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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
FORM 10-K
(MARK ONE)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12380
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AVIALL, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 65-0433083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2075 DIPLOMAT DRIVE
DALLAS, TEXAS 75234-8989
(Address of principal executive offices) (Zip Code)
(972) 406-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------- -----------------------------------------
Common Stock, par value, $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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 Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained
herein, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. X
------
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 14, 1997 was approximately $207.0 million.
The number of shares of Common Stock outstanding at March 14, 1997 was
19,592,581.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 13, 1997, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, are incorporated herein by
reference in Part III.
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AVIALL, INC.
CONTENTS
PART I
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PAGE
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ITEM 1: BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
AIRCRAFT PARTS DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
INVENTORY LOCATOR SERVICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SALES AND MARKETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
CUSTOMERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
SUPPLIERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
BUSINESSES HELD FOR SALE AT DISTRIBUTION DATE . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARRANGEMENTS BETWEEN RYDER AND AVIALL RELATING TO THE DISTRIBUTION . . . . . . . . . . . . . . . . 7
EXECUTIVE OFFICERS OF AVIALL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ITEM 2: PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 3: LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . 9
PART II
ITEM 5: MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ITEM 6: SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 11: EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . 18
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART IV
ITEM 14: EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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PART I
ITEM 1: BUSINESS
GENERAL. Aviall, Inc. ("Aviall" or the "Company") is a leading distributor of
aviation parts and provider of related parts information services. As used in
this report, "Aviall" or the "Company" refers to Aviall and all of its direct
and indirect subsidiaries.
Aviall was incorporated in Delaware in August 1993 to own and operate the
aviation services businesses previously conducted by certain subsidiaries of
Ryder System, Inc., a Florida corporation ("Ryder"). Aviall operated as a
wholly owned subsidiary of Ryder until December 7, 1993 (the "Distribution
Date"), when Ryder distributed Aviall's stock to Ryder's shareholders as a tax
free dividend (the "Distribution"). The Distribution established Aviall as a
publicly held corporation separate from Ryder. In conjunction with the
Distribution, the Company announced plans to dispose of its parts
redistribution, business aviation engine overhaul, and aircraft and terminal
services businesses. The sales of these businesses were completed in 1995.
See "Businesses Held for Sale at Distribution Date" in this Item 1.
In January 1996, Aviall announced its intention to exit the commercial
engine services businesses consisting of its airline engine, component and
accessories repair operations ("Commercial Engine Services"). The sales of
these businesses were completed in 1996, and such businesses are reflected in
the Company's Consolidated Financial Statements included in this report as
discontinued operations. See "Discontinued Operations" in this Item 1.
In September 1996, the Company sold its aerospace fastener distribution
business (the "Fastener Business"). See Note 4 to the Consolidated Financial
Statements included in Item 8 of this report.
OVERVIEW. Aviall is a leading independent global distributor of aircraft parts
and supplies. Aviall also provides on- line parts information services to the
aviation and marine industries through Inventory Locator Service, LP ("ILS"),
which is indirectly wholly owned by Aviall.
As the largest independent global aviation parts distribution company,
Aviall provides a link between parts manufacturers, sellers and buyers
throughout the world. Aviall has developed strong relationships with suppliers
who seek advanced inventory management, order processing, forecasting and
direct electronic communications with end users of their products.
In addition, ILS provides the largest and most timely independent database
of parts information in the commercial aviation industry, covering essentially
every aircraft and engine type in commercial service. Aviall management
believes that ILS is generally the first database to be accessed by buyers
seeking parts availability and sellers wishing to list their parts for sale.
AIRCRAFT PARTS DISTRIBUTION. Aviall is the largest independent global
distributor of aircraft parts and supplies, serving both the commercial and
general aviation after-markets. Product lines distributed by Aviall include a
variety of airframe spares (e.g., oxygen systems, filters, control cables,
batteries, actuators and motors), undercarriage items (e.g., wheels, brakes and
tires), piston engines and parts, and other supplies. Aviall purchases these
new parts from suppliers for its own account and resells such parts to its
customers, which include commercial airlines, freight carriers, maintenance and
overhaul shops, aircraft original equipment manufacturers ("OEMs"), corporate
aircraft operators, brokers, governmental agencies and other distributors.
Aviall's parts distribution business also maintains a network of battery, wheel
and brake repair, hose assembly and tire retread shops offering a wide range of
product repair services.
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Aviall distributes aircraft and engine parts from customer service centers
located throughout the world including North America, Europe and the
Asia-Pacific region. Field sales representatives located in each of these
regions call upon current and potential customers on a regular basis to solicit
orders and provide product and operational information. Each service center is
staffed to receive and process telephone, facsimile and mail orders.
Approximately 60% of the parts distributed by Aviall are located in its Dallas,
Texas warehouse complex, with the remaining parts distributed from its customer
service centers worldwide.
Aviall is an authorized distributor for manufacturers such as BFGoodrich
(ice protection systems, wheel and brake parts), Scott Aviation (oxygen
systems), Teleflex Control Systems (motors and actuators), Lord Corporation
(engine vibration isolators), Champion Aviation Products (ignition systems) and
Textron Lycoming (piston engines, parts and components). This diversity
distinguishes Aviall from most other distributors which carry a narrower range
of products. Over 98,000 unique part numbers are sold to approximately 13,200
customers.
Aviall's integrated data system permits its employees to access information
on stock availability, pricing and order status, and to perform order entry on
a real time basis from anywhere in the world. The system facilitates immediate
drop shipment from Dallas, Texas to customers throughout North America and
overnight fulfillment of European customer orders. Advanced electronic data
interchange ("EDI") communications with other networks used by suppliers and
customers is a key factor enhancing customer service that Aviall believes
provides it with a competitive advantage. Aviall's EDI system provides direct
customer access to Aviall's central inventory management and retrieval system.
In addition, the Aviall AIRNETsm order entry system is available on the
Internet and enables customers to review parts availability, place orders and
check order status.
INVENTORY LOCATOR SERVICE. ILS provides on-line information for the aviation
and commercial marine industries that brings buyers and sellers together.
Suppliers of parts, equipment and services from around the world list their
inventories and capabilities on the ILS system for access by buyers. Using a
personal computer with modem, buyers can quickly locate the suppliers that have
the items or capabilities they need.
Most clients use ILS-provided software that allows them to enter an
identifying number, such as a part number, on their own personal computer.
With a few keystrokes, the software automatically connects with the computer at
ILS headquarters in Memphis, Tennessee and transmits their request. The
database is searched, a report is transmitted back to the requester's personal
computer and the on-line connection is terminated. The process usually takes
less than a minute. In addition to availability data, the report provides the
buyer with the information necessary to contact the seller directly. As an
independent provider of information, ILS does not hold inventory or take part
in any sales transactions between its clients. ILS charges a subscription fee
to access or list data. In this respect, ILS is the largest independent
information source of its type serving the commercial aviation industry.
ILS recently introduced easy-to-use software for the Microsoft Windows
operating system. It includes a powerful messaging system, ILS DIRECTsm, that
enables buyers and sellers to communicate with each other electronically.
Information from database searches can be incorporated directly into messages
to save time and eliminate errors. Electronic directories of all ILS users can
be updated on-line, and users can maintain their own directories of nonusers
which they can use to automatically address and send faxes.
In addition to parts and services availability information, ILS maintains
approximately 92 million records of government data. Provided on a
supplemental basis, this information may be used in locating alternate parts
and suppliers, identifying unknown items, finding new applications for parts
and establishing the value of parts.
The ILS system provides information on over 30 million line items of parts
and equipment, and its databases contain over 123 million records. ILS users
access the system approximately 22,000 times each business day.
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SALES AND MARKETING. Aviall emphasizes breadth of product offering,
competitive pricing, attention to customer service and value-added functions
through advanced systems and inventory management/logistics applications.
Aviall's parts distribution operations serve the different requirements of both
the commercial airline and the general aviation after- market sectors, as well
as the aircraft OEMs.
Aviall's commercial airline parts distribution operations conduct direct
sales and marketing efforts through a team of regional sales managers and field
sales representatives who meet regularly with Aviall's major airline customers.
Their function is not only to sell and provide technical support for existing
products but also to work with Aviall's airline customers and with Aviall's
suppliers in order to identify new market opportunities.
Commercial airlines conduct much of their parts purchasing activities
through annual or longer term contracts with a strong emphasis upon EDI and
systems interfacing. Management believes that Aviall's superior systems
expertise and its focus on service provide a competitive advantage in serving
its airline customers.
Aviall's general aviation parts distribution operations sell through 29
domestic and international customer service centers and use both employee and
third-party sales representatives to meet customer requirements. The general
aviation sales staff works closely with the regional sales managers and the
inventory provisioning group to ensure that inventory availability and customer
service levels are maintained. Frequent meetings are conducted with suppliers
to provide new product introductions as well as marketing and sales training.
The general aviation parts distribution operations also sponsor parts and
maintenance symposiums with participation by both manufacturers and customers.
These symposiums feature new products and experienced representatives from
Aviall suppliers who provide technical training. In addition, management
believes that the Company's parts catalog, which is published every three
years, is the recognized industry standard for parts and applications in the
general aviation sector. A quarterly price subscription service is offered to
complement the catalog. Aviall also uses institutional advertising, co-op
advertising programs with suppliers and direct mail programs, as well as
sending representatives to a number of industry trade shows around the world,
to ensure that its name, products and services are visible in the market.
ILS services are marketed to both the buyers and suppliers in the aviation
and marine industries. Suppliers use ILS services to open new markets and find
additional customers for their products and services. Buyers use ILS to locate
the parts and services they require. Enhancements to ILS services are driven
by customer needs and its hardware/software capabilities. ILS routinely uses
focus groups, questionnaires, industry meetings and surveys to obtain customer
feedback on current and prospective services.
ILS is represented by area sales managers and independent representatives
strategically located throughout the world. ILS, with headquarters in Memphis,
Tennessee, also maintains regional offices in Atlanta, Georgia; Los Angeles,
California; and Hong Kong as well as independent representatives in London,
England; Toronto, Canada; and Sutherland, Australia. In addition, field
service representatives located in the major customer concentration areas
provide customers with training and technical support.
Each year, ILS demonstrates its services at a number of trade shows around
the world as a means of reaching prospective customers. Advertising in major
aviation and marine industry publications also provides additional exposure and
generates leads for the ILS sales team. Increasingly, the ILS web site on the
Internet is being employed as a marketing tool to provide information to
current and prospective customers. In addition, ILS offers seminars and
training sessions to assist customers in maximizing the value from ILS
services.
COMPETITION. Aviall's primary competitors for sales of aircraft parts and
supplies are other independent distributors and the OEMs. The aviation parts
distribution market is extremely fragmented and no single competitor holds a
dominant position. While Aviall historically competed in the parts
distribution sector on the basis of price and availability of parts, management
believes that a primary basis of competition today, and a key differentiating
factor in the future will be the ability to offer value-added services to
customers, such as broad-based inventory management services and sophisticated
systems capability.
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With respect to ILS, buyers and sellers of equipment, parts or services,
including ILS clients in the aviation and commercial marine industries, may
maintain their own databases of (or use noncomputerized means to identify)
potential transaction partners and then contact such parties to determine the
availability of or demand for specific equipment, parts or services. ILS
clients can also access databases maintained by other individual buyers or
sellers or use a competing commercial database service. The largest commercial
database service competing with ILS is the Airline Inventory Redistribution
System ("AIRS") operated by the Air Transport Association. AIRS is
substantially smaller than ILS, in terms of both the number of its users and
the number of records contained in its database.
CUSTOMERS. In 1996, Aviall's ten largest customers represented, in the
aggregate, approximately 12% of total sales, and the single largest customer
accounted for approximately 2% of sales.
Aviall conducts business with many of the world's airlines. As the
commercial aviation industry has changed, major airlines have begun to reassess
their inventory requirements and management. In addition, the emerging
consolidation of regional and commuter airlines, their closer ties with major
carriers through ownership or strategic alliance and the increasing number of
mid-sized regional airlines is changing the industry's requirements and buying
practices. Furthermore, the domestic airline industry has seen the emergence
of a number of startup airlines. Management believes that Aviall is
particularly well-positioned to serve this emerging market through flexible,
customer-focused support programs. Management also believes that the changing
circumstances in the airline industry create significant growth opportunities
in parts distribution.
ILS' customers for aviation services include OEMs, distributors, resellers,
repair and overhaul facilities, fixed base operators and most of the world's
major airlines. Marine services customers include manufacturers, repair
facilities, distributors, ship owners and operators. ILS users number more
than 4,000 and are located in 67 countries.
SUPPLIERS. Aviall purchases supplies from more than 140 suppliers and operates
under distribution agreements with most of its largest suppliers. Aviall
believes the size and scope of its operations, including its unique
international presence, provide an attractive market advantage for its
suppliers. Although Aviall could be affected by the loss of a major supplier,
it is not dependent on any one supplier.
EMPLOYEES. As of December 31, 1996, Aviall had approximately 700 employees,
none of whom are represented by collective bargaining units. Management
believes that Aviall's market leadership allows it to attract highly skilled
and competent employees. Aviall considers its employee relations to be good.
REGULATION. Aviall is regulated by certain federal, state and local government
agencies within the United States with authority over businesses generally,
such as the United States Environmental Protection Agency ("EPA") and the
United States Occupational Safety and Health Administration, as well as
agencies of foreign governments with similar authority in those foreign
jurisdictions where Aviall does business.
In addition to general regulation by these agencies, certain of
Aviall's operations are regulated by agencies with responsibilities over civil
aviation. Aviall's product repair services facilities are regulated in the
United States by the Federal Aviation Administration ("FAA"). Overseas
locations are regulated by the various countries' civil aviation authorities
and the FAA.
DISCONTINUED OPERATIONS. In January 1996, Aviall announced its intention to
exit Commercial Engine Services consisting of its airline engine and component
repair operations and its accessories repair operation. The accessories repair
operation sale was completed in May 1996, and the airline engine and component
repair operations sale was completed in June 1996. See Note 3 to the
Consolidated Financial Statements included in Item 8 of this report.
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BUSINESSES HELD FOR SALE AT DISTRIBUTION DATE. In June 1993, Aviall adopted a
restructuring plan and decided to dispose of its business aviation engine
overhaul and repair operations, its aviation parts redistribution unit and its
Dallas Love Field aircraft and terminal services operation. The sales of these
operations and certain other related assets were completed at various times in
1994 and 1995.
ARRANGEMENTS BETWEEN RYDER AND AVIALL RELATING TO THE DISTRIBUTION. For the
purpose of governing certain of the relationships between Ryder and Aviall
after the Distribution, Ryder and Aviall entered into various agreements,
including those described below.
The Distribution and Indemnity Agreement (the "Distribution Agreement")
provides for certain cross-indemnities designed principally to place financial
responsibility for the liabilities of Aviall and its subsidiaries with Aviall
and financial responsibility for the liabilities of Ryder and its other
subsidiaries with Ryder.
Through the Distribution Date, the results of the operations of Ryder's
domestic subsidiaries engaged in the aviation services businesses were included
in Ryder's consolidated U.S. federal income tax returns. A Tax Sharing
Agreement (the "Tax Sharing Agreement") provides, among other things, for the
allocation between the parties of federal, state, local and foreign tax
liabilities for all periods through the Distribution Date. Though valid as
between the parties thereto, the Tax Sharing Agreement is not binding on the
Internal Revenue Service ("IRS") and does not affect the several liability of
Aviall, Ryder and their respective subsidiaries, to the IRS for all federal
taxes of the consolidated group relating to periods prior to the Distribution
Date.
EXECUTIVE OFFICERS OF AVIALL. The following information concerning the
executive officers of Aviall is as of March 19, 1997.
Eric E. Anderson, 48, is the President and Chief Executive Officer of
Aviall. Mr. Anderson was appointed Chief Executive Officer in December 1996,
having served as President and Chief Operating Officer since June 1996. Mr.
Anderson had served as Executive Vice President of Aviall with responsibility
for parts distribution services and ILS from February 1996 to June 1996.
Previously, Mr. Anderson was President of ILS from 1993 to 1996, and was
Executive Vice President of ILS from 1991 to 1993. Mr. Anderson served as Vice
President of Marketing and Sales of ILS from 1990 to 1991 after having joined
ILS in 1988 as Director of Marketing and Business Development.
Bruce Langsen, 50, is the President of ILS, a position he has held since
June 1996. Previously, Mr. Langsen was Executive Vice President of ILS. Mr.
Langsen joined ILS as Vice President of Marketing and Sales in 1993.
Previously, he was Senior Vice President and General Manager for Express
Airlines II.
Charles M. Kienzle, 44, is the Senior Vice President, Operations of Aviall.
Mr. Kienzle served as Senior Vice President, Operations, U.S. Engine Services
from January to June 1996. From 1993 to January 1996, Mr. Kienzle was Senior
Vice President, Human Resources and Administration of Aviall. From 1991 to
1993, Mr. Kienzle was Vice President, Human Resources of the Ryder Airline
Services division. Prior to 1991, Mr. Kienzle was Director, Human Resources of
the Ryder Airline Services division.
Jeffrey J. Murphy, 50, is the Senior Vice President, Law and Human
Resources, Secretary and General Counsel of Aviall. Mr. Murphy served as
Senior Vice President, Secretary and General Counsel from December 1993 to
January 1996. Prior to the Distribution, Mr. Murphy served as Vice President,
Secretary and Assistant General Counsel of Ryder from 1986 until December 1993.
Jacqueline K. Collier, 43, is the Vice President, Accounting and Controller
of Aviall. Ms. Collier served as Controller for the Ryder Airline Services
division from 1989 until December 1993. Ms. Collier joined Cooper Airmotive, a
predecessor of Aviall, in 1976 as an accountant and has held various financial
positions with Aviall since that date.
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G. Patrick McDonald, 33, is the Vice President, Sales of Aviall. Mr.
McDonald joined Aviall in January 1997 and was appointed an executive officer
of Aviall in March 1997. Mr. McDonald was with Black & Decker, Inc. since
1986, most recently serving as Vice President of Sales for Black & Decker's
North American Accessories Division.
Cornelius Van Den Handel, 41, is the Treasurer and Director of Planning of
Aviall. Mr. Van Den Handel served as the Company's Director of Financial
Planning and Analysis from 1993 to 1996. Prior to 1993, Mr. Van Den Handel was
Manager of Financial Planning and Analysis of the Ryder Airline Services
Division. He joined Aviall in 1985 as a customer service representative.
Officers are elected annually by Aviall's Board of Directors and may be
removed at any time by the Board of Directors. There are no family
relationships among the executive officers listed, and there are no
arrangements or understandings pursuant to which any of them were elected as
officers.
ITEM 2: PROPERTIES
PROPERTIES. Aviall currently occupies 44 facilities worldwide, including
administrative, sales and distribution, and operations/repair facilities, and
maintains its headquarters in Dallas, Texas. Aviall maintains a central
warehouse in Dallas, Texas from which it operates its parts distribution
activities. Substantially all of Aviall's domestic real property is held under
long-term operating leases.
The principal operating facilities maintained by Aviall as of December 31,
1996 are detailed in the following table.
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Square Owned/
Location Footage Leased Function
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<S> <C> <C> <C>
Dallas, TX 137,600 Leased Parts Distribution
Dallas, TX 185,800 Leased Parts Distribution and
Product Repair
Services
Memphis, TN 31,000 Leased Parts Information
Services
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At December 31, 1996, Aviall operated 29 customer service centers worldwide
in support of its parts distribution operations. Aviall believes its
facilities, machinery and equipment are suitable for the purposes for which
they are used and are adequately maintained. Aviall also believes that the
capacity of its distribution and other facilities is adequate for current
requirements and projected normal growth.
ITEM 3: LEGAL PROCEEDINGS
Lockheed Martin Corporation ("Lockheed") and certain other parties entered
into a Consent Decree with the EPA under which Lockheed agreed to undertake an
extraction and treatment program to remediate the groundwater in the Burbank
Operable Unit (the "Burbank Unit") of the San Fernando Valley Superfund Sites
and to operate such program for a limited period. The Company's Burbank,
California facility, which was sold in December 1995, is located within the
boundaries of the Burbank Unit.
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In June 1995, the Company and certain other defendants entered into an
agreement with Lockheed to settle a lawsuit filed in the United States District
Court for the Central District of California in April 1994 against the Company
and more than 100 other parties seeking recovery of or contribution to
Lockheed's response costs to comply with the Consent Decree and subsequent EPA
requirements. Pursuant to the agreement, in exchange for a $2.2 million cash
payment made in June 1995, the Company will be released from and protected
against certain environmental response costs for the Burbank Unit through the
expiration of the interim remedy period established by the EPA, certain claims
by the EPA for costs of oversight of the Burbank Unit and certain other
matters. The agreement does not cover certain matters, including environmental
response costs for any final remedy which may be established by the EPA,
certain EPA oversight costs and costs of any changes mandated by the EPA to the
present interim remedy for the Burbank Unit. The agreement with Lockheed is
subject to court approval of certain modifications to the Consent Decree.
Although the Company presently believes that this condition will be satisfied
in 1997, there can be no assurance of this event.
In July 1996, the spouse of a former employee filed suit in Hidalgo County,
Texas against Aviall and certain chemical manufacturers alleging that the
cancer-related death of her husband was the result of his exposure to toxic
chemicals and metals while working for Aviall at facilities used in the
operation of the Company's former Commercial Engine Services businesses. The
plaintiffs are seeking to find Aviall and the other defendants jointly and
severally liable for actual and punitive damages in an amount not less than $50
million. The suit is in the preliminary stages of discovery. The Company
intends to vigorously defend this suit.
Aviall is routinely involved in legal proceedings incidental to its
business. Pending matters include actions involving alleged breaches of
contracts, alleged employment discrimination, alleged liability for certain
environmental matters, tort claims and other matters (including the matters
described above in this Item 3). For further information concerning such
environmental matters, see "Management Discussion and Analysis of Financial
Condition and Results of Operations - Environmental Matters" in Item 7 of this
report. In each instance, Aviall is defending the pending legal or regulatory
action. While any legal proceeding has an element of uncertainty, based on
information presently available, management believes that the ultimate
disposition of all such proceedings and environmental matters will not have a
material adverse effect on Aviall's results of operations, financial condition
or cash flows, although certain matters could be material to cash flows in any
one year.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
<PAGE> 10
PART II
ITEM 5: MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange, the
Chicago Stock Exchange and the Pacific Stock Exchange with the ticker symbol
AVL. The high and low sales prices for the common stock, and the dividends
declared and paid for each calendar quarter during 1996 and 1995, are shown
below.
<TABLE>
<CAPTION>
Prices
-------------------
Quarters High Low Dividends
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 First $ 9.38 $5.38 $0.00
Second 10.38 8.50 0.00
Third 9.13 7.88 0.00
Fourth 10.50 7.88 0.00
-----------------------------------------------------------------------------
Year $10.50 $5.38 $0.00
-----------------------------------------------------------------------------
1995 First $ 8.13 $5.88 $0.01
Second 8.88 6.38 0.01
Third 8.88 7.25 0.01
Fourth 10.13 7.25 0.01
-----------------------------------------------------------------------------
Year $10.13 $5.88 $0.04
-----------------------------------------------------------------------------
</TABLE>
On February 28, 1996, the Board of Directors of the Company suspended the
quarterly cash dividends. Under the terms of its existing credit facilities,
the Company may not pay cash dividends in excess of $1.0 million annually and
may only pay cash dividends if certain financial ratios are met. In any event,
the Company does not anticipate paying cash dividends in the near future.
The approximate number of shareholders of record of the Company's common
stock as of March 14, 1997 was 15,995.
10
<PAGE> 11
ITEM 6: SELECTED FINANCIAL DATA
The following table summarizes certain selected financial information with
respect to Aviall that has been derived from the audited Consolidated Financial
Statements of the Company. For periods prior to December 7, 1993, the date of
the Distribution, the Company was operated as a division of Ryder. As of the
date of the Distribution, Aviall became an independent publicly traded company.
In conjunction with the Distribution, the Company adopted a formal plan to
dispose of certain businesses including parts redistribution, business aviation
engine overhaul, and aircraft and terminal services (the "Businesses Held for
Sale"). The sales of these businesses were completed in 1995 (see Note 4 to
the Consolidated Financial Statements in Item 8 of this report). The Company
announced in January 1996 its intention to exit Commercial Engine Services
consisting of airline engine, component and accessories repair operations and,
accordingly, reported these businesses as discontinued operations in the 1995
Consolidated Financial Statements. The sales of these businesses were
completed in 1996 (see Note 3 to the Consolidated Financial Statements in Item
8 of this report). The continuing operations consists of parts distribution
and information services. Financial information prior to the Distribution
reflects the results of operations of the Company as a division of Ryder and is
not necessarily indicative of the results of operations had the Company
operated as a separate, stand-alone entity during such prior periods. The
information set forth below should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this report.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Net sales $374,038 346,511 354,938 396,058 439,600(c)
Nonrecurring charges (a) $ (6,613) (28,964) - (215,215) -
Earnings (loss) from continuing operations before
cumulative effect of change in accounting
and extraordinary item $ (2,946) (28,117) 4,565 (153,976) 678(c)
Earnings (loss) from discontinued operations $ 16,946 (212,958) 4,899 13,611 11,233
Cumulative effect of change in accounting $ - - - (4,980) -
Extraordinary item (b) $ (3,421) - - - -
- -----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 10,579 (241,075) 9,464 (145,345) 11,911(c)
=======================================================================================================================
Financial Position:
Total assets $260,877 538,927 847,629 915,799 1,053,366
Long-term debt $ 48,971 110,439 327,767 322,635 29,323
Total debt to total capital 36.59% 78.17% 55.31% 57.67% 3.99%
- -----------------------------------------------------------------------------------------------------------------------
Per Share Data:
Net earnings (loss) from continuing operations $ (0.15) (1.45) 0.24 n/a n/a
Net earnings (loss) from discontinued operations $ 0.87 (10.96) 0.25 n/a n/a
Net loss from extraordinary item $ (0.18) - - n/a n/a
- -----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 0.54 (12.41) 0.49 n/a n/a
=======================================================================================================================
Cash dividends per share $ - 0.04 0.04 n/a n/a
=======================================================================================================================
</TABLE>
(a) Nonrecurring charges in 1996 resulted from the effect of final contract
terms and transaction-related expenses in connection with the 1996 sale of
the Fastener Business. The 1995 nonrecurring charges reflected the
write-down of the Fastener Business assets (primarily inventory), the
write-off of certain deferred charges and income resulting from the
finalization of the accounting related to the Businesses Held for Sale.
Nonrecurring charges in 1993 reflected the restructuring costs of the parts
distribution business and the losses related to the Businesses Held for
Sale.
(b) The extraordinary item in 1996 resulted from the write-off of unamortized
financing costs associated with the Company's 1993 credit agreement which
was refinanced in the third quarter of 1996.
(c) Sales and earnings from continuing operations for 1992 exclude $288.3
million and $8.0 million, respectively, related to the Businesses Held for
Sale.
11
<PAGE> 12
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW. The Company implemented fundamental changes during 1996, selling the
Commercial Engine Services businesses to focus on the core aviation parts
distribution and inventory information business. Corporate functions were
streamlined to reduce operating costs and improve efficiencies, and sales were
expanded in every major market as the aviation industry continued the recovery
which began in 1995. The costs associated with the changes implemented in 1996
were offset by better than expected terms on the sales of the Commercial Engine
Services businesses.
Because the results of the Fastener Business sold in September 1996 are
included in continuing operations in the Company's Consolidated Financial
Statements, the following table is provided to show the results of the ongoing
business separate from those of the Fastener Business, excluding nonrecurring
charges and interest:
<TABLE>
<CAPTION>
(In thousands) 1996 (a) 1995 1994
---------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
Ongoing business $350,953 320,931 337,709
Fastener business 23,085 25,580 17,229
---------------------------------------------------------------------
Gross profit
Ongoing business 88,140 82,649 86,879
Fastener business 7,001 8,071 5,638
---------------------------------------------------------------------
SG&A
Ongoing business 73,877 72,428 69,288
Fastener business 5,658 8,306 5,878
---------------------------------------------------------------------
</TABLE>
(a) Fastener Business results are through September 19, 1996, the date
of the sale of this business.
A discussion of the financial condition and results of continuing
operations for the Company follows and should be read in conjunction with the
Consolidated Financial Statements and Notes included elsewhere in this report.
RESULTS OF OPERATIONS - 1996 VERSUS 1995. Net sales for the ongoing business
increased $30.0 million, or 9%, in 1996 compared with 1995. Parts distribution
sales increased $10.9 million in the Asia-Pacific region and $6.7 million in
Europe, while sales to North American airlines increased $4.8 million over
prior year. Strong sales growth in the North American general aviation market
more than offset a $10.3 million reduction in sales of turbine engine parts
lines no longer distributed by the Company. Parts information services revenue
increased $3.3 million. Sales for the Fastener Business declined $2.5 million
as a result of three fewer months of operations in 1996.
Gross profit for the ongoing business increased $5.5 million, or 7%, in
1996 compared with 1995. Gross profit as a percentage of net sales declined to
25.1% in 1996 from 25.8% in 1995 as a result of lower margins on sales of
excess inventory and pricing actions taken to increase sales and gain market
share. Gross profit for the Fastener Business declined $1.1 million primarily
as a result of lower net sales.
Selling and administrative expenses for the ongoing business increased $1.4
million in 1996, primarily the result of professional fees associated with the
March 1996 amendment of the Company's 1993 credit agreement and charges to
reflect the write-down of certain inventory to net realizable value. The
latter charge reflects the effect of changes in certain distribution
agreements. Fastener Business selling and administrative expenses declined
$2.6 million as a result of three fewer months of operations in 1996 and high
obsolescence charges in 1995.
12
<PAGE> 13
The 1996 nonrecurring charges of $6.6 million resulted from
transaction-related expenses and asset write-downs related to the sale of the
Fastener Business. The 1995 nonrecurring charges included $25.5 million for
the write-down to expected net realizable value of surplus inventory and other
assets in the Fastener Business. Also included was a $7.7 million write-off of
certain pension-related deferred charges. Partially offsetting these charges
was a $4.2 million gain from the finalization of reserves related to the sale
of the business aviation engine overhaul and aircraft and terminal services
operations.
Interest expense decreased $0.4 million in 1996 compared with 1995.
Reduced interest payments resulting from lower average debt balances were
largely offset by $2.8 million of higher debt issuance cost amortization, which
was accelerated due to the March 1996 amendment to the 1993 credit agreement.
The remaining $3.4 million of unamortized debt issuance costs related to the
1993 credit agreement were written off as an extraordinary item in the third
quarter of 1996 when the Company replaced its senior secured credit facilities.
RESULTS OF OPERATIONS - 1995 VERSUS 1994. Net sales for the ongoing business
decreased $16.8 million in 1995 compared with 1994, with growth in both the
North American commercial airline and general aviation markets more than offset
by a $36.4 million reduction in sales of turbine engine parts lines. These
lines were eliminated primarily because of the sale of the business aviation
engine overhaul and repair unit in March 1995 and the consequential loss of
distribution rights to those parts. Excluding turbine engine part sales,
shipments to North American commercial airline customers increased $8.0 million
and a stronger general aviation market in North America resulted in a $7.0
million sales increase. Sales for the Fastener Business increased $8.4 million
in 1995 compared with 1994, primarily as a result of just-in-time ("JIT")
contracts with McDonnell Douglas ($3.7 million) and Bell Helicopter ($2.2
million).
Gross profit for the ongoing business decreased $4.2 million in 1995
compared with 1994 as a result of the lower sales volume. Gross profit as a
percentage of sales was relatively flat year over year. Gross profit for the
Fastener Business increased $2.4 million as a result of higher net sales.
Selling and administrative expenses for the ongoing business increased $3.1
million in 1995, primarily the result of corporate severance charges and
corporate expenses reallocated from discontinued operations under accounting
rules. Selling and administrative expenses for the Fastener Business increased
$2.4 million reflecting higher expenses to support the JIT contracts and higher
obsolescence charges.
See "Results of Operations - 1996 versus 1995" above for a discussion of
nonrecurring charges.
Interest expense rose $2.5 million in 1995 because of both higher interest
rates and higher average debt balances than in 1994.
FOREIGN OPERATIONS. The Company operates parts distribution customer service
centers in Canada, the Netherlands, Hong Kong, Singapore, Australia and New
Zealand and product repair services operations in the United Kingdom and
Australia. These foreign operations use the U.S. dollar as their functional
currency because the majority of net sales and material purchases are
denominated in U.S. dollars. Net sales and earnings before income taxes for
the foreign operations were $84.8 million and $6.7 million, respectively, for
1996, $63.3 million and $0.7 million, respectively, for 1995 and $57.7 million
and $(8.0) million, respectively, for 1994. See Note 15 to the Consolidated
Financial Statements for further discussion.
13
<PAGE> 14
INCOME TAXES. For 1996, the Company's income tax expense reported in the
Statement of Operations was $1.7 million on net income of $12.2 million. The
effective rate for 1996 of 13.5% is different than the federal statutory rate
primarily due to the decrease in the valuation allowance provided for deferred
tax assets resulting from the large net operating loss ("NOL") carryforward
partially offset by the basis difference in the stock which was sold as part of
the sale of Commercial Engine Services. As a result of recent tax losses, the
Company will pay only nominal U.S. federal income taxes on any future domestic
income for the next several years. The Company's income tax expense reported
in the Statement of Operations for 1995 was $0.5 million. The effective rate
for 1995 of (0.2)% was substantially lower than the federal statutory rate
primarily due to amortization and write-off of goodwill and the increase in the
valuation allowance for deferred tax assets. The income tax expense for 1994
was $7.5 million and reflected an effective rate of 44.1%. The 1994 effective
rate exceeded the federal statutory rate primarily due to the amortization of
goodwill.
As of December 31, 1996, the Company recognizes gross deferred income tax
assets of $117.4 million, arising primarily from the losses related to
businesses sold. Based on historical earnings levels, the Company believes
that future taxable income may not be sufficient to realize all deferred tax
assets. Accordingly, the deferred tax assets, net of a $65.0 million valuation
allowance, are considered realizable with sufficient certainty. In addition,
the Company had $3.2 million of deferred tax liabilities at year end. The
resulting net deferred income tax asset as of December 31, 1996 was $49.1
million.
For U.S. federal tax purposes, the Company had a NOL carryforward of
approximately $180 million, substantially expiring in 2009-2011. The majority
of the NOL was created by losses on businesses sold in 1994, 1995 and 1996.
See Note 10 to the Consolidated Financial Statements for further discussion.
PENSION BENEFITS. The Company's primary pension plan ("Aviall Plan") became
effective on January 1, 1994 to provide benefits for services subsequent to the
Distribution. Ryder retained the pension fund assets and accumulated benefit
obligation for all Aviall employees who participated in the Ryder System, Inc.
Employee Retirement Plan ("Ryder Salaried Plan"). Aviall employees were given
credit in the Aviall Plan for prior service in the Ryder Salaried Plan.
Service cost for the ongoing business is expected to approximate $1.3 million
in 1997.
At the Distribution, Ryder transferred to Aviall amounts primarily related
to unrecognized net loss and prior service cost of the Ryder Salaried Plan and
retained the underlying accumulated benefit obligation and related assets.
Aviall and Ryder disagreed with respect to the appropriate accounting treatment
of these deferred charges. Under the terms of an agreement entered into in
connection with the Distribution, Aviall is considering pursuing arbitration
with respect to this matter. The sale of businesses (see Notes 3 and 4 to the
Consolidated Financial Statements) and the Company's reassessment of the
recoverability of these amounts resulted in the 1995 write-off of the related
deferred charges.
FINANCIAL RESOURCES AND LIQUIDITY. The Company's working capital and operating
needs are met through a combination of cash flow from operations, working
capital management, control of capital expenditures and availability under
revolving lines of credit. The improved financial condition of the Company
resulting from the disposal of its Commercial Engine Services businesses
enabled it to replace its existing senior secured credit facilities in
September 1996. The new senior secured credit facilities (the "1996 Credit
Facilities") consist of a $50.0 million five-year amortizing secured term loan
due through 2001 (the "Term Loan"), and a $50 million five-year secured
revolving loan due in 2001 (the "Revolver") with availability determined by
reference to a borrowing base of eligible accounts receivable and inventory of
the Company. The 1996 Credit Facilities will provide significantly lower
interest expense when compared with the previous amended senior secured credit
facilities (the "1993 Credit Facilities"). The 1996 Credit Facilities contain
various covenants, including financial covenants, and limitations on debt,
dividends and capital expenditures. See Note 8 to the Consolidated Financial
Statements for further discussion.
14
<PAGE> 15
During 1996, the Company repaid the 1993 Credit Facilities with proceeds
received from the sale of businesses and borrowings under the 1996 Credit
Facilities. The 1993 Credit Facilities had been amended in March 1996 to
provide for a maturity date of April 30, 1997, which resulted in accelerated
amortization of debt issuance costs during the second and third quarters of
1996.
In January 1997, a $12.0 million subordinated note received in connection
with the March 1995 asset sale of the business aviation engine repair operation
was repaid. The Company applied the proceeds as a permanent reduction of the
Term Loan. The subordinated note bore interest at 12% per annum payable
semiannually, and accrued interest of $0.3 million was received by the Company
at the time of the note repayment. The Company had carried the note at a
discounted value of $10.5 million at December 31, 1996.
The Company believes that its expected cash flow from operations and
availability under its revolving lines of credit are sufficient to meet its
current working capital and operating needs. Improvements in earnings will
further enhance the Company's access to capital and will enable the Company to
finance future investment opportunities.
CASH FLOWS. Cash flow from operations of the continuing operations excluding
working capital changes (defined as net earnings (loss) from continuing
operations and adding back nonrecurring charges, continuing operations
depreciation and amortization and deferred income taxes) was $13.2 million in
1996 compared with $5.1 million in 1995. This increase principally results
from increased gross profits in 1996 and reduced interest payments. Continuing
operations working capital increased $27.2 million in 1996 compared with a
$30.4 million increase in 1995. In 1996, the $16.6 million use of cash in
accounts payable reflected a significant decrease in checks outstanding, while
payments from reserves established in connection with the sales of the
Commercial Engine Services businesses were primarily responsible for the $13.6
million reduction in accrued expenses. Partially offsetting these uses of cash
was a $3.5 million reduction in inventory. The working capital increase in
1995 included a $14.5 million payment to Ryder for the settlement of 1993
federal income taxes made pursuant to the Tax Sharing Agreement entered into in
connection with the Distribution. Also contributing were higher inventory
balances and a pension contribution in 1995. Cash flow from operations of the
continuing operations (before working capital changes) was $16.8 million in
1994, and working capital increased $8.2 million.
Capital spending for the ongoing business was $1.2 million, $4.2 million,
$5.9 million in 1996, 1995 and 1994, respectively. Major projects in 1996
included information systems-related investments. The projects in 1995
included completion of a new warehouse management system and information
systems-related investments. Management expects to spend approximately $4.0
million to $5.0 million to improve its information technology over the next two
to three years, and expects other capital expenditures to be in the range of
$1.0 million to $3.0 million annually.
Net cash outflows from financing activities were $254.4 million in 1996,
$105.3 million in 1995 and $29.4 million in 1994. The Company completed the
sales of the Commercial Engine Services businesses in the second quarter of
1996 and the sale of the Fastener Business in the third quarter of 1996. Total
cash proceeds were $261.3 million, net of transaction and closing costs, and
were used to repay debt in accordance with the requirements of the Company's
1993 Credit Facilities. The remaining borrowings under the 1993 Credit
Facilities were repaid on September 26, 1996 from new borrowings under the 1996
Credit Facilities.
The business aviation engine overhaul and aircraft and terminal services
operations were sold in March 1995 for cash proceeds of $76.8 million and a
$12.0 million subordinated note which, as discussed above, was subsequently
repaid in January 1997. Additionally, the Company completed the sale of other
properties related to the businesses held for sale in 1995. The Company used
these proceeds, net of transaction and closing costs, to prepay a portion of
the 1993 Credit Facilities as required by the terms of such borrowing.
In 1994, Aviall increased revolving loan borrowings by $51.8 million to
finance operations, both continuing and discontinued, and pay certain
liabilities of the businesses held for sale. The sale of the parts
redistribution business in December 1994 together with working capital
reductions in the businesses held for sale produced total proceeds of $81.5
million which were used to reduce debt, primarily prepayments of the term loans
of the 1993 Credit Facilities.
15
<PAGE> 16
ENVIRONMENTAL MATTERS. The Company's parts distribution business, which
includes parts repair operations, requires the use, storage and disposition of
certain chemicals in small quantities which are regulated under various federal
and state environmental protection laws. These laws required the Company to
eliminate or mitigate the impact of these substances on the environment. In
response to these requirements, the Company has upgraded facilities and
implemented programs to detect and minimize contamination. Due to the small
quantities of chemicals used and the current programs in place, the Company
does not anticipate any material environmental liabilities or significant
capital expenditures will be incurred in the future related to these operations
to comply or remain in compliance with existing environmental regulations.
Certain of the Company's previously owned businesses (see Notes 3 and 4 to
the Consolidated Financial Statements) required the use of certain chemicals
classified by various state and federal agencies as hazardous substances. The
Company retains environmental liabilities related to these businesses for the
period during which they were operated by the Company. The Company is involved
in various stages of investigation and cleanup to comply with state and federal
regulations at these locations. The primary locations are Burbank, California,
Dallas (Forest Park), Texas and Commercial Engine Services properties ("CES
Properties") which include three locations in Texas (Love Field, Carter Field
and McAllen) and one location in Prestwick, Scotland.
The Company has been named a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation and Liability Act and
the Superfund Amendments and Reauthorization Act at four third-party disposal
sites to which wastes were allegedly sent by the previous owner of assets used
in the Company's former engine services operations. The Company did not use
these identified disposal sites. Accordingly, the previous owner has retained,
and has been discharging, all liability associated with the cleanup of these
sites pursuant to the sales agreement. Although the Company could be
potentially liable in the event of nonperformance by the previous owner, it
does not anticipate nonperformance. Based on this information, the Company has
not accrued for any costs associated with third- party sites. The Company has
also received notices or inquiries from certain state agencies and other
private parties with respect to certain other environmental matters. One
property owner adjacent to the previously owned Forest Park location has filed
suit against the Company related to environmental contamination. These matters
are under investigation, and the ultimate cost cannot presently be estimated.
In addition, the Company's former Burbank, California engine overhaul
facility is located within the boundaries of the Burbank Unit of the San
Fernando Valley Superfund Sites. The EPA has selected an interim remedial
action for the Burbank Unit, including multiyear operation and maintenance of a
ground water treatment system. Lockheed and certain other parties have entered
into a Consent Decree with the EPA under which Lockheed agreed to implement and
finance a portion of the interim remedial action for a limited period.
In May 1994, the Company was notified by the EPA that it had been named a
PRP with respect to the Burbank Unit. In June 1995, the Company and certain
other defendants entered into an agreement with Lockheed to settle a lawsuit
filed by Lockheed in April 1994 against the Company and more than 100 other
parties seeking recovery of or contribution to Lockheed's response costs to
comply with the Consent Decree and subsequent EPA requirements. Pursuant to
the agreement, in exchange for a $2.2 million cash payment made in June 1995,
the Company will be released from and protected against certain environmental
response costs for the Burbank Unit through expiration of the interim remedy
period established by the EPA, certain claims by the EPA for costs of oversight
of the Burbank Unit and certain other matters. The agreement does not cover
certain matters including environmental response costs for any final remedy
which may be established by the EPA, certain EPA oversight costs and costs of
any changes mandated by the EPA to the present interim remedy for the Burbank
Unit.
The agreement with Lockheed is subject to court approval of certain
modifications to the Consent Decree. Although the Company presently believes
that this condition will be satisfied in 1997, there can be no assurance of
this event. The Company presently has determined additional reserves related
to the Burbank Unit are not required due to the uncertainty of the additional
costs, if any, associated with any changes to the interim remedy or any final
remedy.
16
<PAGE> 17
The Company is presently implementing a state agency approved cleanup for
its former Forest Park facility. The facility is also the subject of an
arbitration proceeding between the Company and the purchaser of the property
concerning the purchaser's involvement in determining the required level of
cleanup. The arbitration is in preliminary stages, and the Company believes
existing financial reserves for the environmental remediation of this location
are sufficient.
There are various stages of discussions underway with state agencies to
determine the appropriate remediation for ground water and soil contamination
at the CES Properties located in Texas. The Company has received notification
of an approved plan from the state agency on soil and ground water issues for
the Carter Field location. Negotiations are in process with the state agency
for approval of a plan on the McAllen facility. The Company began
investigations at Love Field, Texas and Prestwick, Scotland during 1996. Work
on determining exposure and cleanup requirements is continuing at these sites.
Based on current information, the Company believes existing financial reserves
for environmental corrective measures at the CES Properties are sufficient. In
addition, discussions with a previous owner and former insurers of various of
these locations are in process to determine their potential shared liability
associated with the cleanup of these sites. Due to the uncertainty of
recoverability of the various claims the Company has made against these third
parties and insurers, a receivable has not been recorded.
At December 31, 1996 and 1995, accrued environmental liabilities amounted
to $22.8 million and $23.0 million, respectively. The Company recorded $14.4
million and $9.1 million in 1995 and 1994, respectively, for environmental
expense. No environmental expense was recorded in 1996. The ultimate cost of
the Company's environmental liabilities has been estimated, including exit
costs related to both Commercial Engine Services and other previously owned
businesses. The Company's estimates may change in the future as more
information becomes available with respect to the level of contamination, the
effectiveness of selected remediation methods, the stage of management's
investigation at the individual sites and the recoverability of such costs from
third parties. The expected cash funding requirements for 1997 related to
environmental liabilities are $3.0 million. The estimated environmental
remediation expense to be recorded with respect to the ongoing business is not
expected to be significant in the foreseeable future based on the nature of the
activities presently conducted. Based on information presently available and
Company programs to detect and minimize contamination, management believes that
the ultimate disposition of environmental matters will not have a material
adverse effect on the Company's results of operations, cash flows or financial
condition, although certain environmental matters could be material to cash
flows in any one year (see Note 13 to the Consolidated Financial Statements).
OUTLOOK. Aviall's new focus is on the distribution of aviation parts and
providing inventory information services. The Company has completed the sales
of its Commercial Engine Services businesses and used the net proceeds to pay
down debt. Management believes the Company has made significant progress in
streamlining corporate functions to reduce cost and improve efficiency. The
Company intends to seek further opportunities for cost reductions and
efficiency improvements in all areas of its operation.
Aviall primarily participates in the global aviation aftermarket through
its core aviation parts distribution and parts information services business.
The Company can be affected by the general economic cycle, particularly as it
influences flight activity in commercial, business and general aviation.
Recent favorable economic conditions have led to a recovery of the aviation
market, and provided the Company with opportunities for growth.
The Company's ability to manage its inventory is affected by the relative
efficiency of its suppliers. Also, changes in the Company's portfolio of
products and suppliers can result in periodic noncash charges to revalue
inventory of discontinued products.
Information and communication technology is evolving rapidly, and
developments such as the Internet could threaten proprietary database service
companies such as ILS and traditional distribution companies. Management
believes that the active employment by the Company of these new technologies,
such as the Internet, will enable it to maintain its technological leadership
and minimize the risk of obsolescence.
17
<PAGE> 18
CERTAIN FORWARD-LOOKING STATEMENTS. This report contains certain
forward-looking statements (as such term is defined in the Private Securities
Litigation Reform Act of 1995) relating to the Company that are based on the
beliefs of the management of the Company, as well as assumptions and estimates
made by and information currently available to the Company's management. When
used in this report, the words "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions, as they relate to the Company or the
Company's management, identify forward-looking statements. Such statements
reflect the current views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions relating to the
operations and results of operations of the Company as well as its customers
and suppliers, including as a result of competitive factors and pricing
pressures, shifts in market demand, general economic conditions and other
factors including, among others, those that effect flight activity in
commercial, business and general aviation, the business activities of the
Company's customers and suppliers and developments in information and
communication technology. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions or estimates prove incorrect,
actual results may vary materially from those described herein as anticipated,
believed, estimated, expected or intended.
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary data are included
as an annex to this report. See the Index to Consolidated Financial Statements
and Supplementary Data on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors of
Aviall is set forth under the caption "Election of Directors" of Aviall's Proxy
Statement for the 1997 Annual Meeting of Stockholders to be held on June 13,
1997 ("Proxy Statement"), to be filed with the Commission pursuant to
Regulation 14A, which is incorporated herein by reference.
The information required by this item regarding executive officers is set
forth in Item 1 of Part I of this report.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is set forth under the captions
"Compensation of Directors," "Compensation of Executive Officers," "Option/SAR
Grants in 1996," "Aggregated Option/SAR Exercises and December 31, 1996
Option/SAR Values" and "Retirement Benefits" of the Proxy Statement, to be
filed with the Commission pursuant to Regulation 14A, which is incorporated
herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Beneficial Ownership of Common Stock" of the Proxy Statement, to be filed with
the Commission pursuant to Regulation 14A, which is incorporated herein by
reference.
18
<PAGE> 19
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Compensation of Executive Officers - Certain Transactions" of the Proxy
Statement, to be filed with the Commission pursuant to Registration 14A, which
is incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report:
(1) Consolidated Financial Statements of Aviall, Inc. and its
subsidiaries:
Report of Independent Accountants
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules:
Schedule II - Valuation Accounts
All other schedules have been omitted because they are not
applicable or the required information is shown in the
Consolidated Financial Statements or the Notes to the
Consolidated Financial Statements.
(3) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- ---------------------------------------------------------------------------------------------------
<S> <C>
3.1* Restated Certificate of Incorporation of Aviall (Exhibit 3.1 to Aviall's Annual Report on Form
10-K for the fiscal year ended December 31, 1993 (the "1993 Form 10-K"))
3.2* By-Laws of Aviall (Exhibit 3.2 to the 1993 Form 10-K)
4.1* Form of Common Stock Certificate of Aviall (Exhibit 4 to Aviall's Registration Statement on Form
10, as amended (Commission File No. 1-12380) (the "Form 10"))
4.2* Aviall, Inc. Preferred Stock Purchase Rights Plan between Aviall and The First National Bank of
Boston dated as of December 7, 1993 (Exhibit 10.7 to the 1993 Form 10-K)
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- ----------------------------------------------------------------------------------------------------
<S> <C>
10.1*+ Aviall, Inc. Stock Incentive Plan (Exhibit 10.1 to the 1993 Form 10-K)
10.2*+ Aviall, Inc. Directors Stock Plan (Exhibit 10.2 to the 1993 Form 10-K)
10.3* Distribution and Indemnity Agreement by and between Aviall and Ryder dated November 23, 1993
(Exhibit 10.3 to the 1993 Form 10-K)
10.4* Tax Sharing Agreement by and between Aviall and Ryder dated November 23, 1993 (Exhibit 10.4 to
the 1993 Form 10-K)
10.5*+ Form of Severance Agreement between Aviall and certain of its executive officers (Exhibit 10H to
the Form 10)
10.6*+ Form of Change of Control Severance Agreement (Exhibit 10I to the Form 10)
10.7* Asset Purchase Agreement, dated as of May 31, 1994, by and between Aviall Services, Inc. and
Dallas Airmotive, Inc., as amended (Exhibit 10.3 to Aviall's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1994 (the "June 30, 1994 Form 10-Q") and Exhibits 10.17
through 10.23 to Aviall's Annual Report on Form 10-K for the fiscal year ended December 31, 1994
(the "1994 Form 10-K"))
10.8* Asset Purchase Agreement, dated as of August 4, 1994 by and between Aviall Services, Inc. and AJT
Capital Partners d/b/a Aerospace International Services, as amended (Exhibit 10.4 to the June 30,
1994 Form 10-Q and Exhibit 10.25 to the 1994 Form 10-K)
10.9*+ Aviall, Inc. Employee Stock Purchase Plan (Exhibit 10.27 to the 1995 Form 10-K)
10.10* Agreement of Purchase and Sale among Aviall, Inc., Aviall Services, Inc., Greenwich Air Services,
Inc. and GASI Engine Services, Inc., dated April 19, 1996 (Exhibit 2.1 to Aviall's Current Report
on Form 8-K dated April 19, 1996)
10.11* Asset Purchase Agreement between Aviall, Inc. and Curtiss-Wright Flight Systems, Inc., dated
April 25, 1996 (Exhibit 2.2 to Aviall's Current Report on Form 8-K dated April 19, 1996)
10.12* Asset Purchase Agreement by and among Maple Leaf Aerospace, Inc., Aviall Services, Inc. and
Aviall (Canada) Ltd., dated September 5, 1996 (Exhibit 2.1 to Aviall's Current Report on Form 8-K
dated September 19, 1996)
10.13* Credit Agreement, dated as of September 26, 1996, by and among Aviall, Inc. and the financial
institutions parties thereto (Exhibit 10.1 to Aviall's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995)
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
Exhibit
No. Description
- -------- -------------------------------------------------------------------------------------------------
<S> <C>
21.1 Subsidiaries of Aviall
23.1 Consent of Price Waterhouse LLP
24.1 Powers of attorney of directors and officers of Aviall
27.1 Financial Data Schedule
</TABLE>
- --------------------
* Each document marked with an asterisk is incorporated herein by reference
to the designated document previously filed with the Commission.
+ Each document marked with a dagger constitutes a management contract or
compensatory plan or arrangement.
(b) Reports on Form 8-K.
None.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
AVIALL, INC.
March 25, 1997 By /s/ ERIC E. ANDERSON
---------------------------------------
Eric E. Anderson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
SIGNATURE TITLE
- ----------------------------------------------- ----------------------------------------
<S> <C>
/s/ Eric E. Anderson President and Chief Executive Officer
- ----------------------------------------------- (Principal Executive Officer)
Eric E. Anderson
/s/ Jacqueline K. Collier Vice President and Controller
- ----------------------------------------------- (Principal Accounting Officer)
Jacqueline K. Collier
/s/ Cornelius Van Den Handel Treasurer and Director of Planning
- ----------------------------------------------- (Principal Financial Officer)
Cornelius Van Den Handel
Robert G. Lambert* Chairman of the Board of Directors
- -----------------------------------------------
Robert G. Lambert
Henry A. McKinnell* Director
- -----------------------------------------------
Henry A. McKinnell
Donald R. Muzyka* Director
- -----------------------------------------------
Donald R. Muzyka
Henry Wendt* Director
- -----------------------------------------------
Henry Wendt
</TABLE>
* The undersigned, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K pursuant to the Powers of Attorney executed on
behalf of the above-named officers and directors of the Registrant and
contemporaneously filed herewith with the Securities and Exchange Commission.
March 25, 1997 /s/ JEFFREY J. MURPHY
---------------------------------
Jeffrey J. Murphy
Attorney-in-Fact
22
<PAGE> 23
AVIALL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 14(A)(1): CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
CONSOLIDATED BALANCE SHEETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
ITEM 14(A)(2): CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION ACCOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-27
</TABLE>
F-1
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors January 30, 1997
and Shareholders of Aviall, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 19 present fairly, in all
material respects, the financial position of Aviall, Inc. and its subsidiaries
at December 31, 1996 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996,
in conformity with 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 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.
/s/ PRICE WATERHOUSE LLP
- --------------------------------
PRICE WATERHOUSE LLP
Dallas, Texas
F-2
<PAGE> 25
AVIALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $374,038 346,511 354,938
Cost of sales 278,897 255,791 262,421
- ----------------------------------------------------------------------------------------------------------
Gross profit 95,141 90,720 92,517
Operating and other expenses:
Selling and administrative expenses 79,535 80,734 75,166
Nonrecurring charges 6,613 28,964 -
Interest expense 10,282 10,713 8,197
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before
income taxes (1,289) (29,691) 9,154
Provision (benefit) for income taxes 1,657 (1,574) 4,589
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations (2,946) (28,117) 4,565
Discontinued operations:
Earnings (loss) from operations (net of income
tax expense of $2,714 and $2,862 in 1995 and
1994, respectively) - (421) 4,899
Gain (loss) on disposal (net of income tax 16,946 (212,537) -
benefit of $605 in 1995)
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) from discontinued operations 16,946 (212,958) 4,899
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item 14,000 (241,075) 9,464
Extraordinary item (3,421) - -
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 10,579 (241,075) 9,464
==========================================================================================================
Net earnings (loss) per share:
Earnings (loss) from continuing operations $ (0.15) (1.45) 0.24
Earnings (loss) from discontinued operations 0.87 (10.96) 0.25
Extraordinary item (0.18) - -
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 0.54 (12.41) 0.49
==========================================================================================================
Weighted average common and common equivalent shares 19,538,330 19,418,672 19,410,714
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE> 26
AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 4,191 4,690
Receivables 60,716 55,725
Inventories 73,088 100,619
Prepaid expenses and other current assets 2,649 2,953
Deferred income taxes 12,551 45,961
Net assets of discontinued operations - 238,048
- -------------------------------------------------------------------------------------------------------
Total current assets 153,195 447,996
- -------------------------------------------------------------------------------------------------------
Property, plant and equipment 8,727 12,129
Intangible assets 59,560 59,425
Deferred income taxes 36,593 3,249
Other assets 2,802 16,128
- -------------------------------------------------------------------------------------------------------
Total assets $260,877 538,927
=======================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,237 185,171
Accounts payable 28,478 48,176
Accrued expenses 52,499 86,218
- -------------------------------------------------------------------------------------------------------
Total current liabilities 86,214 319,565
- -------------------------------------------------------------------------------------------------------
Long-term debt 48,971 110,439
Other liabilities 31,731 26,391
Shareholders' equity (common stock of $.01 par value per share with
80,000,000 shares authorized; 19,551,688 shares and 19,443,712 shares
issued and outstanding at December 31, 1996 and 1995, respectively;
preferred stock of $.01 par value per share with 10,000,000 shares
authorized and no shares issued and outstanding) 93,961 82,532
- -------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $260,877 538,927
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 27
AVIALL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional Retained
Shares paid-in earnings
Outstanding Amount capital (deficit) Total
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At December 31, 1993 19,322,444 $193 313,807 282 314,282
Net earnings - - - 9,464 9,464
Dividends - - - (776) (776)
Common stock issued 80,994 1 1,134 - 1,135
- ------------------------------------------------------------------------------------------------------
At December 31, 1994 19,403,438 194 314,941 8,970 324,105
Net loss - - - (241,075) (241,075)
Dividends - - - (776) (776)
Common stock issued 40,274 - 278 - 278
- ------------------------------------------------------------------------------------------------------
At December 31, 1995 19,443,712 194 315,219 (232,881) 82,532
Net earnings - - - 10,579 10,579
Common stock issued 107,976 1 849 - 850
- ------------------------------------------------------------------------------------------------------
At December 31, 1996 19,551,688 $195 316,068 (222,302) 93,961
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 28
AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 10,579 (241,075) 9,464
(Gain)/loss on disposal of discontinued operations (16,946) 212,537 -
Nonrecurring charges 6,613 28,964 -
Extraordinary loss 3,421 - -
Continuing operations depreciation and amortization 9,469 7,281 7,320
Discontinued operations depreciation and amortization - 22,321 20,794
Deferred income taxes 43 (3,039) 4,928
Changes in:
Receivables (290) (1,388) 9,350
Inventories 3,471 (11,702) 1,384
Accounts payable (16,577) 6,923 (3,212)
Accrued expenses (13,616) (29,478) (14,719)
Other, net (148) 5,217 (970)
Discontinued operations working capital changes 5,020 40,759 (29,276)
- --------------------------------------------------------------------------------------------------------------------
(8,961) 37,320 5,063
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from businesses sold 261,276 80,100 51,176
Sales of property, plant and equipment 2,198 1,758 1,941
Capital expenditures (1,179) (4,330) (10,435)
Other, net - (2,083) 429
Net change in discontinued operations property, plant and equipment 603 (14,268) (21,561)
- --------------------------------------------------------------------------------------------------------------------
262,898 61,177 21,550
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repaid (169,880) (84,970) (81,538)
Net change in revolving credit facility (132,580) (19,825) 51,828
Debt proceeds 50,000 - -
Debt issue costs paid (2,826) - -
Issuance of common stock 850 278 1,135
Dividends paid - (776) (776)
- --------------------------------------------------------------------------------------------------------------------
(254,436) (105,293) (29,351)
- --------------------------------------------------------------------------------------------------------------------
Change in cash (499) (6,796) (2,738)
Cash, beginning of year 4,690 11,486 14,224
- --------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 4,191 4,690 11,486
- --------------------------------------------------------------------------------------------------------------------
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 17,178 29,550 32,155
Income taxes $ 1,008 19,129 2,201
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 29
AVIALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND AND ORGANIZATION
Aviall, Inc. ("Aviall" or the "Company") is a leading distributor of
aviation parts and provider of related parts information services.
Aviall operated as a wholly owned subsidiary of Ryder System, Inc.
("Ryder") until December 7, 1993 (the "Distribution Date") when Ryder
distributed Aviall's stock to Ryder's shareholders as a tax free dividend (the
"Distribution"). The Distribution established Aviall as a publicly held
corporation separate from Ryder. In conjunction with the Distribution, the
Company announced plans to dispose of its parts redistribution, business
aviation engine overhaul, and aircraft and terminal services businesses. The
sales of these businesses were completed in 1995 (see Note 4).
In January 1996, Aviall announced its intention to exit the commercial
engine services businesses consisting of its airline engine, component and
accessories repair operations ("Commercial Engine Services") and, accordingly,
reported these businesses as discontinued operations. The sales of these
businesses were completed in 1996 (see Note 3). In September 1996, the Company
sold its aerospace fastener distribution business (the "Fastener Business")
(see Note 4).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of Aviall and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Certain prior year amounts have been reclassified to conform to the current
year presentation.
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 consolidated financial statements. Accordingly, upon settlement, actual
results may differ from estimated amounts.
REVENUE RECOGNITION. Income from parts sales is recognized upon shipment of
the product to customers. Income from parts information services is recognized
as services are rendered.
For the discontinued operations, income from engine maintenance services
was recognized at the time of performance test acceptance of engines. Revenue
from long-term fixed-price contracts was recognized under the percentage of
completion method.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH. The Company considers all
highly-liquid, interest-bearing instruments with an original maturity of three
months or less to be cash equivalents. Included in "Prepaid Expenses and Other
Current Assets" at December 31, 1996 is $0.6 million of restricted cash
designated for the payment of environmental remediation costs associated with a
facility sold in May 1996. At December 31, 1995, $1.8 million of restricted
cash, included in "Other Assets", was designated for the payment of demolition
and environmental remediation costs associated with a facility sold in 1995.
This balance was paid in full during 1996.
INVENTORIES. Inventories, composed of aviation parts, are valued at the lower
of average cost or market. Provision is made for estimated excess and obsolete
inventories.
F-7
<PAGE> 30
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 10 to
20 years for buildings and improvements and 5 to 12 years for machinery and
equipment.
INTANGIBLE ASSETS. Intangible assets, principally goodwill, are reported net
of accumulated amortization of $22.2 million in 1996 and $20.0 million in 1995.
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 the
expected life which is forty years.
It is the Company's policy to periodically review the net realizable value
of its intangible assets, including goodwill, through an assessment of the
estimated future cash flows related to such assets. In the event that assets
are found to be carried at amounts which are in excess of estimated gross
future cash flows, then the intangible assets will be adjusted for impairment
to a level commensurate with a discounted cash flow analysis of the underlying
assets. Based upon its most recent analysis, the Company believes no
impairment of goodwill exists at December 31, 1996.
ENVIRONMENTAL COSTS. A liability for environmental assessments and/or 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.
FINANCING COSTS. Fees associated with the incurrence of long-term debt are
reflected as a discount on the associated debt. Issue costs associated with
obtaining debt are recorded as a deferred charge. All fees and issue costs are
amortized over the term of the related debt utilizing an effective interest
rate method.
FOREIGN CURRENCY TRANSLATION. The Company's foreign operations utilize the
U.S. dollar as their functional currency. Translation gains and losses are
included in earnings.
FINANCIAL INSTRUMENTS. The differential to be received or paid on interest
rate swaps is recognized over the terms of the agreements as an adjustment to
interest expense. Premiums paid for purchased interest rate cap agreements are
amortized to interest expense over the terms of such agreements, and any
payments received reduce interest expense. Unamortized premiums are included
in "Prepaid Expenses and Other Current Assets" in the balance sheet. Gains and
losses on foreign currency forward contracts are recognized concurrently with
the related transaction gains and losses. Although the Company is exposed to
certain losses in the event of nonperformance by the financial institutions
which are counterparties to interest and foreign exchange rate agreements, it
does not anticipate nonperformance by the counterparties.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of current assets and
liabilities approximate fair value due to the short-term maturities of these
assets and liabilities. At December 31, 1996, the carrying value of debt
approximates fair value while at December 31, 1995, the estimated fair value
was approximately $288.0 million, and the carrying value was $295.6 million.
INCOME TAXES. The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
plans in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and makes the appropriate
disclosures as required by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123").
F-8
<PAGE> 31
EARNINGS (LOSS) PER SHARE. Net earnings (loss) per share is computed by
dividing net earnings by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
assume the exercise of all dilutive stock options. Quarterly and year-to-date
computations of per share amounts are made independently; therefore, the sum of
per share amounts for the quarters may not equal per share amounts for the
year.
NOTE 3 - DISCONTINUED OPERATIONS
In January 1996, the Company announced its intention to exit Commercial
Engine Services consisting of its airline engine, component and accessories
repair operations located in Texas, Florida and Scotland and, accordingly,
reported these businesses as discontinued operations in its 1995 Consolidated
Financial Statements. Prior year amounts were reclassified accordingly. A
$212.5 million charge, net of tax, was recorded in 1995 to reflect the
estimated fair market value of the assets and disposal costs associated with
the sales. Operations during the phase-out period were expected to break even.
The accessories repair operation sale was completed in May 1996, and the
airline engine and component repair operations sale was completed in June 1996.
Both sale agreements had purchase prices subject to adjustment based upon
completion of an audited closing date statement of net assets. Final
agreements on the purchase price amounts for the airline engine and component
repair operations sale and the accessories repair operation sale were reached
in September 1996 and January 1997, respectively. Proceeds of $242.9 million
from the sales were used to pay down the Company's debt.
During 1996, the Company recognized a gain on disposal of $16.9 million.
The engine and component repair operations sale agreement provided the buyer
the unilateral option to pay a portion of the purchase price in stock. The
estimated loss on disposal of $212.5 million recorded in December 1995 included
a $10.5 million provision for loss on sale of stock. The buyer ultimately paid
the entire purchase price in cash (or assumed liabilities). As a result, the
$10.5 million provision for loss on sale of stock was reversed in the second
quarter of 1996. In addition, in the third quarter of 1996, the provision for
discontinued operations was reduced by $6.4 million as a result of changes in
estimates for transaction-related expenses and settlement of the final sale
price for the airline engine and component repair operations.
The sale agreements required the Company to retain certain liabilities,
primarily environmental, insurance and pension. The losses associated with
these liabilities were estimated and included in the 1995 discontinued
operations provision. The actual cost of these obligations may not become
known for a number of years and in the case of environmental, factors included
in the original estimate of loss, such as level of remediation required, could
change significantly from the Company's original estimate. Accordingly,
certain adjustments may be required in future periods to reflect changes in
these estimates.
Additionally, severance charges were included in the 1995 discontinued
operations provision based on the Company's estimate at the time. A portion of
the severance charges will be finalized in the first quarter of 1997, with the
remainder to be finalized in the second quarter of 1997. Actual payments could
differ from the original estimates. Other changes to the retained liabilities
could occur as actual events differ from the original estimates.
The following table presents unaudited operating results for the
discontinued operations (in thousands):
<TABLE>
<CAPTION>
(Unaudited) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 525,338 508,351
============================================================================================================
Earnings from operations before income taxes and loss on disposal 2,293 7,761
Provision for income taxes 2,714 2,862
- ------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations before loss on disposal ( 421) 4,899
- ------------------------------------------------------------------------------------------------------------
Loss on disposal before income taxes (213,142) -
Benefit for income taxes (605) -
- ------------------------------------------------------------------------------------------------------------
Loss on disposal, net of taxes (212,537) -
- ------------------------------------------------------------------------------------------------------------
Earnings (loss) from discontinued operations $(212,958) 4,899
============================================================================================================
</TABLE>
F-9
<PAGE> 32
During 1996, net sales and loss from operations were $294.5 million and
$3.6 million, respectively. Interest expense was allocated to the discontinued
operations based on the ratio of their net assets to the total net assets of
the Company. Domestic tax benefits were not recognized on the loss from
discontinued operations in 1995.
The components of net assets of the discontinued operations were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1995
----------------------------------------------------------------------------
<S> <C>
Current assets $274,360
Property, plant and equipment and intangibles 57,226
Other assets 4,939
Current and other liabilities (88,075)
Deferred income taxes (10,402)
----------------------------------------------------------------------------
$238,048
============================================================================
</TABLE>
NOTE 4 - NONRECURRING CHARGES
1996 CHARGE. During 1996, the Company sold the Fastener Business. In
connection with the sale, the Company recorded a pretax charge of $6.6 million
to reflect the effect of final contract terms as well as transaction-related
expenses. Proceeds of $18.4 million from the sale were used to pay down debt.
The following table presents unaudited operating results for the Fastener
Business (in thousands):
<TABLE>
<CAPTION>
(Unaudited) 1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $23,085 25,580 17,229
Cost of sales 16,084 17,509 11,591
- ----------------------------------------------------------------------------------------------
Gross profit 7,001 8,071 5,638
Operating and other expenses:
Selling and administrative expenses 5,658 8,306 5,878
Nonrecurring charge 6,613 25,465 -
Interest expense 1,075 1,616 1,313
- ----------------------------------------------------------------------------------------------
Loss before income taxes $(6,345) (27,316) (1,553)
==============================================================================================
</TABLE>
1995 CHARGE. During 1995, the Company revalued certain assets and recorded a
pretax charge of $33.2 million. The charge consisted of the write-down of the
Fastener Business assets of $25.5 million (primarily inventory) and the write-
off of $7.7 million of pension-related deferred charges (see Note 11).
Partially offsetting this amount was a $4.2 million gain which resulted from
the finalization of a charge recorded in 1993 stemming from the Company's
decision to dispose of its parts redistribution, business aviation engine
overhaul, and aircraft and terminal services operations. These sales were
completed in 1995. The $4.2 gain from finalization of these disposals
reflected sales proceeds greater than originally projected, environmental
liabilities settled favorably and better than expected operating results
subsequent to June 1993 (adoption of disposal plan). Partially offsetting
these benefits were expenses related to the disposition which were higher than
anticipated.
F-10
<PAGE> 33
<TABLE>
<CAPTION>
NOTE 5 - RECEIVABLES
(In thousands) 1996 1995
- ------------------------------------------------------------------------
<S> <C> <C>
Trade $51,909 53,148
Notes 11,297 1,334
Other 2,051 3,042
- ------------------------------------------------------------------------
65,257 57,524
Allowance for doubtful accounts (4,541) (1,799)
- ------------------------------------------------------------------------
$60,716 55,725
========================================================================
</TABLE>
Notes receivable is comprised primarily of a $12.0 million face value
unsecured, subordinated note due 2002 with a stated interest rate of 12% which
was recorded at a discounted value of $10.5 million. The Company received this
note in connection with the 1995 sale of its business aviation engine overhaul,
and aircraft and terminal services operations. The note was repaid in January
1997 prior to its scheduled maturity and the proceeds were used to pay down
debt. At December 31, 1995, the note was classified as long-term and included
in "Other Assets." The allowance for doubtful accounts at December 31, 1996
includes $3.0 million related to receivables retained in connection with the
sale of Commercial Engine Services. This amount was included in "Net Assets of
Discontinued Operations" at December 31, 1995.
<TABLE>
<CAPTION>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 40,489 42,523
Buildings and improvements 28 1,279
Capital projects in progress - 240
- ---------------------------------------------------------------------------------
40,517 44,042
Accumulated depreciation (31,790) (31,913)
- ---------------------------------------------------------------------------------
$ 8,727 12,129
=================================================================================
NOTE 7 - ACCRUED EXPENSES
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------
Salaries, wages and benefits $20,668 38,852
Operating taxes 6,362 7,188
Self-insurance reserves 4,067 5,944
Other 21,402 34,234
- ---------------------------------------------------------------------------------
$52,499 86,218
=================================================================================
</TABLE>
F-11
<PAGE> 34
<TABLE>
<CAPTION>
NOTE 8 - DEBT
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
1996 Credit Facilities:
Term Loan $49,134 -
Revolver - -
1993 Credit Facilities:
Term Loan A - 71,529
Term Loan B - 81,602
Revolving Credit Facility - 122,587
Other 5,074 19,892
- ---------------------------------------------------------------------------------
54,208 295,610
Less current portion (5,237) (185,171)
- ---------------------------------------------------------------------------------
$48,971 110,439
=================================================================================
</TABLE>
In September 1996, the Company replaced its existing senior secured credit
facilities. The new senior secured credit facilities (the "1996 Credit
Facilities") consist of a $50.0 million five-year amortizing secured term loan
due through 2001 (the "Term Loan") and a $50.0 million five-year secured
revolving loan due in 2001 (the "Revolver"), with availability determined by
reference to a borrowing base of eligible accounts receivable and inventory of
the Company. Borrowings under the 1996 Credit Facilities bear interest, at the
option of the Company, based upon either of two floating rate options: the
London Interbank Offering Rate ("LIBOR") plus an applicable margin ranging from
.75% to 2.25%, dependent upon certain of the Company's ratios, or the Alternate
Base Rate ("ABR"). The ABR is the higher of the agent bank's prime rate or the
federal funds rate plus .5%, plus an applicable margin ranging from zero to
1.25%, dependent upon certain of the Company's ratios. The applicable margin
for the period from September 1996 through June 1997 is 2% and 1% for the LIBOR
and ABR options, respectively. Interest is payable on a quarterly basis. At
December 31, 1996, the interest rate on the Term Loan and the Revolver was
7.74% and 9.25%, respectively.
The 1996 Credit Facilities provide for the issuance of up to $20.0 million
of letters of credit subject to the borrowing base, of which $0.5 million was
utilized at December 31, 1996. Commitment fees ranging from .25% to .5% are
payable on the unused portion of the Revolver. Obligations under the 1996
Credit Facilities are secured by substantially all of the Company's domestic
assets and 65% of the stock of each of the Company's foreign subsidiaries. The
1996 Credit Facilities contain various covenants, including financial covenants
and limitations on debt, dividends and capital expenditures.
As of December 31, 1995, the Company's senior secured credit facilities
(the "1993 Credit Facilities") consisted of (1) a five-year amortizing secured
term loan due through 1998 ("Term Loan A"); (2) a seven-year amortizing secured
term loan due through 2000 ("Term Loan B"); and (3) a $175.0 million five-year
secured revolving loan due in 1998 (the "Revolving Credit Facility"). The 1993
Credit Facilities were repaid during 1996 with proceeds received from the sale
of businesses (see Notes 3 and 4) and from borrowings under the 1996 Credit
Facilities. In connection with the early retirement of debt outstanding under
the 1993 Credit Facilities, the Company recorded an extraordinary loss of $3.4
million resulting from the write-off of the associated unamortized financing
costs. At December 31, 1995, the interest rate on Term Loan A and the
Revolving Credit Facility was 8.22%, and the rate on Term Loan B was 9.17%.
Outstanding borrowings are stated net of unamortized financing costs of
$0.9 million and $7.6 million at December 31, 1996 and 1995, respectively.
Amortization of financing costs, included in interest expense, amounted to $6.9
million, $3.0 million and $3.9 million in 1996, 1995 and 1994, respectively.
Other debt consists of various notes with interest rates ranging from 5.24%
to 7.83% at December 31, 1996 and from 7.0% to 9.3% at December 31, 1995.
F-12
<PAGE> 35
Scheduled debt maturities for the five years subsequent to December 31,
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Year ending
----------------------------------------------------------
<S> <C>
1997 $ 5,229
1998 8,555
1999 12,004
2000 13,000
2001 15,000
Thereafter 1,300
----------------------------------------------------------
55,088
Unamortized financing costs (880)
----------------------------------------------------------
$54,208
==========================================================
</TABLE>
NOTE 9 - FINANCIAL INSTRUMENTS
The Company uses financial instruments to offset defined market risks
arising from changes in interest rates and foreign exchange rates. The Company
does not use financial instruments for trading or speculative purposes. The
fair values of financial instruments are based on quoted market prices of
similar instruments and represent the amounts the Company would pay or receive
to terminate such agreements.
The Company was a party to an interest rate swap agreement at December 31,
1996 on a notional principal amount of $50.0 million to effectively convert its
floating-rate debt to fixed-rate debt. Under terms of the agreement, the
Company will pay a fixed interest rate of 5.96% and will receive a floating
rate based on LIBOR. The estimated fair value of this agreement at December
31, 1996 was a liability of $0.2 million. The agreement expires December 5,
1997. The counterparty to this agreement is a large financial institution.
The Company was a party to interest rate swap agreements at December 31,
1995 on a notional principal amount of $100.0 million to convert its
floating-rate debt to fixed-rate debt. The estimated fair value of the
agreements was a liability of $2.1 million at December 31, 1995. One agreement
with a notional amount of $50.0 million was terminated in June 1996.
The Company was a party to an interest rate cap agreement at December 31,
1995 on a notional principal amount of $120.0 million. Under the agreement,
the Company received from the counterparties the amount by which the Company's
interest payments based on three-month LIBOR exceeded 6.0% through April 1996.
The estimated fair value of the cap was zero at December 31, 1995. No interest
rate cap agreements were in effect at December 31, 1996.
There were no foreign currency forward exchange contracts outstanding at
December 31, 1996. The Company had foreign currency forward exchange contracts
outstanding at December 31, 1995 to purchase British Pounds Sterling in a
notional amount of $18.4 million at rates ranging from $1.53/L.1 to $1.60/L.1.
F-13
<PAGE> 36
NOTE 10 - INCOME TAXES
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal $ (48) (145) -
State 640 540 -
Foreign 1,022 4,466 1,844
- ---------------------------------------------------------------------------------------------------------------------
1,614 4,861 1,844
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal - (1,044) 4,833
State - (2,022) 246
Foreign 43 (1,260) 528
- ---------------------------------------------------------------------------------------------------------------------
43 (4,326) 5,607
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes $1,657 535 7,451
=====================================================================================================================
</TABLE>
Income tax expense is included in the Consolidated Statements of Operations as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Continuing operations $1,657 (1,574) 4,589
Earnings from discontinued operations - 2,714 2,862
Loss on disposal of discontinued operations - (605) -
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes $1,657 535 7,451
=====================================================================================================================
</TABLE>
A reconciliation of the U.S. federal statutory tax rate with the effective tax
rate follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) at the statutory rate $4,283 35.0 (84,189) 35.0 5,920 35.0
Valuation allowance (5,925) (48.4) 66,191 (27.5) 476 2.8
Amortization and write-off of goodwill 766 6.2 21,841 (9.1) 1,566 9.3
State income taxes, net of federal income tax 416 3.4 (4,884) 2.0 258 1.5
benefit
Basis difference in stock of foreign subsidiary sold 2,446 20.0 - - - -
Miscellaneous items, net (329) (2.7) 1,576 (0.6) (769) (4.5)
- ---------------------------------------------------------------------------------------------------------------------
$1,657 13.5% 535 (0.2)% 7,451 44.1%
=====================================================================================================================
</TABLE>
F-14
<PAGE> 37
The significant temporary differences which gave rise to deferred income
taxes as of December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Loss carryforward $ 79,656 54,086
Compensation related items 12,565 18,486
Inventory related items 8,501 17,114
Property, plant and equipment - 16,354
Environmental related items 8,657 7,895
Accounts receivable allowances 1,759 3,354
Assets of discontinued operations - 1,263
Other items 6,266 5,814
- ------------------------------------------------------------------------------------------------
117,404 124,366
Valuation allowance (65,042) (70,967)
- ------------------------------------------------------------------------------------------------
Deferred income tax assets 52,362 53,399
- ------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Liabilities of discontinued operations - (10,782)
Property and equipment basis differences (252) -
Other items (2,966) (2,925)
- ------------------------------------------------------------------------------------------------
Deferred income tax liabilities (3,218) (13,707)
- ------------------------------------------------------------------------------------------------
Net deferred income tax asset $ 49,144 39,692
================================================================================================
</TABLE>
The Company has a net operating loss ("NOL") carryforward for U.S. federal
tax purposes of approximately $180.0 million substantially expiring in
2009-2011. If certain substantial changes in the Company's ownership should
occur, there would be an annual limitation on the amount of the NOL
carryforward that can be utilized. Based on historical earnings levels, the
Company believes that future taxable income may not be sufficient to realize
all deferred tax assets. Accordingly, the deferred tax assets, net of a $65.0
million valuation allowance, are considered realizable with sufficient
certainty.
Deferred taxes have not been provided on temporary differences related to
investments in foreign subsidiaries that are considered permanent in duration.
These temporary differences consist primarily of undistributed foreign earnings
of $9.1 million and $43.9 million at December 31, 1996 and 1995, respectively.
These earnings could become subject to additional tax if such amounts are
remitted as dividends to the U.S. parent. It is not practicable to estimate
the amount of additional tax that may be payable on the foreign earnings.
In connection with the Distribution, the Company and Ryder entered into a
tax sharing agreement which provided for the payment of taxes and receipt of
tax refunds for periods up through the Distribution Date and provided for
various administrative matters. The Company has decided to carry forward its
domestic tax NOL because of the terms of this agreement. Pursuant to the tax
sharing agreement, the Company paid Ryder $14.5 million in 1995.
NOTE 11 - PENSION PLANS AND POSTRETIREMENT BENEFITS
PENSION PLANS. Substantially all domestic employees are covered by a defined
benefit plan maintained by the Company (the "Aviall Pension Plan") (or Ryder
for periods prior to the Distribution). These employees of Aviall were given
credit under the Aviall Pension Plan for prior service in the Ryder System,
Inc. Retirement Plan (the "Ryder Salaried Plan"). Ryder retained the pension
fund assets and accumulated benefit obligation related to participants in the
Ryder Salaried Plan for services rendered through the Distribution Date.
F-15
<PAGE> 38
In addition to the Aviall Pension Plan, the Company maintains two defined
benefit pension plans: a plan covering certain executives and a plan covering
certain former employees. The benefits for these plans are based upon years of
service, and the funding policy is to contribute such amounts as are necessary
on an actuarial basis to provide the plans with sufficient assets to meet the
benefits payable to plan participants. The plans' assets are primarily
invested in equities and interest-bearing accounts. Prior to the sale of
Commercial Engine Services in 1996, the Company maintained a pension plan for
employees in the United Kingdom. As a result of the sale, no further
obligations exist with respect to this plan.
The following tables reflect the components of net pension expense and the
funded status for all Aviall plans (in thousands):
<TABLE>
<CAPTION>
NET PENSION EXPENSE 1996 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the year $2,131 3,276 5,815
Interest cost on projected benefit obligation 2,679 3,878 3,247
Actual return on plan assets (2,311) (4,190) (334)
Net amortization and deferral 855 1,442 (2,976)
- -------------------------------------------------------------------------------------------------
Net pension expense $3,354 4,406 5,752
==================================================================================================
</TABLE>
The above net pension expense of defined benefit plans included $2.0
million, $3.4 million and $2.9 million in 1996, 1995 and 1994, respectively,
related to the discontinued operations.
In addition, as a result of the sale of Commercial Engine Services and its
parts redistribution business, and the closing of its Burbank facility, the
Company recognized a net curtailment gain (loss) related to its pension plans
of $(3.9) million, $(7.0) million and $1.2 million in 1996, 1995 and 1994,
respectively, which was recorded in the reserves established for each sale.
<TABLE>
<CAPTION>
FUNDED STATUS 1996 1995
- ------------------------------------------------------------------------------------------------------------------
Benefits Assets Benefits
exceed exceed exceed
assets benefits assets
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Plan assets at fair value $28,353 23,607 23,323
- ------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits 30,969 16,819 28,189
Nonvested benefits 608 178 2,964
- ------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 31,577 16,997 31,153
Additional benefits based on projected future salary increases 3,454 6,464 5,253
- ------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 35,031 23,461 36,406
- ------------------------------------------------------------------------------------------------------------------
Plan assets greater (less) than projected benefit obligation (6,678) 146 (13,083)
Unrecognized net losses 1,832 876 5,577
Unrecognized prior service cost 652 20 5,819
Unrecognized transition amount - - 181
- ------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension expense $(4,194) 1,042 (1,506)
==================================================================================================================
</TABLE>
F-16
<PAGE> 39
At the Distribution, Ryder transferred to Aviall amounts primarily related
to unrecognized net loss and prior service cost of the Ryder Salaried Plan and
retained the underlying accumulated benefit obligation and related assets.
Aviall and Ryder disagreed with respect to the appropriate accounting treatment
of these deferred charges. Under the terms of an agreement entered into in
connection with the Distribution, Aviall is considering pursuing arbitration
with respect to this matter. The sale of businesses (see Notes 3 and 4) and
the Company's reassessment of the recoverability of these amounts resulted in
the 1995 write-off of the related deferred charges.
The following table sets forth the year end actuarial assumptions used in
the accounting for the plans:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate for determining projected benefit obligation:
Domestic 7.75% 7.00% 8.75%
Foreign n/a 8.00% 9.00%
Rate of increase in compensation levels:
Domestic 4.50% 4.50% 4.50%
Foreign n/a 5.50% 6.50%
Expected long-term rate of return on plan assets:
Domestic 7.75% 7.75% 7.75%
Foreign n/a 9.50% 9.50%
</TABLE>
Actuarial gains and losses and plan amendments are amortized over the
average remaining service lives of participants expected to receive benefits,
and transition amounts are amortized over 13 to 19 years.
POSTRETIREMENT BENEFITS. The Company maintains plans which provide retired
employees with certain health care and life insurance benefits. Substantially
all domestic employees are eligible for these benefits. Generally, these plans
require employee contributions, limit Company contributions to $95 per month
for nonunion employees and provide for a $10,000 lifetime maximum benefit for
former employees who were subject to collective bargaining agreements.
The components of net periodic postretirement benefit expense were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Present value of benefits earned during the year $30 73 186
Interest cost on postretirement benefit obligation 286 608 666
Net amortization and deferral (288) - 37
- ---------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $28 681 889
===================================================================================================
</TABLE>
The portion of the above net periodic postretirement benefit expense
related to the discontinued operations was not material in 1996 and amounted to
$0.4 million in each of 1995 and 1994.
As a result of the sale of Commercial Engine Services and its parts
redistribution business, and the closing of its Burbank facility, the Company
recognized a net curtailment gain related to the health care and life insurance
plans of $0.7 million and $0.5 million in 1996 and 1994, respectively, which
was recorded in the reserves established for each sale.
F-17
<PAGE> 40
The Company's postretirement benefit plans are not funded. The following
table sets forth the status of the plans:
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.75% 7.00%
Accumulated postretirement benefit obligation:
Retirees $2,505 6,211
Fully eligible active plan participants 186 1,102
Other active plan participants 338 1,169
- --------------------------------------------------------------------------------------------
3,029 8,482
Unrecognized net gain (loss) 2,665 (1,356)
- --------------------------------------------------------------------------------------------
Accrued unfunded postretirement benefit obligation $5,694 7,126
============================================================================================
</TABLE>
The health care cost trend rate for 1997 was assumed to be 6.5%, decreasing
gradually to a rate in 2005 of approximately 5.0%. Increasing the assumed
health care cost trend rates by one percentage point in each future year would
increase the accumulated postretirement benefit obligation as of December 31,
1996 by $0.2 million and would not have a material effect on the 1996 net
periodic postretirement benefit expense.
NOTE 12 - COMMON STOCK, PREFERRED STOCK AND INCENTIVE PLANS
COMMON AND PREFERRED STOCK. The Company is authorized to issue 80,000,000
shares of common stock, $.01 par value, and 10,000,000 shares of preferred
stock, $.01 par value. Preferred stock is issuable in series, with terms fixed
by resolution of the Board of Directors. No preferred stock had been issued at
December 31, 1996.
PREFERRED SHARE PURCHASE RIGHTS. The Company has adopted a Preferred Share
Rights Plan under which each share of common stock is accompanied by one
preferred share purchase right (a "Right"). Each Right entitles the holder to
purchase 1/100th of a share of Series A Junior Participating Preferred Stock
(the "Series A Preferred Shares") of the Company (800,000 shares authorized) at
a price (the "Purchase Price") of $52.50 per 1/100th of a Series A Preferred
Share (subject to adjustment).
In general, the Rights will not become exercisable or transferable apart
from the shares of common stock with which they were issued unless a person or
group of affiliated or associated persons becomes the beneficial owner of, or
commences a tender offer that would result in beneficial ownership of, 10% or
more of the outstanding shares of common stock (any such person or group of
persons being referred to as an "Acquiring Person"). Thereafter, under certain
circumstances, each Right (other than any Rights that are or were beneficially
owned by an Acquiring Person, which Rights will be void) could become
exercisable to purchase at the Purchase Price a number of shares of common
stock having a market value equal to two times the Purchase Price. The Rights
will expire on December 7, 2003, unless earlier redeemed by the Company at a
redemption price of $.01 per Right (subject to adjustment).
OPTION PLAN. The Aviall, Inc. Stock Incentive Plan (the "Incentive Plan")
provides for grants of nonqualified stock options to key employees at a price
not less than the fair market value of shares underlying such options at the
date of grant. Options are for terms not exceeding 10 years and may be granted
in tandem with limited stock appreciation rights. Options granted under the
Incentive Plan vest over periods up to five years. The Incentive Plan also
provides for grants of restricted stock rights, stock appreciation rights and
performance units.
F-18
<PAGE> 41
The Company applies APB 25 in accounting for the Incentive Plan and,
accordingly, recognizes no compensation cost in net earnings from the grant of
options. There were no options granted during 1995. Had compensation cost
been determined consistent with SFAS 123, the Company's 1996 net earnings and
earnings per share would have been reduced to the pro forma amounts below:
<TABLE>
<CAPTION>
In thousands) 1996
------------------------------------------------------------
<S> <C>
Net earnings:
As reported $10,579
Pro forma $ 9,796
Net earnings per share:
As reported $ 0.54
Pro forma $ 0.50
</TABLE>
During 1996, options were granted at exercise prices equal to and greater
than the market price of the Company's stock on the date of grant. The
weighted average fair value of options granted during 1996 was $4.98 per option
for options whose exercise price equaled the market price of the Company's
stock on date of grant and $4.37 per option for options whose exercise price
exceeded the market price of the Company's stock on date of grant. In
accordance with SFAS 123, the fair value of options at date of grant was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------
<S> <C>
Risk-free interest rate 6.29%
Expected life (years) 9.2
Expected volatility 32.61%
Expected dividend yield 0.0%
</TABLE>
F-19
<PAGE> 42
The following table summarizes the status of the Incentive Plan:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,661,744 $12.81 1,863,056 $12.84 1,617,029 $13.84
Granted:
Exercise price equals market price 307,500 $ 8.92 - - 333,125 $ 8.12
Exercise price exceeds market price 225,000 $12.58 - - - -
Exercised (29,444) $ 7.92 (2,055) $ 7.19 (72,655) $12.93
Expired or cancelled (166,339) $15.06 (199,257) $13.16 (14,443) $15.38
---------- --------- ---------
Outstanding at end of year 1,998,461 $12.07 1,661,744 $12.81 1,863,056 $12.84
========== ========= =========
Exercisable at end of year 1,251,191 986,906 825,434
========== ========= =========
Available for grant at end of year 792,385 1,158,546 959,289
========== ========= =========
</TABLE>
The following table summarizes information about options outstanding under
the Incentive Plan at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/96 Life (Years) Exercise Price at 12/31/96 Exercise Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$7.19 to $10.10 712,805 8.08 $ 8.67 348,276 $ 8.61
$11.78 to $16.00 1,285,656 5.71 $13.96 902,915 $13.81
--------- ---------
$7.19 to $16.00 1,998,461 6.71 $12.07 1,251,191 $12.37
========= =========
</TABLE>
PURCHASE PLANS. The Company maintains an employee stock purchase plan covering
substantially all U.S. employees, excluding Incentive Plan participants (the
"Employee Stock Purchase Plan"). The Employee Stock Purchase Plan permits
quarterly offerings to subscribe for shares of common stock at 85% of the fair
market value on either the date of offering or the last day of the purchase
period, whichever is less. Shares are purchased at the end of each ninety-day
purchase period.
F-20
<PAGE> 43
The following table summarizes the status of the Employee Stock Purchase
Plan:
<TABLE>
<CAPTION>
Number of shares Price per share
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1994 - -
Subscribed 45,291 $5.58 to $7.33
Purchased (31,108) $5.58 to $7.17
Expired or canceled - -
- ----------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 14,183 $7.33
Subscribed 33,190 $6.96 to $7.44
Purchased (41,867) $6.96 to $7.44
Expired or canceled - -
- ----------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 5,506 $6.96
====================================================================================================
Reserved for future subscriptions 171,519
====================================================================================================
</TABLE>
Prior to the sale of Commercial Engine Services, the Company maintained a
stock purchase plan for employees in the United Kingdom (the "Employee Stock
Purchase Scheme"). The Employee Stock Purchase Scheme was terminated as a
result of the sale. All assets of the plan were distributed to participants in
1996, including 30,000 shares of the Company's common stock.
DIRECTORS STOCK PLAN. The Company has reserved 37,500 shares of common stock
for issuance under its Directors Stock Plan of which 19,299 shares had been
issued at December 31, 1996. Under the terms of this plan, each nonemployee
director may make an election to receive shares of common stock in lieu of a
portion of the annual cash retainer for services as a director.
NOTE 13 - ENVIRONMENTAL MATTERS
OVERVIEW. The Company's parts distribution services business, which includes
certain parts repair operations, uses certain chemicals in small quantities
which have been classified by various state and federal agencies as hazardous
material. The Company is not currently involved in any cleanup related to
these facilities to comply with state and federal regulations. Due to the
small quantities of chemicals used, it is not expected that any material
environmental liabilities will be incurred related to these operations.
Certain of the Company's previously owned businesses (see Notes 3 and 4)
used certain chemicals classified by various state and federal agencies as
hazardous substances. The Company retains environmental liabilities related to
these businesses for the period during which they were operated by the Company.
The Company is involved in various stages of investigation and cleanup to
comply with state and federal regulations at certain of these locations. The
primary locations are Burbank, California, Dallas (Forest Park), Texas and the
Commercial Engine Services properties ("CES Properties") which include three
locations in Texas (Love Field, Carter Field and McAllen) and one location in
Prestwick, Scotland.
BURBANK UNIT. The Company's former Burbank, California facility is located
within the boundaries of the Burbank Operable Unit (the "Burbank Unit") of the
San Fernando Valley Superfund Sites. The United States Environmental
Protection Agency ("EPA") selected an interim remedial action for the Burbank
Unit, including multiyear operation and maintenance of a ground water treatment
system. Lockheed Martin Corporation ("Lockheed") and certain other parties
have entered into a Consent Decree with the EPA under which Lockheed agreed to
implement and finance a portion of the interim remedial action for a limited
period.
F-21
<PAGE> 44
In May 1994, the Company was notified by the EPA that it had been named a
potentially responsible party ("PRP") with respect to the Burbank Unit. In
June 1995, the Company and certain other defendants entered into an agreement
with Lockheed to settle a lawsuit filed by Lockheed in April 1994 against the
Company and more than 100 other parties seeking recovery of or contribution to
Lockheed's response costs to comply with the Consent Decree and subsequent EPA
requirements. Pursuant to the agreement, in exchange for a $2.2 million cash
payment made in June 1995, the Company will be released from and protected
against certain environmental response costs for the Burbank Unit through the
expiration of the interim remedy period established by the EPA, certain claims
by the EPA for costs of oversight of the Burbank Unit and certain other
matters. The agreement does not cover certain matters, including environmental
response costs for any final remedy which may be established by the EPA upon
expiration of the interim remedy period, certain EPA oversight costs and costs
of any changes mandated by the EPA to the present interim remedy for the
Burbank Unit.
The agreement with Lockheed is subject to court approval of certain
modifications to the Consent Decree. Although the Company presently believes
this condition will be met in 1997, there can be no assurance of this event.
The Company has presently determined additional reserves related to the Burbank
Unit are not required due to the uncertainty of the additional costs, if any,
associated with any changes to the interim remedy or any final remedy.
PREVIOUSLY OWNED PROPERTIES. The Company is presently implementing a state
agency approved cleanup plan for its former Forest Park facility. The facility
is also the subject of an arbitration proceeding between the Company and the
purchaser of the property concerning the purchaser's involvement in determining
the required level of cleanup. The arbitration is in preliminary stages. The
Company presently believes existing financial reserves for this location to be
sufficient.
There are various stages of discussions underway with the state agencies to
determine the appropriate cleanup levels for ground water and soil
contamination at the CES Properties located in Texas. The Company has received
notification of an approved plan from the state agency on soil and ground water
issues for the Carter Field location. Negotiations are in process with the
state agency for approval of a plan on the McAllen facility. The Company began
investigations at Love Field, Texas and Prestwick, Scotland during 1996. Work
on determining exposure and cleanup requirements is continuing at these sites.
Based on current information, the Company believes existing financial reserves
for the CES Properties are sufficient. In addition, discussions with a
previous owner and former insurers of various of these locations are in process
to determine their potential shared liability associated with the cleanup of
these sites. Due to the uncertainty of recoverability of the various claims
the Company has made against these third parties and insurers, a receivable has
not been recorded.
THIRD-PARTY SITES AND OTHER MATTERS. The Company has been named a PRP under
the Comprehensive Environmental Response, Compensation and Liability Act and
the Superfund Amendments and Reauthorization Act at four third-party disposal
sites to which wastes were allegedly sent by the previous owner of assets used
in the Company's discontinued engine services operations. The Company did not
use the identified disposal sites. Accordingly, the previous owner has
retained, and has been discharging, all liability associated with the cleanup
of these sites pursuant to the sales agreement. Although the Company could be
potentially liable in the event of nonperformance by the previous owner, it
does not anticipate nonperformance. Based on this information, the Company has
not accrued for any costs associated with third- party sites. The Company has
also received notices or inquiries from certain state agencies and other
private parties with respect to certain other environmental matters. One
property owner adjacent to the previously owned Forest Park location has filed
suit against the Company related to environmental contamination. These matters
are under investigation and the ultimate cost cannot presently be estimated.
F-22
<PAGE> 45
ACCOUNTING AND REPORTING. At December 31, 1996 and 1995, accrued environmental
liabilities were $22.8 million and $23.0 million, respectively. The Company
recorded $14.4 million and $9.1 million in 1995 and 1994, respectively, for
environmental expense. No environmental expense was recorded in 1996. The
Company's probable environmental loss estimates are based on information
obtained from independent environmental engineers and/or from Company experts
regarding the nature and extent of environmental contamination, remedial
alternatives available and the cleanup criteria required by relevant
governmental agencies. The estimated costs include anticipated site testing,
consulting, remediation, disposal, post-remediation monitoring and related
legal fees based on available information and represent the undiscounted costs
to resolve the environmental matters in accordance with prevailing federal,
state and local requirements.
The Company's reserves for environmental liabilities are estimates. These
estimates may change in the future as more information becomes available with
respect to the level of contamination, the effectiveness of selected
remediation methods, the stage of management's investigation at the individual
sites, the recoverability of such costs from third parties and changes in
federal and state statutes and regulations or their interpretation . Based on
information presently available and Company programs to detect and minimize
contamination, management believes that the ultimate disposition of these
matters will not have a material adverse effect on the Company's results of
operations, cash flows or financial condition, although certain environmental
matters could be material to cash flows in any one year.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
Under leases, primarily for parts distribution facilities, rent expense
included in earnings from continuing operations was $6.8 million, $7.0 million
and $8.6 million in 1996, 1995 and 1994, respectively, and was offset by
sublease income of $0.5 million, $0.1 million and $2.5 million, respectively.
Future minimum payments under noncancellable operating leases with initial
or remaining terms of one year or more at the end of 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
Year ending
--------------------------------------------------------
<S> <C>
1997 $ 4,480
1998 3,604
1999 2,599
2000 1,451
2001 1,022
Thereafter 3,479
--------------------------------------------------------
16,635
Less amounts representing sublease income (3,194)
--------------------------------------------------------
Total minimum lease payments $13,441
========================================================
</TABLE>
In July 1996, the spouse of a former employee filed suit in Hidalgo County,
Texas against Aviall and certain chemical manufacturers alleging that the
cancer-related death of her husband was the result of his exposure to toxic
chemicals and metals while working for Aviall at facilities used in the
operation of the Company's former Commercial Engine Services businesses. The
plaintiffs are seeking to find Aviall and the other defendants jointly and
severally liable for actual and punitive damages in an amount not less than
$50.0 million. The suit is in the preliminary stages of discovery. The
Company intends to vigorously defend this suit. Due to the preliminary status
of this lawsuit, the Company is not able to reasonably estimate the extent, if
any, of the liability to which it could be exposed.
F-23
<PAGE> 46
In addition to the environmental related matters discussed in Note 13 and
the legal matter discussed above, the Company is a party to various other
claims, legal actions and complaints arising in the ordinary course of
business. Based on information presently available, management believes that
the ultimate disposition of these other matters will not have a material
adverse effect on the Company's results of operations, cash flows or financial
condition, although certain matters could be material to cash flows in any one
year.
The Company, through its participation in the global aviation aftermarket,
can be affected by the general economic cycle, particularly as it influences
flight activity in commercial, business and general aviation. Data base
services provided by ILS can be influenced by the rapidly evolving information
and communication industry. By monitoring and timely responding to these
outside influences, the Company believes it will be able to maintain and
improve its position in the markets it services.
NOTE 15 - OTHER INFORMATION
The Company operates in the aviation industry and reports its activities as
one business segment. For the years ended December 31, 1996, 1995 and 1994,
the Company did not derive more than 10% of its total net sales from any
individual customer, government or export sales.
The Company maintains parts distribution customer service centers in
Canada, the Netherlands, Hong Kong, Singapore, Australia and New Zealand. As
the Company's foreign operations have similar aviation business environments,
all foreign operations have been grouped together below.
<TABLE>
<CAPTION>
(In thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales:
United States $289,255 283,200 297,272
Foreign 84,783 63,311 57,666
- -----------------------------------------------------------------------------------------------------------------------
$374,038 346,511 354,938
=======================================================================================================================
Earnings (loss) from continuing operations before income taxes
and extraordinary item*:
United States $(8,015) (30,375) 17,122
Foreign 6,726 684 (7,968)
- -----------------------------------------------------------------------------------------------------------------------
$(1,289) (29,691) 9,154
=======================================================================================================================
Identifiable assets:
United States $232,595 510,732 823,820
Foreign 28,282 28,195 23,809
- -----------------------------------------------------------------------------------------------------------------------
$260,877 538,927 847,629
=======================================================================================================================
</TABLE>
* Includes nonrecurring charges of $6.6 million and $29.0 million in 1996 and
1995, respectively, for the United States.
F-24
<PAGE> 47
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of operations
for 1996 and 1995 (in thousands, except per share data):
<TABLE>
<CAPTION>
First Second Third Fourth
1996 (Unaudited) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $92,168 93,594 98,637 89,639
Cost of sales 67,572 69,823 74,210 67,292
- -----------------------------------------------------------------------------------------------------------------
Gross profit 24,596 23,771 24,427 22,347
Operating and other expenses:
Selling and administrative expenses 21,474 20,199 19,378 18,484
Nonrecurring charges 3,850 - 2,763 -
Interest expense 2,763 3,390 3,503 626
- -----------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before
income taxes (3,491) 182 (1,217) 3,237
Provision for income taxes 236 211 1,210 -
- -----------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations (3,727) (29) (2,427) 3,237
Earnings from discontinued operations - 10,500 6,446 -
- -----------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item (3,727) 10,471 4,019 3,237
Extraordinary item - - (3,421) -
- -----------------------------------------------------------------------------------------------------------------
Net earnings (loss) $(3,727) 10,471 598 3,237
=================================================================================================================
Net earnings (loss) per share:
Earnings (loss) from continuing operations $ (0.19) - (0.13) 0.17
Earnings from discontinued operations - 0.54 0.33 -
Extraordinary item - - (0.17) -
- -----------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (0.19) 0.54 0.03 0.17
=================================================================================================================
Weighted average common and common
equivalent shares 19,457,739 19,556,335 19,539,541 19,603,466
Common stock price range per share $5.38 to 9.38 8.50 to 10.38 7.88 to 9.13 7.88 to 10.50
Common stock trading volume, number of shares 12,432,400 5,799,400 2,114,900 4,366,300
=================================================================================================================
</TABLE>
F-25
<PAGE> 48
<TABLE>
<CAPTION>
First Second Third Fourth
1995 (Unaudited) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 86,896 87,834 83,111 88,670
Cost of sales 62,807 65,644 61,083 66,257
- ---------------------------------------------------------------------------------------------------------------
Gross profit 24,089 22,190 22,028 22,413
Operating and other expenses (income):
Selling and administrative expenses 20,915 19,111 18,025 22,683
Nonrecurring charges - - (4,201) 33,165
Interest expense 2,911 2,849 2,827 2,126
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before
income taxes 263 230 5,377 (35,561)
Provision (benefit) for income taxes 291 563 2,643 (5,071)
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations (28) (333) 2,734 (30,490)
Earnings (loss) from discontinued operations 1,716 2,675 1,689 (219,038)
- ---------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,688 2,342 4,423 (249,528)
===============================================================================================================
Net earnings (loss) per share:
Earnings (loss) from continuing operations $ (0.00) (0.02) 0.14 (1.57)
Earnings (loss) from discontinued operations 0.09 0.14 0.09 (11.26)
- ---------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 0.09 0.12 0.23 (12.83)
===============================================================================================================
Weighted average common and common
equivalent shares 19,403,439 19,414,110 19,443,847 19,442,908
Common stock price range per share $5.88 to 8.13 6.38 to 8.88 7.25 to 8.88 7.75 to 10.13
Common stock trading volume, number of shares 3,995,900 7,894,100 4,950,000 6,346,000
===============================================================================================================
</TABLE>
F-26
<PAGE> 49
SCHEDULE II
AVIALL, INC.
VALUATION ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged Balance
Beginning to Costs at End
of Year and Expense Other Deductions of Year
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Accounts receivable allowance $ 1,799 1,108 2,914(1) (1,280)(3) 4,541
Reserves for excess and obsolete inventories $ 7,208 3,088 - (6,289)(4) 4,007
Reserve for aerospace inventory $22,385 3,362 - (25,747) -
- --------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
Accounts receivable allowance $ 1,559 1,310 33(2) (1,103)(3) 1,799
Reserves for excess and obsolete inventories $ 7,295 3,481 - (3,568)(4) 7,208
Reserve for aerospace inventory $ - 22,385 - - 22,385
- --------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1994:
Accounts receivable allowance $ 1,220 1,049 374(2) (1,084)(3) 1,559
Reserves for excess and obsolete inventories $11,193 1,780 - (5,678)(4) 7,295
Restructuring reserve $16,791 - - (16,791) -
====================================================================================================================
</TABLE>
(1) Accounts receivable allowance related to accounts receivable retained
by the Company from the sale of Commercial Engine Services.
(2) Collection of accounts previously charged off.
(3) Write-off of doubtful accounts and concessions granted.
(4) Write-off of excess and obsolete inventories.
F-27
<PAGE> 50
<TABLE>
<CAPTION>
Exhibit
No Description
- ---------------------------------------------------------------------------------------
<S> <C>
3.1* Restated Certificate of Incorporation of Aviall (Exhibit 3.1 to Aviall's
Annual Report on Form 10-K for the fiscal year ended December 31, 1993
(the "1993 Form 10-K"))
3.2* By-Laws of Aviall (Exhibit 3.2 to the 1993 Form 10-K)
4.1* Form of Common Stock Certificate of Aviall (Exhibit 4 to Aviall's
Registration Statement on Form 10, as amended (Commission File No.
1-12380) (the "Form 10"))
4.2* Aviall, Inc. Preferred Stock Purchase Rights Plan between Aviall and The
First National Bank of Boston dated as of December 7, 1993 (Exhibit 10.7
to the 1993 Form 10-K)
10.1*+ Aviall, Inc. Stock Incentive Plan (Exhibit 10.1 to the 1993 Form 10-K)
10.2*+ Aviall, Inc. Directors Stock Plan (Exhibit 10.2 to the 1993 Form 10-K)
10.3* Distribution and Indemnity Agreement by and between Aviall and Ryder
dated November 23, 1993 (Exhibit 10.3 to the 1993 Form 10-K)
10.4* Tax Sharing Agreement by and between Aviall and Ryder dated November 23,
1993 (Exhibit 10.4 to the 1993 Form 10-K)
10.5*+ Form of Severance Agreement between Aviall and certain of its executive
officers (Exhibit 10H to the Form 10)
10.6*+ Form of Change of Control Severance Agreement (Exhibit 10I to the Form
10)
10.7* Asset Purchase Agreement, dated as of May 31, 1994, by and between
Aviall Services, Inc. and Dallas Airmotive, Inc., as amended (Exhibit
10.3 to Aviall's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1994 (the "June 30, 1994 Form 10-Q") and Exhibits 10.17
through 10.23 to Aviall's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (the "1994 Form 10-K"))
10.8* Asset Purchase Agreement, dated as of August 4, 1994 by and between
Aviall Services, Inc. and AJT Capital Partners d/b/a Aerospace
International Services, as amended (Exhibit 10.4 to the June 30, 1994
Form 10-Q and Exhibit 10.25 to the 1994 Form 10-K)
10.9*+ Aviall, Inc. Employee Stock Purchase Plan (Exhibit 10.27 to the 1995
Form 10-K)
</TABLE>
<PAGE> 51
<TABLE>
<CAPTION>
Exhibit
No Description
- ---------------------------------------------------------------------------------------
<S> <C>
10.10* Agreement of Purchase and Sale among Aviall, Inc., Aviall Services,
Inc., Greenwich Air Services, Inc. and GASI Engine Services, Inc., dated
April 19, 1996 (Exhibit 2.1 to Aviall's Current Report on Form 8-K dated
April 19, 1996)
10.11* Asset Purchase Agreement between Aviall, Inc. and Curtiss-Wright Flight
Systems, Inc., dated April 25, 1996 (Exhibit 2.2 to Aviall's Current
Report on Form 8-K dated April 19, 1996)
10.12* Asset Purchase Agreement by and among Maple Leaf Aerospace, Inc., Aviall
Services, Inc. and Aviall (Canada) Ltd., dated September 5, 1996
(Exhibit 2.1 to Aviall's Current Report on Form 8-K dated September 19,
1996)
10.13* Credit Agreement, dated as of September 26, 1996, by and among Aviall,
Inc. and the financial institutions parties thereto (Exhibit 10.1 to
Aviall's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1995)
21.1 Subsidiaries of Aviall
23.1 Consent of Price Waterhouse LLP
24.1 Powers of attorney of directors and officers of Aviall
27.1 Financial Data Schedule
- --------------------
</TABLE>
* Each document marked with an asterisk is incorporated herein by reference
to the designated document previously filed with the Commission.
+ Each document marked with a dagger constitutes a management contract or
compensatory plan or arrangement.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF AVIALL
Aviall, Inc. [Delaware]
Inventory Locator Service GP, Inc.* [Tennessee]
ILS Investor, Inc.* [Delaware]
Aviall Services, Inc. [Delaware]
Aviall Product Repair Services, Inc. [Delaware]
Aviall (UK) Limited [England]
Aviall Pte Ltd [Singapore]
Aviall Foreign Sales Corporation [Barbados]
Aviall Asia Limited [Hong Kong]
Aviall Airstocks Limited [Hong Kong]
Aviall (Canada) Ltd. [Ontario]
Aviall de Mexico, S.A. de C.V. [Mexico]
Aviall of Texas GmbH [Germany]
Aviall S.A.R.L. [France]
Aviall Australia Pty Ltd [Australia]
Mulayl Pty Ltd [Australia]
Van Dusen Aircraft Supplies Ltd [Australia]
Aviall New Zealand Limited [New Zealand]
* Inventory Locator Service GP, Inc. is the sole general partner and ILS
Investor, Inc. is the sole limited partner of Inventory Locator Service,
LP, a Delaware limited partnership.
<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 and 33-90722) of
Aviall, Inc. and its subsidiaries of our report dated January 30, 1997
appearing on page F-2 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
- -----------------------------------
Price Waterhouse LLP
Dallas, Texas
March 26, 1997
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of
Aviall, Inc., a Delaware Corporation (the "Company"), hereby constitutes and
appoints Jeffrey J. Murphy, James E. O'Bannon, and Heather J. Haase and each of
them, the true and lawful attorney or attorneys-in-fact, with full power of
substitution and resubstitution, for the Company, to sign on behalf of the
Company and on behalf of the undersigned in my capacity as an officer and/or a
director of the Company, the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, and to sign any or all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, to or with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, granting unto said attorney or attorneys-in-fact, and each of them
with or without the others, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as the undersigned might or could in person, hereby ratifying and confirming
all that said attorney or attorneys-in-fact or any of them or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney effective
as of March 19, 1997.
/s/ HENRY A. McKINNELL
- ------------------------
Henry A. McKinnell
<PAGE> 2
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of
Aviall, Inc., a Delaware Corporation (the "Company"), hereby constitutes and
appoints Jeffrey J. Murphy, James E. O'Bannon, and Heather J. Haase and each of
them, the true and lawful attorney or attorneys-in-fact, with full power of
substitution and resubstitution, for the Company, to sign on behalf of the
Company and on behalf of the undersigned in my capacity as an officer and/or a
director of the Company, the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, and to sign any or all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, to or with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, granting unto said attorney or attorneys-in-fact, and each of them
with or without the others, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as the undersigned might or could in person, hereby ratifying and confirming
all that said attorney or attorneys-in-fact or any of them or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney effective
as of March 19, 1997.
/S/ CORNELIUS VAN DEN HANDEL
- ------------------------------
Cornelius Van Den Handel
<PAGE> 3
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of
Aviall, Inc., a Delaware Corporation (the "Company"), hereby constitutes and
appoints Jeffrey J. Murphy, James E. O'Bannon, and Heather J. Haase and each of
them, the true and lawful attorney or attorneys-in-fact, with full power of
substitution and resubstitution, for the Company, to sign on behalf of the
Company and on behalf of the undersigned in my capacity as an officer and/or a
director of the Company, the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, and to sign any or all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, to or with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, granting unto said attorney or attorneys-in-fact, and each of them
with or without the others, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as the undersigned might or could in person, hereby ratifying and confirming
all that said attorney or attorneys-in-fact or any of them or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney effective
as of March 19, 1997.
/S/ JACQUELINE K. COLLIER
- ---------------------------
Jacqueline K. Collier
<PAGE> 4
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of
Aviall, Inc., a Delaware Corporation (the "Company"), hereby constitutes and
appoints Jeffrey J. Murphy, James E. O'Bannon, and Heather J. Haase and each of
them, the true and lawful attorney or attorneys-in-fact, with full power of
substitution and resubstitution, for the Company, to sign on behalf of the
Company and on behalf of the undersigned in my capacity as an officer and/or a
director of the Company, the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, and to sign any or all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, to or with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, granting unto said attorney or attorneys-in-fact, and each of them
with or without the others, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as the undersigned might or could in person, hereby ratifying and confirming
all that said attorney or attorneys-in-fact or any of them or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney effective
as of March 19, 1997.
/s/ ERIC E. ANDERSON
- -----------------------
Eric E. Anderson
<PAGE> 5
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of
Aviall, Inc., a Delaware Corporation (the "Company"), hereby constitutes and
appoints Jeffrey J. Murphy, James E. O'Bannon, and Heather J. Haase and each of
them, the true and lawful attorney or attorneys-in-fact, with full power of
substitution and resubstitution, for the Company, to sign on behalf of the
Company and on behalf of the undersigned in my capacity as an officer and/or a
director of the Company, the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, and to sign any or all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, to or with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, granting unto said attorney or attorneys-in-fact, and each of them
with or without the others, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as the undersigned might or could in person, hereby ratifying and confirming
all that said attorney or attorneys-in-fact or any of them or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney effective
as of March 19, 1997.
/s/ HENRY WENDT
- ----------------------
Henry Wendt
<PAGE> 6
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of
Aviall, Inc., a Delaware Corporation (the "Company"), hereby constitutes and
appoints Jeffrey J. Murphy, James E. O'Bannon, and Heather J. Haase and each of
them, the true and lawful attorney or attorneys-in-fact, with full power of
substitution and resubstitution, for the Company, to sign on behalf of the
Company and on behalf of the undersigned in my capacity as an officer and/or a
director of the Company, the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, and to sign any or all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, to or with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, granting unto said attorney or attorneys-in-fact, and each of them
with or without the others, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as the undersigned might or could in person, hereby ratifying and confirming
all that said attorney or attorneys-in-fact or any of them or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney effective
as of March 19, 1997.
/s/ DONALD R. MUZYKA
- ------------------------
Donald R. Muzyka
<PAGE> 7
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, on behalf of
Aviall, Inc., a Delaware Corporation (the "Company"), hereby constitutes and
appoints Jeffrey J. Murphy, James E. O'Bannon, and Heather J. Haase and each of
them, the true and lawful attorney or attorneys-in-fact, with full power of
substitution and resubstitution, for the Company, to sign on behalf of the
Company and on behalf of the undersigned in my capacity as an officer and/or a
director of the Company, the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, and to sign any or all amendments thereto, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, to or with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended, and the regulations promulgated
thereunder, granting unto said attorney or attorneys-in-fact, and each of them
with or without the others, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises in order to effectuate the same as fully to all intents and purposes
as the undersigned might or could in person, hereby ratifying and confirming
all that said attorney or attorneys-in-fact or any of them or their substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have executed this Power of Attorney effective
as of March 19, 1997.
/s/ ROBERT G. LAMBERT
- -------------------------
Robert G. Lambert
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from AVIALL,
INC's ANNUAL 1996 FINANCIAL STATEMENTS and is qualified in its entirety by
reference to such ANNUAL 1996 FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,191
<SECURITIES> 0
<RECEIVABLES> 65,257
<ALLOWANCES> 4,541
<INVENTORY> 73,088
<CURRENT-ASSETS> 153,195
<PP&E> 40,517
<DEPRECIATION> 31,790
<TOTAL-ASSETS> 260,877
<CURRENT-LIABILITIES> 86,214
<BONDS> 48,971
0
0
<COMMON> 196
<OTHER-SE> 93,765
<TOTAL-LIABILITY-AND-EQUITY> 260,877
<SALES> 374,038
<TOTAL-REVENUES> 374,038
<CGS> 278,897
<TOTAL-COSTS> 278,897
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,282
<INCOME-PRETAX> (1,289)
<INCOME-TAX> 1,657
<INCOME-CONTINUING> (2,946)
<DISCONTINUED> 16,946
<EXTRAORDINARY> (3,421)
<CHANGES> 0
<NET-INCOME> 10,579
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0
</TABLE>
