sales of property, plant and equipment 148 150
Other, net 44 (27)
- ----------------------------------------------------------------------------------------------------------
(6,629) (7,969)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in Due to Aviall 5,986 (12,176)
Net change in revolving credit facility (527) 3,224
Debt repaid (5,041) (5,446)
- ----------------------------------------------------------------------------------------------------------
418 (14,398)
- ----------------------------------------------------------------------------------------------------------
Change in cash 900 (1,396)
Cash, beginning of year 855 1,755
- ----------------------------------------------------------------------------------------------------------
Cash, end of year $ 1,755 359
==========================================================================================================
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 2,740 2,068
Income taxes $ 596 1,665
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
AVIALL LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND
Aviall Limited (the "Company") is engaged in the maintenance and overhaul
of turbine engines used primarily in commercial aviation and provides its
services on a worldwide basis. The engine repair operation located in
Prestwick, Scotland is a wholly owned United Kingdom foreign subsidiary of
Aviall, Inc. ("Aviall").
Based on a decision by the Aviall Board of Directors on January 24, 1996,
Aviall signed a letter of intent with Greenwich Air Services, Inc. ("GASI") for
the sale of its commercial engine services business which includes the Company.
A definitive agreement was signed on April 19, 1996. The sale is expected to
be completed in 1996. In accordance with Accounting Principles Board Opinion
No. 30, Aviall recorded in its consolidated financial statements a
"discontinued operations" charge of $212.5 million as of December 31, 1995 to
reflect its estimate of the loss it will incur upon sale of the discontinued
commercial engine services operations. The Company has not recorded in its
1995 financial statements any amounts included in the charge related to the
Company since this discontinued operations treatment is not appropriate at this
level. Direct costs approximating $3.7 million will be incurred by Aviall on
behalf of the Company and, accordingly, will be reflected in the Company's
financial statements in 1996. Upon completion of the sale, GASI will allocate
its purchase price in accordance with Accounting Principles Board Opinion No.
16 and thus will establish different bases of certain assets and liabilities
than are reflected in these financial statements.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated in consolidation. The Company's
fiscal year ends on November 30. The accompanying financial statements are
prepared in U.S. dollars. The fair value of current assets and liabilities
approximates carrying value.
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the financial statements. Accordingly, upon settlement, actual results may
differ from estimated amounts.
REVENUE RECOGNITION. Income from engine maintenance services is recognized at
the time of performance test acceptance of engines (the "completed contract"
method). Revenue from long-term fixed-price contracts, such as
"power-by-the-hour" or "flat-rate" contracts, is recognized under the
"percentage-of-completion" method.
INVENTORIES. Inventories are valued at the lower of cost or market. Cost is
determined on the basis of average cost of materials and supplies and actual
cost for labor and overhead included in work-in-process. Provision is made for
estimated excess and obsolete inventories. All inventory available for sale
during the course of the normal business cycle has been included in current
assets.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are carried at
cost and depreciated over the estimated useful lives of the related assets
using the straight-line method. Lives assigned to asset categories are 40
years for buildings and improvements and 4 to 15 years for machinery, equipment
and tooling.
7
<PAGE> 8
INTANGIBLE ASSETS. Goodwill is reported net of accumulated amortization of
$5.2 million and $5.9 million as of November 30, 1994 and 1995, respectively.
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is amortized using the straight-line method over forty
years.
The Company has reviewed the net realizable value of its goodwill through
an assessment of the estimated future cash flows related to such assets and has
concluded that there is no impairment of the net carrying value.
ENVIRONMENTAL COSTS. A liability for environmental assessments and cleanup is
accrued when it is probable a loss has been incurred and is estimable.
Generally, the timing of these accruals coincides with the identification of an
environmental obligation through the Company's internal procedures or upon
notification from regulatory agencies. The Company is not aware of any
exposure to environmental costs arising from its continuing operations and thus
has not accrued any such liability.
FOREIGN EXCHANGE AND FORWARD EXCHANGE CONTRACTS. The Company utilizes the U.S.
dollar as its functional currency. Translation gains and losses are included
in earnings. Aviall enters into forward exchange contracts on behalf of the
Company to hedge certain of its foreign currency commitments including loan
commitments with the European Investment Bank ("EIB") and certain labor costs.
Gains and losses on forward contracts are recognized by the Company
concurrently with the related transaction gains and losses. Total translation
and transaction gains or (losses) included in earnings were $(0.5) million and
$1.2 million in 1994 and 1995, respectively.
INCOME TAXES. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
IMPAIRMENT OF LONG-LIVED ASSETS. In March 1995, the Financial Accounting
Standards Board ("FASB") issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
effective for fiscal years beginning after December 15, 1995. FASB Statement
No. 121 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable. The adoption of this statement is not expected
to have a material effect on the Company's financial position or results of
operations.
NOTE 3 - TRANSACTIONS WITH AVIALL
GENERAL AND ADMINISTRATIVE SERVICES. Aviall provided certain corporate general
and administrative services to the Company, including legal, treasury, human
resources and finance, among others. Costs related to these services were
allocated to the Company on a basis that approximated either the proportional
share of the Company's usage of the actual services provided or a
representative share of certain corporate fixed expenses. Management believes
these allocations are reasonable.
Total allocated expenses included in "Selling and Administrative Expenses"
in the accompanying Consolidated Statements of Operations were $2.9 million and
$3.7 million in 1994 and 1995, respectively.
8
<PAGE> 9
INTERCOMPANY FINANCING AND INTEREST EXPENSE. "Due to Aviall" reflected in the
Consolidated Balance Sheets represents Aviall's net advances to the Company
resulting from cash and non-cash transfers and intercompany allocations. The
intercompany advances by Aviall to the Company are evidenced by a promissory
note dated December 7, 1993 maturing on December 31, 2000. The annual interest
rate is agreed upon between the parties and was equal to the quarterly floating
London Interbank Offering Rate ("LIBOR") plus 3%. At November 30, 1994 and
1995, the interest rate was 8.6% and 8.9%, respectively. Total intercompany
interest charged by Aviall to the Company in 1994 and 1995 was $3.4 million and
$4.4 million, respectively. The note may be prepaid without penalty at the
option of the Company. If the transaction in Note 1 is completed, the note
will be repaid by GASI immediately after close.
CORPORATE INSURANCE PROGRAMS. The Company participated in Aviall's combined
risk management programs for property and casualty insurance, including
aviation products liability. The Company was charged $1.4 million and $1.6
million in 1994 and 1995, respectively, which represented an allocation of
third party premiums.
GUARANTEES OF DEBT BY AVIALL. The Company's debt with the EIB is supported by
letters of credit issued under Aviall's credit facility. In addition, the
Company's L.4.0 million unsecured bank overdraft facility is guaranteed by
Aviall.
SECURITY FOR AVIALL DEBT. On March 25, 1996, Aviall amended its credit
facilities to provide for a maturity date of April 30, 1997. The amended
credit facilities contain various covenants, including financial covenants,
limitations on debt and limitations on capital expenditures. In the absence of
obtaining the amended agreement, Aviall would have been in default of the
financial covenants of its previously outstanding credit facilities. Aviall's
amended credit facilities are secured in part by a pledge of 65% of the stock
of the Company.
NOTE 4 - ACCOUNTS RECEIVABLE ALLOWANCES
The Company provides services to a wide variety of aviation-related
businesses, including several commercial airlines. Management believes that
sufficient allowances for doubtful accounts have been provided as of November
30, 1994 and 1995. In addition, a substantial portion of the Company's
accounts receivable balance is covered by credit insurance. The following is a
summary of the accounts receivable allowances (in thousands):
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
Balance at beginning of year $ 677 644
Provision for doubtful accounts 125 168
Write-off of doubtful accounts, net of recoveries (158) (560)
- -----------------------------------------------------------------------------------------------------
Balance at end of year $ 644 252
=====================================================================================================
</TABLE>
NOTE 5 - INVENTORIES
<TABLE>
<CAPTION>
(In thousands) 1994 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Repair parts $74,302 64,353
Work-in-process 15,770 12,521
Distribution parts 454 488
- -----------------------------------------------------------------------------------------------------
90,526 77,362
Reserves for excess and obsolete inventories (3,220) (3,313)
- -----------------------------------------------------------------------------------------------------
$87,306 74,049
=====================================================================================================
</TABLE>
9
<PAGE> 10
The following is a summary of the reserve for excess and obsolete
inventories (in thousands):
<TABLE>
<CAPTION>
1994 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning of year $2,014 3,220
Provision for excess and obsolete inventory 1,557 423
Write-off of excess and obsolete inventory (351) (330)
- -----------------------------------------------------------------------------------------------------
Balance at end of year $3,220 3,313
=====================================================================================================
</TABLE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
(In thousands) 1994 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 461 461
Buildings and improvements 17,892 18,241
Machinery and equipment 43,320 49,452
Rental engines 10,418 11,320
Capital projects in progress 4,062 4,202
- -----------------------------------------------------------------------------------------------------
76,153 83,676
Accumulated depreciation (27,581) (32,026)
- -----------------------------------------------------------------------------------------------------
$ 48,572 51,650
=====================================================================================================
</TABLE>
NOTE 7 - ACCRUED EXPENSES
<TABLE>
<CAPTION>
(In thousands) 1994 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Salaries, wages and benefits $1,403 1,187
Current income taxes 1,373 1,516
Other 4,006 4,163
- -----------------------------------------------------------------------------------------------------
$6,782 6,866
=====================================================================================================
</TABLE>
NOTE 8 - DEBT
The Company's financing is provided primarily by Aviall's credit
facilities. In addition, the Company has borrowings directly from financial
institutions in the United Kingdom. The Company's credit facilities consist of
(1) two ten-year amortizing unsecured term loans with the EIB payable
semiannually through 1996 ("Loans A and B"); (2) a ten-year amortizing
unsecured term loan with the EIB payable semiannually through 1998 ("Loan C");
and (3) a L.4.0 million unsecured overdraft facility with a bank payable on
demand (the "Overdraft Facility").
<TABLE>
<CAPTION>
(In thousands) 1994 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans A and B $ 5,279 2,721
Loan C 13,302 10,414
Overdraft Facility 1,150 4,374
- -----------------------------------------------------------------------------------------------------
19,731 17,509
Less current portion (6,596) (10,117)
- -----------------------------------------------------------------------------------------------------
$13,135 7,392
=====================================================================================================
</TABLE>
The interest rates on Loan A and Loan B are 7% and 7.5%, respectively, and
the interest rate on Loan C is 9.3%. Borrowings under the Overdraft Facility
bear interest at LIBOR plus 1.625%.
10
<PAGE> 11
Scheduled debt maturities for years subsequent to November 30, 1995 are as
follows (in thousands):
<TABLE>
<CAPTION>
Year ending
- -------------------------------------------------------------------------------------
<S> <C>
1996 $10,117
1997 3,464
1998 3,928
- -------------------------------------------------------------------------------------
$17,509
=====================================================================================
</TABLE>
If the transaction described in Note 1 is completed, it is likely the EIB
loans will be repaid in 1996. At November 30, 1994 and 1995, the estimated
fair value of the Company's debt approximated the outstanding net book value.
NOTE 9 - INCOME TAXES
<TABLE>
<CAPTION>
(In thousands) 1994 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Current tax expense $2,585 2,766
Deferred tax expense (benefit) 240 (52)
- -----------------------------------------------------------------------------------------------------
Provision for income taxes $2,825 2,714
- -----------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of expected statutory tax expense using the statutory tax
rate of 33% to actual tax expense follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Expected statutory tax expense $2,674 2,131
Amortization of goodwill 218 218
Meals and entertainment 97 116
Regional development grants (7) -
Miscellaneous items, net (157) 249
- ------------------------------------------------------------------------------------------------------
Actual tax expense $2,825 2,714
======================================================================================================
</TABLE>
At November 30, 1994 and 1995, substantially all of the deferred tax
liability arises from temporary differences related to property and equipment
basis differences.
The Company's income tax returns are subject to review by Inland Revenue.
Returns through 1993 have been settled and the 1994 return is currently under
discussion.
NOTE 10 - PENSION PLANS
The Company maintains a defined benefit pension plan. The benefits for
this plan are based upon a final-pay benefit formula. The funding policy for
the plan is to contribute such amounts as are necessary on an actuarial basis
to provide the plan with sufficient assets to meet the benefits payable to plan
participants. The plan's assets are primarily invested in equities and
interest-bearing accounts.
11
<PAGE> 12
The following tables reflect the components of net pension expense and the
funded status for the plan (in thousands):
<TABLE>
<CAPTION>
NET PENSION EXPENSE 1994 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost - benefits earned during the year $ 2,332 1,203
Interest cost on projected benefit obligation 1,344 1,585
Actual return on plan assets 390 (2,993)
Net amortization and deferral (3,005) 1,131
- ------------------------------------------------------------------------------------------------------
Net pension expense $ 1,061 926
======================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FUNDED STATUS 1994 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Plan assets at fair value $19,030 23,607
- ------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits 12,953 16,819
Nonvested benefits 136 178
- ------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 13,089 16,997
Additional benefits based on projected future salary increases 4,979 6,464
- ------------------------------------------------------------------------------------------------------
Projected benefit obligation 18,068 23,461
- ------------------------------------------------------------------------------------------------------
Plan assets greater than projected benefit obligation 962 146
Unrecognized net (gains) losses (199) 876
Unrecognized prior service cost 23 20
- ------------------------------------------------------------------------------------------------------
Prepaid pension expense $ 786 1,042
======================================================================================================
</TABLE>
The following table sets forth the year end actuarial assumptions used in the
accounting for the plan:
<TABLE>
<CAPTION>
1994 1995
<S> <C> <C>
- -------------------------------------------------------------------------------------------------
Discount rate for determining projected benefit obligation 9.00% 8.00%
Rate of increase in compensation levels 6.50% 5.50%
Expected long-term rate of return on plan assets 9.50% 9.50%
</TABLE>
Actuarial gains and losses and plan amendments are amortized over the
average remaining service lives of active members expected to receive benefits
and transition amounts are amortized over 19 years.
NOTE 11 - COMMON STOCK
The Company is authorized to issue 1,000,000 L.1 par value shares ("A
Ordinary Shares") and 36,000,000 $1 par value shares ("B Ordinary Shares").
Each A Ordinary Share has 1.8 votes per share and each B Ordinary Share has 1
vote per share. Dividends or other amounts payable to holders, whether on
liquidation or otherwise, are apportioned so that 1.8 times the amount payable
in respect of each B Ordinary Share is payable in respect of each A Ordinary
Share. All 1,000,000 A Ordinary Shares are issued and outstanding and
22,069,272 B Ordinary Shares are issued and outstanding.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims, legal actions and complaints
arising in the ordinary course of business. Management believes that the
disposition of these matters will not have a material impact on the financial
condition, results of operations or cash flows of the Company.
12
<PAGE> 13
NOTE 13 - OTHER INFORMATION
The Company operates in the aviation industry and reports its activities as
one business segment. For the years ended November 30, 1994 and 1995, sales to
Continental Airlines amounted to 34% and 24%, respectively, of total net sales
and sales to Federal Express amounted to 19% and 15%, respectively, of total
net sales. Net sales by geographic area were as follows:
<TABLE>
<CAPTION>
(In thousands) 1994 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Export sales:
North America $125,668 111,889
Europe 15,546 23,620
Other 32,376 43,942
- -----------------------------------------------------------------------------------------------------
173,590 179,451
- -----------------------------------------------------------------------------------------------------
United Kingdom 30,915 37,669
- -----------------------------------------------------------------------------------------------------
$204,505 217,120
=====================================================================================================
</TABLE>
13
