<PAGE> 1
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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, 1998
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
-----------------------
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 75234-8999
(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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<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------- -----------------------------------------
<S> <C>
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 15, 1999 was approximately $282.4 million.
The number of shares of Common Stock outstanding at March 15, 1999 was
18,223,243.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders 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
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PAGE
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PART I
ITEM 1: BUSINESS..........................................................3
OVERVIEW......................................................3
PARTS DISTRIBUTION............................................3
INVENTORY LOCATOR SERVICE.....................................4
SALES AND MARKETING...........................................4
COMPETITION...................................................5
CUSTOMERS.....................................................5
SUPPLIERS.....................................................6
EMPLOYEES.....................................................6
REGULATION....................................................6
ARRANGEMENTS BETWEEN RYDER AND AVIALL RELATING TO THE
DISTRIBUTION..................................................6
EXECUTIVE OFFICERS OF AVIALL..................................6
ITEM 2: PROPERTIES........................................................7
ITEM 3: LEGAL PROCEEDINGS.................................................7
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............8
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.......................................................9
ITEM 6: SELECTED FINANCIAL DATA..........................................10
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................11
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......20
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.........20
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.........................................20
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............20
ITEM 11: EXECUTIVE COMPENSATION...........................................21
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...21
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................21
PART IV
ITEM 14: EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K..................................................21
SIGNATURES .................................................................24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........F-1
</TABLE>
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PART I
ITEM 1: BUSINESS
OVERVIEW. Aviall, Inc. ("Aviall" or the "Company") is a leading independent
global distributor of new aviation parts and supplies ("Parts Distribution").
Aviall also provides on-line inventory information services to the aviation and
marine industries through Inventory Locator Service, LP ("ILS"), which is
indirectly wholly owned by Aviall. As used in this report, "Aviall" or the
"Company" refers to Aviall and all of its direct and indirect subsidiaries.
Parts Distribution and ILS are separate segments for financial accounting
reporting purposes.
As the largest independent global distributor of new aviation parts,
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 independent database of inventory
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 desiring to list their parts for sale.
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 certain businesses. The
sales of these businesses were completed in 1995.
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. See Note 3 to the Consolidated
Financial Statements included in Item 8 of this report.
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.
PARTS DISTRIBUTION. Aviall is the largest independent global distributor of new
aviation parts and supplies, serving both the commercial and general aviation
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 these parts to its customers, which include
commercial airlines, freight carriers, maintenance and overhaul shops,
fixed-base operators, 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.
Aviall distributes aircraft and engine parts from 40 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 62% 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.
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Aviall is an authorized distributor for manufacturers such as BFGoodrich
(ice protection systems, wheel and brake parts), Scott Aviation (oxygen
systems), Telair International (motors, actuators and cargo handling systems),
Lord Corporation (engine vibration isolators), Federal Mogul Aviation, formerly
Champion (ignition systems) and Textron Lycoming (piston engines, parts and
components). This diversity distinguishes Aviall from most other aviation parts
distributors which carry a narrower range of products. Approximately 98,000
unique part numbers are sold to approximately 13,000 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 AIRNET(sm) order entry system is available on
the Internet at aviall.com. This system enables customers to review parts
availability, place orders and check order status.
INVENTORY LOCATOR SERVICE. ILS provides on-line inventory 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 client software runs on the Microsoft(R) Windows(R) operating system.
It includes a powerful messaging system, ILS DIRECT(sm), 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
reduce 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 90 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 37 million line items of parts
and equipment, and its databases contain over 127 million records. ILS users
access the system approximately 24,000 times each business day.
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 operation serves the different requirements of the
commercial airline, regional airline, and corporate and general aviation market
sectors.
Aviall's parts distribution operation conducts direct sales and marketing
efforts through a team of regional sales managers, field sales representatives
and third-party sales representatives who meet regularly with Aviall's major
customers. Their function is not only to sell and provide technical support for
existing products but also to work with Aviall's customers and with Aviall's
suppliers in order to identify new market opportunities.
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Aviall locates critical parts inventories in 29 domestic and 11
international customer service centers to meet customer requirements. The
Company's 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.
Aviall also sponsors 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 corporate and general aviation sectors. A
quarterly price subscription service is offered to supplement 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; Seattle,
Washington; and Hong Kong as well as independent representatives in London,
England; Sutherland, Australia; and Toronto, Canada. 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 at
go-ils.com 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 new 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 key differentiating factor in the future will be the ability to tailor
services to improve customer service and lower costs by leveraging new computer
and communications technologies.
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 1998, 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.
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
approximately 4,900 and are located in 78 countries.
5
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SUPPLIERS. Aviall purchases supplies from more than 180 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, 1998, Aviall had 739 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 believes its relations with its employees are 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.
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. A tax
sharing agreement entered into by Aviall and Ryder in connection with the
Distribution 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 15, 1999.
Eric E. Anderson, 50, is the Chairman of the Board, President and Chief
Executive Officer of Aviall. Mr. Anderson was appointed Chairman in December
1997 and 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
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, 52, 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, 46, 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, 52, is the Senior Vice President of 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.
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Margaret M. Bouline, 35, is the Vice President of Information Services of
Aviall. From August 1996 to December 1997, Ms. Bouline was Director,
Information Services. Ms. Bouline joined Aviall in October 1995 as Senior
Manager of Business Systems. Prior to joining Aviall, she was Director of
Information Services at Sunbelt Nursery Group since 1992.
Jacqueline K. Collier, 45, is the Vice President 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.
G. Patrick McDonald, 35, is the Vice President of Sales of Aviall. Mr.
McDonald joined Aviall in January 1997. Prior to that time, 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.
James T. Quinn, 50, is the Vice President of Marketing and Supplier
Services of Aviall, a position he has held since July 1997. Mr. Quinn joined
Aviall as Director, Distribution Services Marketing in 1994. He was with
Champion Aviation Products, a unit of Cooper Industries, since 1981, most
recently serving as Director of Distribution Marketing.
Cornelius Van Den Handel, 43, is the Vice President and Treasurer of
Aviall. From June 1996 to December 1997, he served as Treasurer and Director of
Planning. 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
Aviall maintains its headquarters in Dallas, Texas and currently occupies
48 facilities worldwide, including administrative, sales and distribution and
operations/repair facilities. Aviall maintains a central warehouse in Dallas,
Texas from which it operates its parts distribution activities. 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,
1998 are detailed in the following table.
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Square
Location Footage Function
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Dallas, TX 137,600 Parts Distribution
Dallas, TX 185,800 Parts Distribution and Product Repair Services
Memphis, TN 31,000 Inventory Information Services
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At December 31, 1998, Aviall operated 40 customer service centers
worldwide in support of its parts distribution operation. 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 was 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 had
been subject to court approval of a new consent decree relating to the interim
remedy for the Burbank Unit. Court approval was obtained in 1998.
The Company, together with approximately 50 other parties, are defendants
in numerous separate lawsuits alleging personal injury and/or property damage
arising out of the alleged release of toxic substances, including
trichloroethylene, perchloroethylene, trichloroethane and hexavalent chromium,
into the air, soil and/or groundwater in the City of Burbank, California. The
damages for personal injuries claimed are broad and varied, and include cancer,
fear of cancer, fear of injury, birth defects, reproductive harm, injuries to
immune systems, future medical monitoring, emotional distress and loss of
consortium. In addition to Aviall, the named defendants in these suits include
Lockheed and certain other parties who were named potentially responsible
parties with respect to the Burbank Unit. These cases, which were filed in the
Superior Court of California for the County of Los Angeles and involve over
3,000 plaintiffs, have been consolidated for pretrial purposes. The total
damages claimed by the plaintiffs is not known although the jurisdictional
allegations in the lawsuits seek damages in excess of $25,000 per plaintiff.
The court has approved a proposed settlement of this suit between the
plaintiffs and certain defendants, including the Company. The payment the
Company will make pursuant to this proposed settlement is not material. The
settlement agreement is presently expected to be finalized in the first quarter
of 1999.
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
metals and toxic chemicals while working for the Company at facilities used in
the operation of the Company's former Commercial Engine Services businesses.
The plaintiffs are seeking to find the Company and the other defendants jointly
and severally liable for actual and punitive damages in an amount not less than
$50 million. This suit is presently scheduled to be tried in the third quarter
of 1999. 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.
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PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 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 for each calendar
quarter and the full year during 1997 and 1998 are shown below.
<TABLE>
<CAPTION>
Prices
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Quarters High Low
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<S> <C> <C> <C>
1997 First $12.12 $ 9.00
Second $16.00 $ 10.50
Third $16.87 $ 13.25
Fourth $17.19 $ 11.00
Year $17.19 $ 9.00
============================================================
1998 First $15.56 $ 12.12
Second $15.62 $ 13.00
Third $14.62 $ 10.31
Fourth $12.69 $ 9.94
Year $15.62 $ 9.94
============================================================
</TABLE>
No cash dividends were paid by the Company in 1997 or 1998. 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 15, 1999 was 11,655.
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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. During 1994 and 1995 the Company sold certain
businesses including parts redistribution, business aviation engine overhaul,
and aircraft and terminal services. 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 1995. The sales of these businesses
were completed in 1996. The continuing operations consist of Parts Distribution
and ILS. 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) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Net sales $ 400,032 386,060 374,038 346,511 354,938
Nonrecurring items (a) $ - 1,436 (6,613) (28,964) -
Provision (benefit) for income taxes (b) $ (32,175) 1,096 1,657 (1,574) 4,589
Earnings (loss) from continuing operations (b) $ 61,736 26,424 (2,946) (28,117) 4,565
Earnings (loss) from discontinued operations $ 2,821 2,673 16,946 (212,958) 4,899
Extraordinary item (c) $ - - (3,421) - -
Net earnings (loss) (b) $ 64,557 29,097 10,579 (241,075) 9,464
==============================================================================================================================
Financial Position:
Total assets $ 304,646 259,392 260,877 538,927 847,629
Long-term debt $ 32,000 28,004 48,971 110,439 327,767
Total debt to total capital 21.30% 22.30% 36.59% 78.17% 55.31%
==============================================================================================================================
Basic Per Share Data:
Net earnings (loss) from continuing operations $ 3.22 1.34 (0.15) (1.45) 0.24
Net earnings (loss) from discontinued operations 0.15 0.14 0.87 (10.96) 0.25
Net loss from extraordinary item - - (0.18) - -
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 3.37 1.48 0.54 (12.41) 0.49
==============================================================================================================================
Weighted average common shares 19,150,869 19,711,105 19,494,561 19,418,671 19,391,876
==============================================================================================================================
Diluted Per Share Data:
Net earnings (loss) from continuing operations $ 3.17 1.32 (0.15) (1.45) 0.23
Net earnings (loss) from discontinued operations 0.15 0.13 0.87 (10.96) 0.25
Net loss from extraordinary item - - (0.18) - -
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $ 3.32 1.45 0.54 (12.41) 0.48
==============================================================================================================================
Weighted average common and dilutive potential
common shares 19,466,419 20,061,205 19,494,561 19,418,671 19,488,598
==============================================================================================================================
Cash dividends per share $ - - - 0.04 0.04
==============================================================================================================================
</TABLE>
(a) The 1997 nonrecurring gain resulted from the repayment of a discounted
note received in connection with the sale of the business aviation
operations in 1995. 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 from the finalization of the accounting related to certain
businesses held for sale.
(b) Earnings from continuing operations and net earnings in 1998 included a
$32.2 million tax benefit resulting from the release of $33.5 million of
the federal deferred tax valuation allowance offset by provisions of
certain U.S. state and foreign taxes.
(c) 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 1996.
10
<PAGE> 11
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW. The Company experienced continued growth in 1998 as a result of
fundamental changes implemented in late 1996 which focused on the core aviation
parts distribution and inventory information businesses. The net sales and
resulting gross profit improvements stem from a strong aviation marketplace,
although there was a weakening in sales growth during the second half of 1998.
The expense reduction reflects the Company's ongoing cost control efforts and
the streamlining of corporate functions.
The following table is provided to show the results of the ongoing
business (Parts Distribution and ILS) separate from those of the Fastener
Business since it was sold in the third quarter of 1996. These results exclude
nonrecurring items and interest:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996 (a)
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
Parts Distribution $371,422 359,373 327,313
ILS 28,610 26,687 24,872
-------------------------------------------------------------------------------
Subtotal ongoing business $400,032 386,060 352,185
Fastener Business $ - - 23,085
===============================================================================
Gross profit
Ongoing business $101,015 97,197 88,140
Fastener Business $ - - 7,001
===============================================================================
SG&A
Ongoing business $ 68,773 67,912 73,877
Fastener Business $ - - 5,658
===============================================================================
(a) Fastener Business results are through September 19, 1996,
the date of the sale of this business.
</TABLE>
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 - 1998 VERSUS 1997. Net sales for the Parts Distribution
business increased $12.0 million, or 3.4%, in 1998 compared to 1997. Parts
Distribution sales increased $10.0 million, or 3.7%, in the Americas region,
$1.7 million, or 4.9%, in Europe and $0.3 million, or 0.6%, in the Asia-Pacific
region. ILS revenue increased $1.9 million, or 7.2%.
Gross profit increased $3.8 million, or 3.9%, in 1998 compared with 1997
due to higher sales volume. Gross profit as a percentage of sales was slightly
higher year over year.
Selling and administrative expenses increased $0.9 million, or 1.3%, in
1998 primarily due to higher depreciation expenses resulting from the Company's
new computer system implementation.
The $1.4 million nonrecurring gain in 1997 was related to the repayment of
a $12.0 million unsecured subordinated note received in connection with the
1995 sale of the business aviation operations. The Company had carried the note
at a discounted value of $10.5 million.
Interest expense in 1998 decreased $0.5 million reflecting lower average
borrowings in 1998.
11
<PAGE> 12
RESULTS OF OPERATIONS - 1997 VERSUS 1996. Net sales for the Parts Distribution
business increased $32.1 million, or 9.8%, in 1997 compared to 1996. Parts
Distribution sales increased $19.4 million, or 7.8%, in the Americas region,
$6.6 million, or 18.6%, in Europe and $5.9 million, or 14.1%, in the
Asia-Pacific region. ILS revenue increased $1.8 million, or 7.3%.
Gross profit for the ongoing business increased $9.1 million, or 10.3%, in
1997 compared with 1996 primarily as a result of higher sales volume. Gross
profit as a percentage of sales was slightly higher year over year.
Selling and administrative expenses for the ongoing business decreased
$6.0 million in 1997 primarily the result of high 1996 professional fees
relating to amending the Company's former bank credit agreement and severance
charges from staff reductions implemented in 1996.
The $1.4 million nonrecurring gain in 1997 was related to the repayment of
a $12.0 million note as described above. The 1996 nonrecurring charge of $6.6
million reflects the effect of the final contract terms and related transaction
costs in connection with the disposal of the Fastener Business.
Interest expense decreased $7.1 million in 1997 reflecting lower bank
borrowings, lower interest rates and lower debt issuance amortization under the
1996 bank agreement. Proceeds from the businesses sold in 1996 significantly
reduced debt.
EARNINGS PER SHARE. The table below provides additional information regarding
the Company's diluted earnings (loss) per share from continuing operations.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Ongoing business $1.45 1.25 0.19
Nonrecurring items - 0.07 (0.34)
Deferred tax release 1.72 - -
---------------------------------------------------------------------
Total continuing operations $3.17 1.32 (0.15)
=====================================================================
</TABLE>
The diluted earnings per share for continuing operations in 1998 was
$3.17. The earnings from continuing operations includes a tax benefit of $33.5
million that if excluded gives the ongoing business diluted earnings per share
of $1.45. The 1997 diluted earnings per share was $1.32 for the continuing
operations. The earnings from continuing operations in 1997 includes a $0.07
per share nonrecurring amount for the gain resulting from the repayment of an
unsecured subordinated note received in connection with the 1995 sale of the
business aviation operations. Diluted earnings per share for the ongoing
business increased 16.5% to $1.45 in 1998 from $1.25 in 1997. The weighted
average dilutive shares decreased 3.0% due to the timing of the share
repurchase program that was undertaken and completed during 1998.
The 1996 diluted loss per share was $(0.15) for the continuing operations.
The continuing operations amount includes a $(0.34) per share nonrecurring
charge for the effects of the final contract terms and related transaction
costs in connection with the disposal of the Fastener Business. The 1997
ongoing business diluted earnings per share increased over 550% from the 1996
ongoing business diluted earnings per share on a 2.9% increase in weighted
average diluted shares.
FOREIGN OPERATIONS. The Company operates Parts Distribution customer service
centers in Australia, Canada, Hong Kong, the Netherlands, New Zealand and
Singapore, and a repair facility in the United Kingdom. These foreign
operations use the U.S. dollar as their functional currency because the
majority of their net sales and inventory purchases are denominated in U.S.
dollars. Currently, there are no legal restrictions regarding the repatriation
of cash from the foreign operations to the U.S. However, the Company's general
policy is not to repatriate such cash. Net sales and earnings before income
taxes for the operations located in foreign countries were $89.4 million and
$4.4 million, respectively, for 1998, $93.1 million and $6.2 million,
respectively, for 1997 and $84.8 million and $6.7 million, respectively, for
1996.
12
<PAGE> 13
INCOME TAXES. The Company had an income tax benefit of $32.2 million in 1998.
The benefit was attributable to the release of $33.5 million of a U.S. federal
valuation allowance in the fourth quarter of 1998 offset by certain U.S. state
and foreign taxes. An additional $11.9 million of net valuation allowance was
released in 1998 based on net operating loss ("NOL") utilization from actual
current year earnings. Management periodically assesses the realizability of
deferred tax assets and adjusts the related valuation allowance based on the
amount of these assets management believes is more likely than not to be
realized. During the fourth quarter of 1998, management assessed the Company's
historical earnings and expected future operating results and determined that
the realization of all U.S. federal tax assets was more likely than not and
released the valuation allowance for these assets. However, management believes
it may not generate sufficient future income in certain U.S. state and foreign
tax jurisdictions to realize all their NOL carryforwards before expiration.
Accordingly, a valuation allowance of $14.7 million remains on the net deferred
tax assets. The Company will continue to monitor and assess the realizability
of deferred tax assets. Therefore, future changes in the valuation allowance
may occur.
At December 31, 1998, the Company had NOL carryforwards for U.S. federal
income taxes of approximately $180 million expiring from 2009 to 2011. If
certain substantial changes in the Company's ownership should occur, there
would be an annual limitation on the amount of U.S. federal NOL carryforward
that can be utilized. The amount of the annual limitation can vary
significantly based on certain factors existing at the date of the change.
Unless an ownership change occurs that significantly limits the amount of NOL
that can be utilized, the Company will pay only alternative minimum taxes
("AMT") for U.S. federal income tax purposes until the NOLs are fully utilized.
Based on current and expected future earnings levels, the NOLs may not be fully
utilized for several years. The Company's future financial statements will
reflect U.S. federal income tax expense at a more typical effective tax rate
due to the release of the valuation allowance.
Income tax expense in 1997 and 1996 was $1.1 million and $1.7 million,
respectively, representing an effective tax rate of 3.7% and 13.5%,
respectively. The effective tax rates were substantially below the U.S. federal
statutory rate due to release of valuation allowance as a result of utilizing
NOLs based on actual earnings in those periods. The 1996 income tax expense
also reflects the tax basis difference in the stock of a foreign subsidiary
that was sold as a part of the sale of Commercial Engine Services.
FINANCIAL RESOURCES AND LIQUIDITY. The Company's working capital and operating
needs are met through a combination of cash flow from operations and borrowings
under revolving lines of credit. Aviall's current senior secured credit
facilities consist of a $50 million secured term loan due through 2001 (the
"Term Loan"), and a $50 million 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 credit
facilities contain various covenants, including financial covenants, and
limitations on debt, dividends and capital expenditures.
See Note 9 to the Financial Statements for further discussion.
In January 1998, the Company announced a share repurchase program to
buyback up to 10% of the Company's outstanding common stock in open market
transactions, depending on market, economic and other factors. The Company
completed this share repurchase program in the third quarter of 1998, having
purchased a total of two million shares. The Company utilized its existing
credit facility to partially finance the stock repurchases.
The total cost of the shares was $27.7 million.
In January 1997, a $12 million subordinated note received in connection
with the March 1995 asset sale of the business aviation operations 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. Because of the uncertainty regarding the collection of the note
in March 1995, the Company carried the note at a discounted value of $10.5
million.
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.
13
<PAGE> 14
CASH FLOWS. Cash flow from continuing operations, excluding working capital
changes, was $34.6 million in 1998 compared to $30.5 million in 1997 and $13.2
million in 1996. These increases in 1998 and 1997 principally resulted from
increased sales and gross profits. Continuing operations working capital
increased $14.3 million in 1998 compared to 1997 and $20.4 million in 1997
compared to 1996. The 1998 working capital increase reflected higher inventory
levels for higher anticipated sales volume and payments for retained
liabilities for businesses sold. The increase in 1997 was mainly due to lower
liabilities associated with the payments related to businesses previously sold
and an increase in receivables, reflecting higher sales. The 1996 working
capital increase reflected a decrease in accounts payable due to the reduction
in outstanding checks and a decrease in accrued expenses as reserves
established in connection with the sale of businesses were repaid.
Capital spending was $3.7 million, $4.3 million and $1.2 million in 1998,
1997 and 1996, respectively. In addition, the Company paid $5.8 million in 1998
for the acquisition of distribution rights for AlliedSignal remanufactured
aviation turbochargers. Major projects in 1998, 1997 and 1996 included
information systems-related investments. Based on the Company's present plans
for improving its information technology capabilities, annual capital
expenditures for the continuing business are expected to be approximately $3.5
million in 1999 and $1 million to $3 million per year thereafter. Also, the
Company expects to spend approximately $4.3 million on retained environmental
liabilities in 1999.
Net cash flows used in financing activities were $15.3 million in 1998,
$14.5 million in 1997, and $254.4 million in 1996. In 1998, the Company
purchased two million shares of its common stock at a total cost of $27.7
million. The Company completed the sales of the Commercial Engine Services
businesses and the Fastener Business in 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 previous credit facilities.
The remaining borrowings under the previous credit facilities were repaid in
September 1996 from new borrowings under the existing credit facilities.
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 require 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 Note 3 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 five 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 any costs associated with these 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. These
matters are in the preliminary stage of investigation, and the ultimate cost
cannot presently be estimated.
14
<PAGE> 15
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 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 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. Pursuant to the agreement, in exchange for a
$2.2 million cash payment made in June 1995, the Company was 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 had been subject to court approval of a new
consent decree relating to the interim remedy for the Burbank Unit. Court
approval was obtained in 1998. The Company presently has determined that
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.
The Company, together with approximately 50 other parties, were defendants
in numerous separate lawsuits alleging personal injury and/or property damage
arising out of the alleged release of toxic substances into the air, soil
and/or groundwater in the City of Burbank, California. In addition to Aviall,
the named defendants in these suits included Lockheed and certain other parties
who were named PRPs with respect to the Burbank Unit. These cases, which were
filed in the Superior Court of California and involve over 3,000 plaintiffs,
have been consolidated. The court has approved the terms of a proposed
settlement between the plaintiffs and certain defendants, including the
Company. The payment by the Company pursuant to the proposed settlement is not
material. The settlement agreement is expected to be finalized in the first
quarter of 1999.
The Company is presently implementing a state agency approved cleanup for
its former Forest Park facility. 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 regarding
the appropriate remediation for ground water and soil contamination at the CES
Properties located in Texas. The Company has completed the state agency
required remediation on soil and ground water issues for the Carter Field and
McAllen locations. During 1997, investigations were completed at Love Field,
Texas and Prestwick, Scotland. The Company received notification of an approved
plan in 1997 from the Scotland Environmental Protection Agency on soil and
ground water issues for the Prestwick, Scotland site. The approved plan is
currently being implemented at the Scotland site. Also during 1998, the Company
submitted a Conceptual Exposure Assessment Model for the Love Field site to the
state agency for approval. Based on current information, the Company believes
existing financial reserves for environmental corrective measures at the CES
Properties are sufficient. In addition, the Company is in litigation with a
previous owner of various of these locations as to their potential shared
liability associated with the cleanup of these sites. Due to the uncertainty of
recoverability of the claim the Company has made against the previous owner, a
receivable has not been recorded. In February 1998, a proposed settlement for
$1.5 million was reached with insurers of the CES Properties. This settlement
is expected to be finalized in the first quarter of 1999. The Company will
recognize the recovery of this settlement when received.
15
<PAGE> 16
At December 31, 1998 and 1997, accrued environmental liabilities amounted
to $18.3 million and $20.4 million, respectively. No environmental expense was
recorded in 1998, 1997 or 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 will 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 1999 related to environmental
liabilities are $4.3 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 14 to the Consolidated Financial Statements).
NEW ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. SFAS 133
requires companies to recognize all derivatives as either assets or liabilities
and measure those instruments at fair value. Changes in fair value of
derivatives that do not qualify as hedges are recognized in earnings when they
occur. Changes in fair value of derivatives that qualify as hedges are
generally recognized in earnings in the same period as the item being hedged.
SFAS 133 is effective for the Company's year ending December 31, 2000. The
Company does not expect the adoption of this statement to have a significant
impact on the consolidated financial statements.
The Accounting Standards Executive Committee of the AICPA issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1") in March 1998. SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. Generally, external direct costs of materials and services
consumed in developing or obtaining internal-use computer software and internal
payroll costs for employees who are directly associated with and who devote
time to the internal use software project are capitalized. Costs incurred in
the preliminary project stage, training costs and data conversion costs should
be expensed as incurred. The SOP is effective January 1, 1999. The Company does
not expect adoption of SOP 98-1 to have a significant impact on the
consolidated financial statements.
16
<PAGE> 17
YEAR 2000 COMPUTER SYSTEM COMPLIANCE. Many existing computer software and
hardware programs refer to the year by only using the last two digits of the
year. These computer programs will not properly interpret the year 2000. These
programs, unless upgraded, could fail or create erroneous results causing a
disruption in the operations of a company.
STATE OF READINESS. During 1998, hardware and system software reviews for
Year 2000 compliance, including information technology ("IT") and non-IT
systems, were conducted by the Company with the assistance of outside
consultants. In addition, the Company is assessing its exposure from external
sources to Year 2000 failures, including major suppliers, customers and
third-party providers. The Company is replacing its financial and Parts
Distribution applications software with Year 2000 compliant systems. The
replacement of the financial software was implemented in the second quarter of
1998. The Parts Distribution applications software replacement was implemented
on schedule in the first quarter of 1999. ILS utilizes internally developed
applications software. The program modifications to make this proprietary
software Year 2000 compliant have been completed. Testing and validation of
these modifications will continue to be conducted during the first quarter of
1999. The following is a table showing the Company's critical systems state of
readiness for Year 2000 based on management's assessment:
STATE OF READINESS AS OF DECEMBER 31, 1998
INTERNAL IT AND NON-IT SYSTEMS AND EQUIPMENT
<TABLE>
<CAPTION>
ESTIMATED
PERCENT ESTIMATED
PHASE COMPLETE COMPLETION DATE
----- --------- ---------------
<S> <C> <C>
Awareness 100% Complete
Assessment of changes required 95% 1st Quarter 1999
Remediation or replacement 75% 2nd Quarter 1999
Testing 90% 3rd Quarter 1999
Contingency planning as applicable 5% 3rd Quarter 1999
</TABLE>
SUPPLIERS, CUSTOMERS AND THIRD-PARTY PROVIDERS
<TABLE>
<CAPTION>
ESTIMATED
PERCENT ESTIMATED
PHASE COMPLETE COMPLETION DATE
----- --------- ---------------
<S> <C> <C>
Awareness - identify companies 100% Complete
Assessment questionnaires completed by major suppliers 100% Complete
Detailed assessment review with key third-party providers 20% 2nd Quarter 1999
Review contractual commitments 0% 3rd Quarter 1999
Risk assessment 10% 2nd Quarter 1999
Contingency planning as applicable 5% 2nd Quarter 1999
Testing as applicable 0% 3rd Quarter 1999
</TABLE>
17
<PAGE> 18
COSTS. The Company has replaced its Parts Distribution applications and
financial software with an integrated enterprise system at a cost of
approximately $5 million which is being capitalized. The replacement resulted
from both the need to enhance the efficiencies and effectiveness of the Parts
Distribution operating system by replacing several old legacy systems and to
address the Year 2000 issue. Approximately $200,000 has been expensed to date
related to Parts Distribution for Year 2000 issues. An estimated additional
$200,000 will be expensed. The cost expensed to date to modify the ILS
operating software was $125,000. An additional $100,000 is expected to be
required to complete this project, including testing.
RISKS AND CONTINGENCY PLANS. In management's assessment, the most likely
worst case scenario for Year 2000 non-compliance for Parts Distribution would
result if suppliers were unable to ship inventory. The Company has distributed
questionnaires to its major suppliers to assess their Year 2000 readiness.
Management may adjust inventory purchasing prior to January 1, 2000 for any
suppliers with suspected Year 2000 issues. In addition, Parts Distribution does
limited electronic data interchange ("EDI") with both suppliers and customers.
Purchase and sale orders from EDI suppliers or customers could be processed
manually if EDI failed from either side. Management's assessment of the most
likely worst case scenario for ILS would result if either the listing companies
were unable to update their data or clients were unable to access ILS' database
due to their own systems not being Year 2000 compliant. The Company has
distributed information through the mail and the ILS website on corrective
actions that clients can take to address Year 2000 compliance of their own
systems. The Company depends on third-party providers for key services such as
telecommunications, utilities and transportation. Interruption of these
services could, in management's view, have a material impact on the operations
of the Company. The Company has begun to evaluate the readiness of these
critical suppliers. The Company will assess and develop contingency plans
throughout 1999 depending on circumstances encountered during the year.
Although Aviall's management presently believes the Company is taking
appropriate steps to assess and correct its Year 2000 issues, due to the
general uncertainty inherent in the Year 2000 issue and the readiness of third
parties, Aviall is unable to determine whether Year 2000 will have a material
adverse effect on the Company's results of operations or financial condition.
OUTLOOK. Aviall primarily participates in the global aviation aftermarket
through its core aviation Parts Distribution and ILS businesses. The Company is
affected by the general economic cycle, particularly as it influences flight
activity in commercial, business and general aviation. Aviall serves a
significant number of customers in the Asia-Pacific and Latin American regions.
Recently, countries in these regions have experienced financial market
volatility and the currencies of certain countries have fallen in value
relative to the U.S. dollar. These factors reduced demand for air travel in the
Asia-Pacific region in 1998 and as a result reduced customers' need for
aircraft parts and their ability to pay in a timely manner. Continued
volatility in Latin America could produce similar results in that region in
1999. Recent improvements in the Asia-Pacific region may lead to a slow
business recovery in the region in 1999, which could result in greater demand
for aircraft parts in this region.
The continued strong domestic economy combined with recent changes in the
legal environment for aviation product liability have resulted in renewed
growth in both business and general aviation, increasing demand for the
Company's products and services. Management believes that Aviall's competitive
strengths in service and availability position the Company to benefit from
future growth in these segments.
Commercial airlines in North America and Europe continue to effectively
manage their capacity by retiring older aircraft as new aircraft are delivered,
limiting growth in demand for replacement parts. Management is actively seeking
new sources of supply for airline products to expand Aviall's growth in this
segment.
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 write down
inventory of discontinued products.
18
<PAGE> 19
Information and communication technology is evolving rapidly, and
developments such as the Internet could affect 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. A new version of the aviall.com website
currently in development will offer significant improvements to the
functionality of the on-line Parts Distribution ordering system, drawing on the
advanced Internet capabilities of the new Lawson InSight(tm) enterprise system.
Similarly, ILS is preparing new content for its website that will be offered in
its new ILSmart service. ILS is also continuing its transition into electronic
commerce, and is working with a number of firms to offer new services in this
area.
The operations modules of the Lawson InSight(tm) system were implemented by
Parts Distribution in February 1999. Normal systems implementation issues and
the learning curve associated with the new processes significantly affected
sales in February and early March. The Company and Lawson have addressed the
major issues with the system, and Parts Distribution employees are increasing
their proficiency with the system every day. As a result, management believes
the issues associated with the implementation will not have a material effect
in future periods.
AviallOne, a new program to improve sales processes and enhance customer
service, will be a key internal focus for Parts Distribution throughout 1999.
It will establish one high standard of proficiency using the Lawson InSight(tm)
system to better meet specific customer requirements. In addition to improving
the efficiency and increasing call capacity in the Dallas Sales Center,
AviallOne will enable Parts Distribution to measure, document and implement
best practices in the Sales organization and to provide an excellent experience
for all customers.
In February 1999, the Company announced that its Board of Directors had
retained an investment banking firm to assist the Company in exploring
alternatives to improve shareholder value. In that regard, the Company's Board
authorized management to examine a range of possible transactions which may
include a sale, joint venture or other transaction involving the Company or
either of its two operating businesses, Parts Distribution and ILS. There can
be no assurance that any such transaction will be completed or of the terms or
timing of any such transaction.
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, Year 2000 issues, 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.
19
<PAGE> 20
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK. The Company has market risk exposure arising from changes in
interest rates and foreign exchange rates. The Company from time to time has
used financial instruments to offset such risks. Financial instruments are not
used for trading or speculative purposes.
The Company's earnings are affected by changes in short-term interest
rates as a result of borrowings under its Credit Facilities which bear interest
based on floating rates. The Company has periodically entered into interest
rate caps, swaps and other similar instruments to reduce the impact of
fluctuation in interest rates on its floating rate debt and may do so in the
future. As of December 31, 1998 and 1997, there were no interest rate hedges in
place.
At December 31, 1998, the Company had approximately $45.6 million of
variable rate debt obligations outstanding with a weighted average interest
rate of 6.38%. A hypothetical 10% change in the effective interest rate for
these borrowings, assuming debt levels at December 31, 1998, would change
interest expense by approximately $291,000.
The Company's foreign operations utilize the U.S. dollar as their
functional currency. Foreign currency translation and transaction gains and
losses are included in earnings. Foreign currency transaction exposure relates
primarily to foreign currency denominated accounts receivables and the transfer
of foreign currency from subsidiaries to the parent company. The Company has
sale transactions denominated in foreign currencies in Australia, Canada and
New Zealand. Currency transaction exposures are not hedged. Unrealized currency
translation gains and losses are recognized each month upon translation of the
foreign subsidiaries' balance sheets to U.S. dollars. In certain situations,
the Company uses foreign currency borrowings as a hedge against foreign
denominated net assets. As of December 31 1998 and 1997, the Company had a
Canadian dollar denominated loan of $1.7 million and $2.6 million,
respectively.
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 1999 Annual Meeting of Stockholders ("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, and incorporated herein by reference.
20
<PAGE> 21
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 1998," "Aggregated Option/SAR Exercises in 1998 and December 31, 1998
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.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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 Income
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.
21
<PAGE> 22
(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)
3.3* Amendment to the By-Laws of Aviall (incorporated by
reference to Exhibit 4.3 to Aviall's Post-Effective
Amendment No. 1 to the Registration Statement on Form S-8
(Commission File No. 33-72602))
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. 1998 Stock Incentive Plan (Exhibit 10.2 to
Aviall's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998)
10.3+ Aviall, Inc. Amended and Restated 1998 Directors Stock
Plan
10.4* Distribution and Indemnity Agreement by and between Aviall
and Ryder dated November 23, 1993 (Exhibit 10.3 to the
1993 Form 10-K)
10.5* Tax Sharing Agreement by and between Aviall and Ryder
dated November 23, 1993 (Exhibit 10.4 to the 1993 Form
10-K)
10.6*+ Form of Severance Agreement between Aviall and its
executive officers (Exhibit 10.5 to Aviall's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997
(the "1997 Form 10-K"))
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*+ Aviall, Inc. Employee Stock Purchase Plan (Exhibit 10.27
to the 1995 Form 10-K)
10.9* 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)
10.10* 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>
22
<PAGE> 23
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
10.11* First Amendment to Credit Agreement, dated January 28,
1998, by and among Aviall, Inc. and the financial
institutions parties thereto (Exhibit 10.13 to the 1997
Form 10-K)
21.1 Subsidiaries of Aviall
23.1 Consent of PricewaterhouseCoopers 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.
23
<PAGE> 24
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 15, 1999 By /s/ Eric E. Anderson
-----------------------------
Eric E. Anderson
Chairman, 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>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Eric E. Anderson Chairman, 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 Vice President and Treasurer
- --------------------------------------------------------- (Principal Financial Officer)
Cornelius Van Den Handel
Robert G. Lambert* Director
- ---------------------------------------------------------
Robert G. Lambert
Henry A. McKinnell* Director
- ---------------------------------------------------------
Henry A. McKinnell
Donald R. Muzyka* Director
- ---------------------------------------------------------
Donald R. Muzyka
Richard J. Schnieders* Director
- ---------------------------------------------------------
Richard J. Schnieders
Bruce N. Whitman* Director
- ---------------------------------------------------------
Bruce N. Whitman
</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 15, 1999 /s/ Jeffrey J. Murphy
----------------------------------
Jeffrey J. Murphy
Attorney-in-Fact
24
<PAGE> 25
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 INCOME..................................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> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
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 21 present fairly, in all
material respects, the financial position of Aviall, Inc. and its subsidiaries
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998,
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.
PricewaterhouseCoopers LLP
Dallas, Texas
January 27, 1999
F-2
<PAGE> 27
AVIALL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $400,032 386,060 374,038
Cost of sales 299,017 288,863 278,897
- ---------------------------------------------------------------------------------------------------------------
Gross profit 101,015 97,197 95,141
Operating and other expenses:
Selling and administrative expenses 68,773 67,912 79,535
Nonrecurring items - (1,436) 6,613
Interest expense 2,681 3,201 10,282
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before income taxes 29,561 27,520 (1,289)
Provision (benefit) for income taxes (32,175) 1,096 1,657
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations 61,736 26,424 (2,946)
Discontinued operations:
Gain on disposal 2,821 2,673 16,946
- ---------------------------------------------------------------------------------------------------------------
Earnings from discontinued operations 2,821 2,673 16,946
- ---------------------------------------------------------------------------------------------------------------
Earnings before extraordinary item 64,557 29,097 14,000
Extraordinary item - - (3,421)
- ---------------------------------------------------------------------------------------------------------------
Net earnings $ 64,557 29,097 10,579
===============================================================================================================
Basic net earnings (loss) per share:
Earnings (loss) from continuing operations $ 3.22 1.34 (0.15)
Earnings from discontinued operations 0.15 0.14 0.87
Extraordinary item - - (0.18)
- ---------------------------------------------------------------------------------------------------------------
Net earnings $ 3.37 1.48 0.54
===============================================================================================================
Weighted average common shares 19,150,869 19,711,105 19,494,561
===============================================================================================================
Diluted net earnings (loss) per share:
Earnings (loss) from continuing operations $ 3.17 1.32 (0.15)
Earnings from discontinued operations 0.15 0.13 0.87
Extraordinary item - - (0.18)
- ---------------------------------------------------------------------------------------------------------------
Net earnings $ 3.32 1.45 0.54
===============================================================================================================
Weighted average common and dilutive potential common shares 19,466,419 20,061,205 19,494,561
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 28
AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,136 7,556
Receivables 59,357 59,119
Inventories 84,078 73,414
Prepaid expenses and other current assets 1,849 1,627
Deferred income taxes 7,674 11,795
- --------------------------------------------------------------------------------------------------------------
Total current assets 156,094 153,511
- --------------------------------------------------------------------------------------------------------------
Property, plant and equipment 10,331 9,758
Intangible assets 58,709 55,134
Deferred income taxes 76,222 37,530
Other assets 3,290 3,459
- --------------------------------------------------------------------------------------------------------------
Total assets $ 304,646 259,392
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 13,628 8,556
Accounts payable 31,615 27,765
Accrued expenses 34,934 40,309
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 80,177 76,630
- --------------------------------------------------------------------------------------------------------------
Long-term debt 32,000 28,004
Other liabilities 23,880 27,397
Shareholders' equity (common stock of $.01 par value per share with 80,000,000
shares authorized; 20,180,267 shares and 19,900,195 shares issued at
December 31, 1998 and 1997, respectively; 18,180,267 shares and 19,900,195
shares outstanding at December 31, 1998 and 1997, respectively; preferred
stock of $.01 par value per share with 10,000,000
shares authorized and no shares issued and outstanding) 168,589 127,361
- --------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 304,646 259,392
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 29
AVIALL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
------------------------ Additional Retained
Shares Treasury Unearned Paid-In Earnings
Outstanding Amount Stock Compensation Capital (Deficit) Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1995 19,443,712 $194 - - - (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
Net earnings - - - - - 29,097 29,097
Restricted stock awards - - - (947) 947 - -
Compensation expense - - - 294 - - 294
Common stock issued 348,507 4 - - 4,005 - 4,009
- ----------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 19,900,195 199 - (653) 321,020 (193,205) 127,361
Net earnings - - - - - 64,557 64,557
Restricted stock awards - - - (383) 383 - -
Compensation expense - - - 323 - - 323
Common stock issued 280,072 3 - - 3,360 - 3,363
Treasury stock purchased (2,000,000) - (27,733) - - - (27,733)
Reversal of valuation
allowance on tax benefit
from exercise of stock
options in prior years - - - - 455 - 455
Tax benefit from exer- -
cise of stock options - - - 263 - 263
- ----------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 18,180,267 $202 (27,733) (713) 325,481 (128,648) $168,589
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 30
AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 64,557 29,097 10,579
Gain on disposal of discontinued operations (2,821) (2,673) (16,946)
Nonrecurring items - (1,436) 6,613
Extraordinary loss - - 3,421
Depreciation and amortization 5,695 5,426 9,469
Compensation expense on restricted stock awards 323 294 -
Deferred income taxes (33,870) (181) 43
Reversal of valuation allowance on tax benefit from exercise of stock
options in prior years 455 - -
Tax benefit from exercise of stock options 263 - -
Changes in:
Receivables 424 (8,090) (290)
Inventories (10,564) (200) 3,471
Accounts payable 3,850 (724) (16,577)
Accrued expenses (3,489) (8,420) (13,616)
Other, net (4,571) (2,982) (148)
Discontinued operations working capital changes - - 5,020
- -------------------------------------------------------------------------------------------------------------------------
20,252 10,111 (8,961)
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of distribution rights (5,753) - -
Capital expenditures (3,726) (4,348) (1,179)
Sales of property, plant and equipment 109 110 2,198
Proceeds from repayment of note receivable - 12,000 -
Proceeds from businesses sold - - 261,276
Net change in discontinued operations property, plant and equipment - - 603
- -------------------------------------------------------------------------------------------------------------------------
(9,370) 7,762 262,898
- -------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (27,733) - -
Net change in revolving credit facility 17,623 (2,178) (132,580)
Debt repaid (8,555) (16,339) (169,880)
Issuance of common stock 3,363 4,009 850
Debt proceeds - - 50,000
Debt issue costs paid - - (2,826)
- -------------------------------------------------------------------------------------------------------------------------
(15,302) (14,508) (254,436)
- -------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents (4,420) 3,365 (499)
Cash and cash equivalents, beginning of year 7,556 4,191 4,690
- -------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,136 7,556 4,191
=========================================================================================================================
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 2,643 3,655 17,178
Income taxes $ 1,430 1,080 1,008
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 31
AVIALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND AND ORGANIZATION
Aviall, Inc. ("Aviall" or the "Company") is a leading distributor of new
aviation parts ("Parts Distribution") and provider of related inventory
information services ("ILS"). The Company reports Parts Distribution and ILS as
separate operating segments (see Note 16).
Aviall operated as a wholly owned subsidiary of Ryder System, Inc.
("Ryder") until December 7, 1993 when Ryder distributed Aviall's stock to
Ryder's shareholders as a tax free dividend and established Aviall as a
publicly held corporation separate from Ryder. 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. 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 inventory information services is recognized
as services are rendered.
CASH AND CASH EQUIVALENTS. The Company considers all highly-liquid,
interest-bearing instruments with an original maturity of three months or less
to be cash equivalents. The Company reclassifies cash overdrafts to accounts
payable. Cash overdrafts included in accounts payable were $5.2 million and
$5.1 million at December 31, 1998 and 1997, respectively.
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.
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 leasehold improvements and 5 to 12 years for machinery and equipment.
INTANGIBLE ASSETS. 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. Other
intangible assets, principally distribution rights, are amortized using the
straight-line method over the life of the contract.
F-7
<PAGE> 32
LONG-LIVED ASSETS. It is the Company's policy to periodically review the net
realizable value of its long-lived assets, including goodwill and other
intangible assets, 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
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 long-lived assets exists
at December 31, 1998.
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. Recoveries from insurers or other third
parties of these liabilities, if any, are recognized upon receipt of payment.
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
included in interest expense and amortized over the term of the related debt
utilizing an effective interest rate method. Amortization of financing costs
amounted to $0.3 million, $0.4 million and $6.9 million in 1998, 1997 and 1996,
respectively.
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 Company periodically 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. Gains and losses on
foreign currency forward contracts are recognized concurrently with the related
transaction gains and losses. The Company had a foreign currency forward
exchange contract outstanding at December 31, 1997 to purchase Canadian dollars
in a notional amount of $2.6 million at a rate of $0.69/C$1. There were no
foreign currency forward exchange contracts outstanding at December 31, 1998.
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, 1998 and 1997, the carrying value of
debt approximates fair value.
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").
EARNINGS (LOSS) PER SHARE. The Company computes earnings (loss) per share in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128"). Earnings per share for 1996 have been restated in
accordance with SFAS 128. Basic net earnings (loss) per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during the period. Diluted net earnings (loss) per share is
computed by dividing net earnings by the weighted average number of common and
dilutive potential common shares outstanding during the period. 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.
F-8
<PAGE> 33
NEW ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. SFAS 133
requires companies to recognize all derivatives as either assets or liabilities
and measure those instruments at fair value. Changes in fair value of
derivatives that do not qualify as hedges are recognized in earnings when they
occur. Changes in fair value of derivatives that qualify as hedges are
generally recognized in earnings in the same period as the item being hedged.
SFAS 133 is effective for the Company's year ending December 31, 2000. The
Company does not expect the adoption of this statement to have a significant
impact on the consolidated financial statements.
The Accounting Standards Executive Committee of the AICPA issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1") in March 1998. SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. Generally, external direct costs of materials and services
consumed in developing or obtaining internal-use computer software and internal
payroll costs for employees who are directly associated with and who devote
time to the internal use software project are capitalized. Costs incurred in
the preliminary project stage, training costs and data conversion costs should
be expensed as incurred. The SOP is effective January 1, 1999. The Company does
not expect adoption of SOP 98-1 to have a significant impact on the
consolidated financial statements.
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 and, accordingly, reported these businesses as discontinued
operations in its 1995 Consolidated Financial Statements. 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. These businesses were
sold in 1996.
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 addition,
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.
During 1998 and 1997, the Company recognized a gain on disposal of $2.8
million and $2.7 million, respectively, related to changes in estimates of
certain liabilities as a result of the expiration of the indemnification
periods under the asset sale contracts and revised projections for certain
nonenvironmental liabilities based on recent experiences.
The sale agreements required the Company to retain certain liabilities,
primarily environmental, product liability 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.
During 1996, net sales and loss from discontinued 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.
F-9
<PAGE> 34
NOTE 4 - NONRECURRING ITEMS
1997 GAIN. During 1997, the Company received payment on a $12.0 million
unsecured, subordinated note received in connection with the 1995 sale of the
business aviation operations. The Company recorded a $1.4 million gain in
connection with the repayment of the note, which had been carried at a
discounted value of $10.5 million.
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
----------------------------------------------------------
<S> <C>
Net sales $23,085
Cost of sales 16,084
---------------------------------------------------------
Gross profit 7,001
Operating and other expenses:
Selling and administrative expenses 5,658
Nonrecurring charge 6,613
Interest expense 1,075
---------------------------------------------------------
Loss before income taxes $(6,345)
=========================================================
</TABLE>
<TABLE>
<CAPTION>
NOTE 5 - RECEIVABLES
(In Thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Trade $ 58,202 59,405
Notes 64 612
Other 4,366 3,339
- ------------------------------------------------------------------------------
62,632 63,356
Allowance for doubtful accounts (3,275) (4,237)
- ------------------------------------------------------------------------------
$ 59,357 59,119
==============================================================================
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
(In Thousands) 1998 1997
- ------------------------------------------------------------------------------
Machinery and equipment $ 33,917 30,878
Leasehold improvements 4,053 3,969
Capital projects in progress 2,462 2,029
- ------------------------------------------------------------------------------
40,432 36,876
Accumulated depreciation (30,101) (27,118)
- ------------------------------------------------------------------------------
$ 10,331 9,758
==============================================================================
</TABLE>
F-10
<PAGE> 35
<TABLE>
<CAPTION>
NOTE 7 - INTANGIBLE ASSETS
(In Thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $ 79,405 79,405
Distribution rights 5,753 -
Other 140 100
- ------------------------------------------------------------------------------
85,298 79,505
Accumulated amortization (26,589) (24,371)
- ------------------------------------------------------------------------------
$ 58,709 55,134
==============================================================================
NOTE 8 - ACCRUED EXPENSES
(In Thousands) 1998 1997
- ------------------------------------------------------------------------------
Salaries, wages and benefits $ 9,266 10,691
Operating taxes 9,094 8,974
Environmental reserves 4,290 4,116
Self-insurance reserves 2,224 2,956
Other 10,060 13,572
- ------------------------------------------------------------------------------
$ 34,934 40,309
==============================================================================
NOTE 9 - DEBT
(In Thousands) 1998 1997
- ------------------------------------------------------------------------------
Term Loan $ 28,000 36,000
Revolver 16,000 -
Other 1,628 560
- ------------------------------------------------------------------------------
45,628 36,560
Less current portion (13,628) (8,556)
- ------------------------------------------------------------------------------
$ 32,000 28,004
==============================================================================
</TABLE>
The Company's senior secured credit facilities (the "Credit Facilities")
consist of a $50.0 million secured term loan due through 2001 (the "Term Loan")
and a $50.0 million secured revolving loan due in 2001 (the "Revolver"), with
availability determined by reference to a borrowing base determined by
reference to the Company's eligible accounts receivable and inventory.
Borrowings under the 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%,
depending upon certain of the Company's financial 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%, depending upon certain of the Company's ratios. Interest is payable on a
quarterly basis. At December 31, 1998 and 1997, the interest rate on the Term
Loan was 6.38% and 6.75%, respectively, and the interest rate on the Revolver
was 6.38% and 8.50%, respectively.
The Credit Facilities provide for the issuance of up to $20.0 million of
letters of credit under the Revolver subject to the borrowing base, of which
$5.5 million was utilized at December 31, 1998. Commitment fees ranging from
.25% to .5% are payable on the unused portion of the Revolver. Obligations
under the 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 Credit Facilities contain various covenants, including
financial covenants and limitations on debt, dividends and capital
expenditures.
F-11
<PAGE> 36
The Company repaid its previous senior secured credit facilities in 1996
and recorded an extraordinary loss of $3.4 million resulting from the write-off
of the associated unamortized financing costs. No tax benefit was recorded on
the extraordinary loss due to the Company's uncertainty surrounding the
realizability of the deferred tax assets.
Other debt consists of various notes with interest rates ranging from
6.75% to 7.50% at December 31, 1998 and 1997, respectively.
Scheduled debt maturities for the years subsequent to December 31, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending
-----------------------------------------------------------
<S> <C>
1999 $13,628
2000 13,000
2001 19,000
-----------------------------------------------------------
$45,628
===========================================================
</TABLE>
NOTE 10 - INCOME TAXES
Net earnings before income taxes were taxed under the following
jurisdictions:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $31,235 28,444 7,060
Foreign 1,147 1,749 5,176
- ------------------------------------------------------------------------------
Net earnings before income taxes $32,382 30,193 12,236
==============================================================================
</TABLE>
The provision (benefit) for income taxes consisted of the following
components:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense (benefit):
U.S. federal $ 455 385 (48)
U.S. state 102 49 640
Foreign 1,138 843 1,022
- ------------------------------------------------------------------------------
1,695 1,277 1,614
- ------------------------------------------------------------------------------
Deferred tax expense (benefit):
U.S. federal (33,944) (385) -
Foreign 74 204 43
- ------------------------------------------------------------------------------
(33,870) (181) 43
- ------------------------------------------------------------------------------
Provision (benefit) for income taxes $(32,175) 1,096 1,657
==============================================================================
</TABLE>
F-12
<PAGE> 37
A reconciliation of the U.S. federal statutory tax rate with the effective
tax rate follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision at the statutory rate $ 11,334 35.0% 10,567 35.0 4,283 35.0
Valuation allowance (46,080) (142.3) (10,437) (34.6) (5,925) (48.4)
Amortization of goodwill 765 2.4 765 2.5 766 6.2
State income taxes, net of federal income tax benefit 773 2.4 (246) (0.8) 416 3.4
Basis difference in stock of foreign subsidiary sold - - - - 2,446 20.0
Miscellaneous items, net 1,033 3.1 447 1.5 (329) (2.7)
- -----------------------------------------------------------------------------------------------------------------------------
$ (32,175) (99.4)% 1,096 3.7 1,657 13.5
=============================================================================================================================
</TABLE>
The significant temporary differences which gave rise to deferred income
taxes as of December 31 were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C>
Deferred income tax assets:
Loss carryforwards and credits
U.S. federal $ 63,544 70,321
U.S. state 11,600 13,940
Foreign 3,140 2,979
Compensation-related items 6,725 9,100
Inventory-related items 3,920 3,369
Environmental-related items 6,889 8,722
Property and equipment basis differences 701 -
Accounts receivable allowances 1,053 1,509
Other items 2,740 4,719
- ------------------------------------------------------------------------------
100,312 114,659
Valuation allowance (14,740) (60,092)
- ------------------------------------------------------------------------------
Deferred income tax assets 85,572 54,567
- ------------------------------------------------------------------------------
Deferred income tax liabilities:
Property and equipment basis differences - (2,202)
Other items (1,676) (3,040)
- ------------------------------------------------------------------------------
Deferred income tax liabilities (1,676) (5,242)
- ------------------------------------------------------------------------------
Net deferred income tax asset $ 83,896 49,325
==============================================================================
</TABLE>
The Company periodically assesses the realizability of deferred tax assets
and adjusts the related valuation allowance based on the amount of deferred tax
assets management believes is more likely than not to be realized. In the
fourth quarter of 1998, the Company released $33.5 million of valuation
allowance associated with U.S. federal deferred tax assets based on
management's assessment of historical earnings and expected future operating
results. An additional $11.9 million of net valuation allowance was released in
1998 due to utilization of the net operating loss ("NOL") from actual current
year earnings. In total, $45.4 million of the valuation allowance was released
in 1998, resulting in a net income tax benefit of $32.2 million. Management
believes it may not generate sufficient future income in certain U.S. state and
foreign tax jurisdictions to realize all NOL carryforwards before their
expiration and as a result has retained a valuation allowance of $14.7 million.
F-13
<PAGE> 38
The Company has an NOL carryforward for U.S. federal income tax purposes
of approximately $180 million substantially expiring in 2009 through 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 could
be utilized.
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 $3.8 million and $7.8 million at December 31, 1998 and 1997, 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 these foreign earnings.
In connection with the distribution of Aviall's common stock to Ryder's
shareholders on December 7, 1993, the Company and Ryder entered into a tax
sharing agreement that provided for the payment of taxes and receipt of tax
refunds for periods up through December 7, 1993 and provided for various
administrative matters. Ryder's tax returns for 1990 through 1993 remain open
and therefore are subject to this agreement.
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"). These
employees were given credit under the Aviall Pension Plan for prior service in
the Ryder System, Inc. Retirement Plan which retained the pension fund assets
and accumulated benefit obligation related to participants for services
rendered through the date of distribution. In addition to the Aviall Pension
Plan, the Company maintains two other defined benefit pension plans.
The following table reflects the components of net pension expense:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 982 888 2,131
Interest cost on projected benefit obligation 2,788 2,624 2,679
Expected return on plan assets (2,398) (2,264) (2,023)
Transition obligation recognition - - 3
Prior service cost amortization 101 126 397
Net loss recognition 115 47 167
- ----------------------------------------------------------------------------------------
Net pension expense $ 1,588 1,421 3,354
========================================================================================
</TABLE>
The above net pension expense included $2.0 million in 1996 related to the
discontinued operations. In addition, as a result of the sale of certain
businesses and assets, the Company recognized a net curtailment gain (loss)
related to its pension plans of $0.4 million and $(3.9) million in 1997 and
1996, respectively, which was recorded in the reserves established for each
sale.
F-14
<PAGE> 39
The following table reflects the reconciliations of the beginning and
ending balances of the fair value of plan assets and benefit obligation and the
funded status for all plans:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets at beginning of period $34,712 28,353
Actual return on plan assets 8,056 6,557
Contributions by the employer 829 2,261
Benefits paid (2,014) (2,075)
Expenses paid (414) (384)
- -----------------------------------------------------------------------------
Fair value of plan assets at end of period 41,169 34,712
- -----------------------------------------------------------------------------
Projected benefit obligation at beginning of period 38,589 35,031
Service cost 982 888
Interest cost 2,788 2,624
Actuarial losses 5,576 2,889
Benefits paid (2,014) (2,075)
Expenses paid (414) (384)
Curtailments - (384)
- -----------------------------------------------------------------------------
Projected benefit obligation at end of period 45,507 38,589
- -----------------------------------------------------------------------------
Funded status (4,338) (3,877)
Unrecognized net losses 184 380
Unrecognized prior service cost 424 526
- -----------------------------------------------------------------------------
Accrued pension expense $(3,730) (2,971)
=============================================================================
</TABLE>
The following table sets forth the year end actuarial assumptions used in
the accounting for the plans:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate for determining projected benefit obligation 6.50% 7.25% 7.75%
Rate of increase in compensation levels 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets 7.75% 7.75% 7.75%
</TABLE>
POSTRETIREMENT BENEFITS. The Company maintains plans which provide retired
employees with certain health care and life insurance benefits.
The following tables reflect the components of net periodic postretirement
benefit expense, the reconciliation of the beginning and ending balances of the
accumulated postretirement benefit obligation and the funded status for all
plans:
<TABLE>
<CAPTION>
(In Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Present value of benefits earned during the year $ 55 49 30
Interest cost on postretirement benefit obligation 259 250 286
Net amortization and deferral (182) (248) (288)
- ----------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $ 132 51 28
========================================================================================
</TABLE>
F-15
<PAGE> 40
As a result of the sale of certain businesses and assets, the Company
recognized a net curtailment gain related to its health care and life insurance
plans of $0.7 million in 1996 which was recorded in the reserves established
for each sale.
<TABLE>
<CAPTION>
(In Thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation at beginning of period $ 3,444 3,029
Service cost 55 49
Interest cost 259 250
Expected benefits paid (net of contributions) (296) (269)
Actuarial loss 576 385
- --------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation at end of period 4,038 3,444
- --------------------------------------------------------------------------------------------------
Funded status (4,038) (3,444)
Unrecognized net gain (1,086) (2,023)
- --------------------------------------------------------------------------------------------------
Accrued unfunded postretirement benefit obligation $(5,124) (5,467)
==================================================================================================
</TABLE>
The discount rate used for determining the accumulated postretirement
benefit obligation was 6.50%, 7.25% and 7.75% in 1998, 1997 and 1996,
respectively.
The health care cost trend rate for 1998 was assumed to be 6.5%,
decreasing gradually to a rate in 2005 of approximately 5.0%. Increasing and
decreasing the assumed health care cost trend rates by one percentage point in
each future year would have no impact on the accumulated postretirement benefit
obligation as of December 31, 1998 or the 1998 net periodic postretirement
benefit expense because Company contributions have reached the maximum allowed
amount.
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, 1998.
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).
F-16
<PAGE> 41
STOCK INCENTIVE PLANS. The Aviall, Inc. stock incentive plans (the "Incentive
Plans") provide for grants of qualified and 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. Options granted under the Incentive Plans vest over periods up to five
years. The Incentive Plans also provide for grants of restricted stock, stock
appreciation rights and performance units.
The following table summarizes the status of stock options granted under
the Incentive Plans:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
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 1,944,260 $11.84 1,998,461 $12.07 1,661,744 $12.81
Granted:
Exercise price equals market price 411,000 $14.68 428,000 $11.10 307,500 $ 8.92
Exercise price exceeds market price - - - - 225,000 $12.58
Exercised (270,978) $11.98 (335,570) $11.48 (29,444) $ 7.92
Expired or cancelled (313,844) $14.13 (146,631) $13.61 (166,339) $15.06
---------- ---------- ----------
Outstanding at end of year 1,770,438 $12.07 1,944,260 $11.84 1,998,461 $12.07
========== ========== ==========
Exercisable at end of year 854,643 1,103,764 1,251,191
========== ========== ==========
Available for grant at end of year 930,000 511,016 792,385
========== ========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
under the Incentive Plans at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/98 Life (Years) Price at 12/31/98 Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 7.19 to $ 8.31 215,277 6.3 $ 7.93 171,247 $ 7.88
$ 8.31 to $ 9.97 225,000 7.6 $ 9.75 153,500 $ 9.75
$ 9.98 to $ 11.64 438,627 7.8 $10.89 161,912 $10.77
$ 11.64 to $ 13.30 171,374 4.6 $12.21 123,874 $12.30
$ 13.31 to $ 14.96 655,160 7.7 $14.63 226,660 $14.47
$ 14.97 to $ 16.00 65,000 8.1 $15.78 17,450 $15.73
--------- ---------
1,770,438 7.3 $12.07 854,643 $11.31
========= =========
</TABLE>
F-17
<PAGE> 42
The Company applies APB 25 in accounting for compensation cost associated
with the Incentive Plans. Had compensation cost been determined consistent with
SFAS 123, the Company's net earnings and earnings per share would have been
reduced to the pro forma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------
(In Thousands, Except Per Share Data) Basic Diluted Basic Diluted Basic Diluted
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net earnings:
As reported $ 64,557 64,557 29,097 29,097 10,579 10,579
Pro forma $ 63,041 63,041 27,732 27,732 9,796 9,796
Net earnings per share:
As reported $ 3.37 3.32 1.47 1.45 0.54 0.54
Pro forma $ 3.29 3.25 1.40 1.39 0.50 0.50
</TABLE>
Options were granted at exercise prices equal to the market price of the
Company's stock on the date of grant during 1998, 1997 and 1996. The weighted
average fair value of options granted was $7.46 per option in 1998, $5.59 per
option in 1997 and $4.98 per option in 1996 for options whose exercise price
equaled the market price of the Company's common stock on date of grant. During
1996, options were also granted at exercise prices greater than the market
price of the Company's common stock on the date of grant. The weighted average
fair value of options granted in 1996 was $4.37 per option for options whose
exercise price exceeded the market price of the Company's common stock on the
date of grant. In accordance with SFAS 123, the fair value of options at the
date of grant was estimated using the Black-Scholes option-pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.64% 6.55% 6.29%
Expected life (years) 6.9 7.0 9.2
Expected volatility 39.21% 34.53% 32.61%
Expected dividend yield 0.00% 0.00% 0.00%
</TABLE>
During 1998, 32,509 shares and 700 shares of restricted stock with a stock
price on the date of grant of $11.50 per share and $13.75 per share,
respectively, were awarded under the Incentive Plans. In 1997, 73,438 shares
and 500 shares of restricted stock with a stock price on the date of grant of
$12.78 per share and $15.91 per share, respectively, were also awarded under
the Incentive Plans. The restricted stock vests three years from the date of
grant. All restricted stock carries full dividend rights. Recipients of
restricted stock awards granted under the 1998 Incentive Plan have full voting
rights. Recipients of grants of restricted stock made under the Company's other
Incentive Plan are not entitled to vote the shares until the awards have
vested. Unearned compensation is charged to shareholders' equity based on the
market value of the Company's common stock at the date of the award.
Compensation expense of $0.3 million and $0.3 million was recognized in 1998
and 1997, respectively, related to restricted stock awards.
PURCHASE PLAN. Prior to January 1, 1997, the Company maintained an employee
stock purchase plan covering substantially all U.S. employees. During 1997,
5,506 shares of previously subscribed common stock were purchased at a price of
$6.96 per share. There has been no further activity.
F-18
<PAGE> 43
DIRECTORS STOCK PLAN. The Company has reserved 147,500 shares of common stock
for issuance under its Directors Stock Plan of which 35,514 shares had been
issued at December 31, 1998. Of the total issued, 8,784 shares, 8,764 shares
and 6,665 shares of common stock were issued during 1998, 1997 and 1996,
respectively, with fair values at date of issuance of $13.66 per share, $13.69
per share and $9.00 per share, respectively. Under the terms of this plan, each
nonemployee director may make an election to receive shares of common stock in
lieu of the annual cash retainer for services as a director. In addition,
grants of options to purchase up to 3,000 shares of common stock may be made to
each nonemployee director under this plan each fiscal year.
NOTE 13 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share ("EPS") calculations for income from continuing
operations follows:
<TABLE>
<CAPTION>
Basic EPS Effect of Dilutive Securities Diluted EPS
-------------------------------------------------------------------------------------------
(Dollars in Thousands, Earnings (Loss) from Stock Restricted Earnings (Loss) from
Except Share Data) Continuing Operations Options Stock Continuing Operations
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
For year ended 1998:
Income (Numerator) $ 61,736 $ 61,736
Shares (Denominator) 19,150,869 232,957 82,593 19,466,419
Per share amount $ 3.22 $ 3.17
For year ended 1997:
Income (Numerator) $ 26,424 $ 26,424
Shares (Denominator) 19,711,105 331,760 18,340 20,061,205
Per share amount $ 1.34 $ 1.32
For year ended 1996:
Income (Numerator) $ (2,946) $ (2,946)
Shares (Denominator) 19,494,561 - - 19,494,561
Per share amount $ (0.15) $ (0.15)
</TABLE>
Options to purchase 891,534 and 632,767 shares of common stock at exercise
prices ranging from $11.75 to $16.00 and $14.50 to $16.00 were outstanding at
December 31, 1998 and December 31, 1997, respectively, but were not included in
the computation of diluted EPS, because the options' exercise price was greater
than the average market price of the common stock. Options to purchase
1,998,461 shares of common stock during 1996 were excluded from the computation
of diluted EPS in 1996 because their inclusion would result in an antidilutive
effect on EPS.
F-19
<PAGE> 44
NOTE 14 - ENVIRONMENTAL MATTERS
OVERVIEW. The Company's parts distribution 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. 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
entered into a consent decree with the EPA under which the City of Burbank and
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
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 was 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 had been subject to court approval of a new
consent decree relating to the interim remedy for the Burbank Unit. Court
approval was obtained in 1998. The Company has presently determined that
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.
The Company, together with approximately 50 other parties, were defendants
in numerous separate lawsuits alleging personal injury and/or property damage
arising out of the alleged release of toxic substances into the air, soil
and/or groundwater in the City of Burbank, California. In addition to Aviall,
the named defendants in these suits included Lockheed and certain other parties
who were named PRPs with respect to the Burbank Unit. These cases, which were
filed in the Superior Court of California and involve over 3,000 plaintiffs,
have been consolidated. The court has approved a proposed settlement between
the plaintiff and defendants, including the Company. The payment by the Company
pursuant to this proposed settlement is not material. The settlement agreement
is expected to be finalized in the first quarter of 1999. The Company will
recognize the recovery of the settlement when received.
F-20
<PAGE> 45
PREVIOUSLY OWNED PROPERTIES. The Company is presently implementing state agency
approved corrective measures for its former Forest Park facility. 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 completed
state agency required remediation on soil and ground water issues for the
Carter Field and McAllen locations. During 1997, the Company completed
investigations at Love Field, Texas and Prestwick, Scotland. The Company
received notification in 1997 of an approved plan from the Scotland
Environmental Protection Agency on soil and ground water issues for the
Prestwick, Scotland site. The approved plan is currently being implemented at
the Scotland site. Also during 1998, the Company submitted a Conceptual
Exposure Assessment Model for the Love Field site to the state agency for
approval. Based on current information, the Company believes existing financial
reserves for the CES Properties are sufficient. In addition, the Company is in
litigation with a previous owner of various of these locations as to 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.
In February 1998, a proposed settlement for $1.5 million was reached with the
insurers of the CES Properties. This settlement is expected to be finalized in
the first quarter of 1999.
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 five 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 environmental matters. These matters are under
investigation and the ultimate cost cannot presently be estimated.
ACCOUNTING AND REPORTING. At December 31, 1998 and 1997, accrued environmental
liabilities were $18.3 million and $20.4 million, respectively. No
environmental expense was recorded in 1998, 1997 or 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.
F-21
<PAGE> 46
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Under leases, primarily for parts distribution facilities, rent expense
included in earnings from continuing operations was $6.2 million, $6.7 million
and $6.9 million in 1998, 1997 and 1996, respectively, and was offset by
sublease income of $0.4 million, $0.5 million and $0.7 million in 1998, 1997
and 1996, respectively.
Future minimum payments under noncancellable operating leases with initial
or remaining terms of one year or more at the end of 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Year Ending
---------------------------------------------------------
<S> <C>
1999 $ 4,722
2000 3,169
2001 1,299
2002 904
2003 569
Thereafter 164
---------------------------------------------------------
10,827
Less amounts representing sublease income (2,192)
---------------------------------------------------------
Total minimum lease payments $ 8,635
=========================================================
</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
metals and toxic chemicals 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. This suit is presently scheduled to be tried in the third
quarter of 1999. The Company intends to vigorously defend this suit. The
Company is not able to reasonably estimate the extent, if any, of the liability
to which it could be exposed.
In addition to the environmental-related matters discussed in Note 14 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. The services
provided by ILS can be influenced by the rapidly evolving information and
communication industry.
The Company uses the U.S. dollar as the functional currency for all
foreign operations and, therefore, recognizes all translation gains and losses
in earnings. Changes in foreign currency exchange rates could significantly
impact the Company's earnings. In addition, the Company's earnings are affected
by changes in short-term interest rates as a result of borrowings under its
Credit Facilities which bear interest based on floating rates.
F-22
<PAGE> 47
NOTE 16 - SEGMENT AND RELATED INFORMATION
The Company has two reportable operating segments: new aviation parts
distribution and on-line inventory information services, as a result of
differences in the nature of the products and services sold and differences in
the related distribution methods. The Company distributes new aviation parts
servicing both the commercial and general aviation markets. It provides a link
between parts manufacturers, sellers and buyers by purchasing parts for its own
account and reselling such parts. In addition, Aviall is a provider of on-line
inventory information services to the aviation and marine industries through
ILS, a wholly owned subsidiary. Suppliers of parts, equipment and services list
their inventory and capabilities on the ILS system for access by buyers. ILS
charges a subscription fee to access or list data. Aviall's reportable segments
are managed separately due to current marketing strategies.
The accounting policies of the reportable segments are the same as those
described in Note 2 - Summary of Significant Accounting Policies. Segment
profit (loss) reflects operating income. Corporate includes treasury, general
accounting, human resources, legal and office of the president. Corporate
expenses, corporate assets, nonrecurring items and interest expense are not
allocated to segments. Corporate assets include assets retained from divested
activities. The deferred tax asset, due primarily to losses from the sales of
certain businesses, is shown separately. The results of divested activities are
shown separately from segment revenues, profit (loss), and depreciation and
amortization.
The following tables present information by operating segment (in
thousands):
<TABLE>
<CAPTION>
Revenues 1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Parts Distribution $ 371,422 359,373 327,313
ILS 28,610 26,687 24,872
- --------------------------------------------------------------------------------------------------------
Reportable segment revenue 400,032 386,060 352,185
Divested activities net of intercompany revenue - - 21,853
- --------------------------------------------------------------------------------------------------------
Total revenue $ 400,032 386,060 374,038
========================================================================================================
Profit (loss)
- --------------------------------------------------------------------------------------------------------
Parts Distribution $ 22,031 20,847 16,441
ILS 16,466 14,903 13,344
- --------------------------------------------------------------------------------------------------------
Reportable segment profit 38,497 35,750 29,785
Divested activities - - 1,343
Nonrecurring gain (loss) - 1,436 (6,613)
Corporate (6,255) (6,465) (15,522)
Interest expense (2,681) (3,201) (10,282)
- --------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before income taxes $ 29,561 27,520 (1,289)
========================================================================================================
Depreciation and amortization
- --------------------------------------------------------------------------------------------------------
Parts Distribution $ 4,605 4,132 4,263
ILS 491 580 809
- --------------------------------------------------------------------------------------------------------
Reportable segment depreciation and amortization 5,096 4,712 5,072
Divested activities - - 124
Corporate 258 358 506
Debt issue cost included in interest expense 341 356 3,767
- --------------------------------------------------------------------------------------------------------
Total depreciation and amortization $ 5,695 5,426 9,469
========================================================================================================
</TABLE>
F-23
<PAGE> 48
<TABLE>
<CAPTION>
Assets 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Parts Distribution $ 212,210 201,769 188,293
ILS 7,589 7,556 8,098
- -----------------------------------------------------------------------------------------
Reportable segment assets 219,799 209,325 196,391
Corporate 951 742 15,342
Deferred tax asset 83,896 49,325 49,144
- -----------------------------------------------------------------------------------------
Total assets $ 304,646 259,392 260,877
=========================================================================================
Long-lived asset additions
- -----------------------------------------------------------------------------------------
Parts Distribution $ 9,085 4,125 962
ILS 409 267 255
- -----------------------------------------------------------------------------------------
Reportable segment long-lived asset additions 9,494 4,392 1,217
Corporate 25 6 12
- -----------------------------------------------------------------------------------------
Total long-lived asset additions $ 9,519 4,398 1,229
=========================================================================================
</TABLE>
The following table presents revenues by geographic area based on sales
destination (in thousands):
<TABLE>
<CAPTION>
Revenues 1998 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 279,015 269,626 271,604
Foreign countries 121,017 116,434 102,434
- -----------------------------------------------------------------------------------------
Total revenue $ 400,032 386,060 374,038
=========================================================================================
</TABLE>
The following table presents long-lived assets by physical location (in
thousands):
<TABLE>
<CAPTION>
Long-lived assets
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
United States $ 66,384 61,899 66,974
Foreign countries 2,656 2,993 1,313
- -----------------------------------------------------------------------------------------
Total long-lived assets $ 69,040 64,892 68,287
=========================================================================================
</TABLE>
The Company did not derive 10% or more of its total net sales from any
individual customer.
F-24
<PAGE> 49
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of
operations for 1998 and 1997 (in thousands, except share data):
<TABLE>
<CAPTION>
First Second Third Fourth
1998 (Unaudited) Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 98,030 104,949 102,126 94,927
Cost of sales 72,990 78,970 76,672 70,385
- -------------------------------------------------------------------------------------------------------------------------
Gross profit 25,040 25,979 25,454 24,542
Operating and other expenses:
Selling and administrative expenses 17,187 17,481 17,132 16,973
Interest expense 507 576 809 789
- -------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes 7,346 7,922 7,513 6,780
Provision (benefit) for income taxes 367 94 232 (32,868)
- -------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 6,979 7,828 7,281 39,648
Earnings from discontinued operations - 2,083 - 738
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 6,979 9,911 7,281 40,386
=========================================================================================================================
Basic net earnings per share:
Earnings from continuing operations $ 0.35 0.40 0.39 2.18
Earnings from discontinued operations - 0.10 - 0.04
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.35 0.50 0.39 2.22
=========================================================================================================================
Weighted average common shares 19,968,503 19,727,636 18,742,140 18,179,957
=========================================================================================================================
Diluted net earnings per share:
Earnings from continuing operations $ 0.34 0.39 0.38 2.16
Earnings from discontinued operations - 0.10 - 0.04
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.34 0.49 0.38 2.20
=========================================================================================================================
Weighted average common and dilutive potential
common shares 20,388,350 20,119,859 19,038,745 18,358,727
=========================================================================================================================
Common stock price range per share $12.12 to 15.56 13.00 to 15.62 10.31 to 14.62 9.94 to 12.69
=========================================================================================================================
Common stock trading volume, number of shares 4,200,000 3,231,500 3,472,900 6,703,000
=========================================================================================================================
</TABLE>
F-25
<PAGE> 50
<TABLE>
<CAPTION>
First Second Third Fourth
1997 (Unaudited) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 91,682 96,063 100,267 98,048
Cost of sales 68,638 71,830 75,339 73,056
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 23,044 24,233 24,928 24,992
Operating and other expenses:
Selling and administrative expenses 16,191 16,827 17,017 17,877
Nonrecurring items (1,436) - - -
Interest expense 734 991 752 724
- -----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes 7,555 6,415 7,159 6,391
Provision for income taxes 612 288 123 73
- -----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 6,943 6,127 7,036 6,318
Earnings from discontinued operations - - - 2,673
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 6,943 6,127 7,036 8,991
=======================================================================================================================
Basic net earnings per share:
Earnings from continuing operations $ 0.35 0.31 0.36 0.32
Earnings from discontinued operations - - - 0.13
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.35 0.31 0.36 0.45
=======================================================================================================================
Weighted average common shares 19,576,555 19,629,361 19,742,977 19,891,712
=======================================================================================================================
Diluted net earnings per share:
Earnings from continuing operations $ 0.35 0.31 0.35 0.31
Earnings from discontinued operations - - - 0.13
- -----------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.35 0.31 0.35 0.44
=======================================================================================================================
Weighted average common and dilutive potential
common shares 19,714,638 19,955,833 0,249,746 20,320,788
=======================================================================================================================
Common stock price range per share $ 9.00 to 12.12 10.50 to 16.00 13.25 to 16.87 11.00 to 17.19
=======================================================================================================================
Common stock trading volume, number of shares 5,357,000 7,531,900 4,127,500 6,418,500
=======================================================================================================================
</TABLE>
F-26
<PAGE> 51
AVIALL, INC. SCHEDULE II
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, 1998:
Accounts receivable allowance $ 4,238 306 163 (1) (1,432) (3) 3,275
Reserves for excess and obsolete inventories $ 3,941 1,867 - (2,600) (4) 3,208
===========================================================================================================================
Year ended December 31, 1997:
Accounts receivable allowance $ 4,541 1,430 (323)(1) (1,410) (3) 4,238
Reserves for excess and obsolete inventories $ 4,007 721 - (787) (4) 3,941
===========================================================================================================================
Year ended December 31, 1996:
Accounts receivable allowance $ 1,799 1,108 2,914 (2) (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) -
===========================================================================================================================
</TABLE>
(1) Collection of accounts receivable previously written off.
(2) Accounts receivable allowance related to accounts receivable retained by
the Company from the sale of Commercial Engine Services.
(3) Write-off of doubtful accounts and concessions granted.
(4) Write-off of excess and obsolete inventories.
F-27
<PAGE> 52
INDEX TO 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)
3.3* Amendment to the By-Laws of Aviall (incorporated by reference to Exhibit 4.3 to Aviall's
Post-Effective Amendment No. 1 to the Registration Statement on Form S-8 (Commission File No.
33-72602))
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. 1998 Stock Incentive Plan (Exhibit 10.2 to Aviall's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998)
10.3+ Aviall, Inc. Amended and Restated 1998 Directors Stock Plan
10.4* Distribution and Indemnity Agreement by and between Aviall and Ryder dated November 23, 1993 (Exhibit
10.3 to the 1993 Form 10-K)
10.5* Tax Sharing Agreement by and between Aviall and Ryder dated November 23, 1993 (Exhibit 10.4 to the
1993 Form 10-K)
10.6*+ Form of Severance Agreement between Aviall and its executive officers (Exhibit 10.5 to Aviall's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 Form 10-K"))
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*+ Aviall, Inc. Employee Stock Purchase Plan (Exhibit 10.27 to the 1995 Form 10-K)
10.9* 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)
10.10* 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>
<PAGE> 53
<TABLE>
<CAPTION>
Exhibit
No. Description
- --------------- ---------------------------------------------------------------------------------------------------
<S> <C>
10.11* First Amendment to Credit Agreement, dated January 28, 1998, by and among Aviall, Inc. and the
financial institutions parties thereto (Exhibit 10.13 to the 1997 Form 10-K)
21.1 Subsidiaries of Aviall
23.1 Consent of PricewaterhouseCoopers 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 10.3
AVIALL, INC.
AMENDED AND RESTATED 1998 DIRECTORS STOCK PLAN
SECTION I
PURPOSES OF THE PLAN
The Aviall, Inc. Amended and Restated 1998 Directors Stock Plan (the
"Plan") is intended to enable Aviall, Inc. (the "Company") to attract and retain
persons of outstanding competence to serve as members of the Board of Directors
of the Company and to provide a direct link between Directors' compensation and
stockholder value.
SECTION II
ADMINISTRATION OF THE PLAN
A. Board -- The Plan shall be administered by the Board of Directors of
the Company or a duly authorized committee thereof (the Board of Directors of
the Company or any such committee being hereinafter referred to as the "Board").
Grants of stock and stock options to eligible participants under the Plan and
the amount, nature and timing of the grants shall be determined as set forth in
Sections IV, V and VI.
B. Authority of the Board -- Subject to the limitations and
restrictions set forth in the Plan, the Board shall have full and final
authority to interpret the Plan; to prescribe, amend and rescind rules and
regulations, if any, relating to the Plan; and to make all determinations
necessary or advisable for the administration of the Plan. No member of the
Board shall be liable for anything done or omitted to be done by him or by any
other member of the Board in connection with the Plan, except for his own
willful misconduct or gross negligence. All decisions which are made by the
Board with respect to interpretation of the terms of the Plan and with respect
to any questions or disputes arising under the Plan shall be final and binding
on the Company and the participants, their heirs or beneficiaries.
C. Acts of the Board -- A majority of the Board will constitute a
quorum and the acts of a majority of the members present at any meeting at which
a quorum is present, or acts approved in writing by all members of the Board
without a meeting, will be the acts of the Board.
SECTION III
STOCK SUBJECT TO THE PLAN
A. Common Stock -- The stock which is the subject of grants under the
Plan shall be the Company's Common Stock, par value $.01 per share ("Common
Stock"), which shares shall be subject to the terms, conditions and restrictions
described in the Plan.
B. Maximum Number of Shares That May Be Granted -- There may be granted
under the Plan an aggregate of not more than one hundred forty-seven thousand
five hundred (147,500) shares of Common Stock, subject to adjustment as provided
in Section IX hereof. Shares of Common Stock granted pursuant to the Plan may be
either authorized, but unissued, shares or reacquired shares, or both.
<PAGE> 2
C. Rights With Respect To Shares -- A Director to whom a grant of
Common Stock has been made shall have absolute beneficial ownership of the
shares of Common Stock granted to that Director, including the right to vote the
shares and to receive dividends thereunder; subject, however, to the terms,
conditions and restrictions described in the Plan, including, but not limited
to, under Section V. The certificate(s) for such shares shall be held by the
Company (or by an agent designated by the Secretary of the Company) for the
Director's benefit until the terms, conditions and restrictions lapse, whereupon
the certificates shall be delivered to the Director.
SECTION IV
PARTICIPATION
A. Directors -- Participation in the Plan shall be limited to persons
who serve as members of the Board of Directors of the Company and who, at the
time of grant, are not "employees" of the Company and/or any of its
subsidiaries, within the meaning of the Employee Retirement Income Security Act
of 1974 ("ERISA") (an "Eligible Director"). A Director who is an employee and
who retires or resigns from employment with the Company and/or any of its
subsidiaries, but remains a Director of the Company, shall become eligible to
participate in the Plan at the time of such termination of employment.
B. Elections -- Any Eligible Director may elect to participate in the
Plan and receive grants of Common Stock as set out in Paragraph C of this
Section IV by delivering to the Committee a written notice to such effect. Any
such election shall remain in effect until revoked by the participating Director
by delivering to the Board a written notice to such effect. An election shall be
made at least six (6) months prior to the Grant Date (as defined below), and
according to procedures established by the Board.
C. Stock Grants -- Each participating Director who has made an election
to participate in the Plan pursuant to Paragraph B of this Section IV shall be
eligible to receive annually, on the first New York Stock Exchange trading day
in July of each calendar year (the "Grant Date"), following such election, in
lieu of such Director's annual retainer for service as a director of the Company
(the "Annual Retainer") a grant of Common Stock. The number of shares of Common
Stock that shall be granted to a participating Director will be the number of
whole shares which can be purchased for Thirty Thousand Dollars ($30,000.00)
(the "Share Value") based on the Fair Market Value of the shares on the Grant
Date. Fractional shares shall not be granted. For the purposes of this Plan,
"Fair Market Value" means of the highest and lowest sale price for the Common
Stock as reported on the New York Stock Exchange Composite Transaction Reporting
System on the Grant Date.
D. Adjustment of Share Value -- In the event that there shall be an
increase or decrease in the Annual Retainer, the Share Value shall adjust
automatically so that the ratio between the Annual Retainer and the Share Value
is maintained.
SECTION V
TERMS AND CONDITIONS OF STOCK GRANTS
A. Vesting -- Each grant of Common Stock to a participating Director in
accordance with Section IV shall be vested on the six-month anniversary of the
Grant Date, so long as the Director has served continuously as a director of the
Company during the intervening six-month period; provided, however, that a
participating Director who leaves the Board of Directors of the Company
following the completion of the term of service for which the Director was
elected prior to the end of such six-month period or whose service during such
six-month period was interrupted due to death or disability shall be vested in a
pro rata number of such shares. Except as described in the preceding sentence,
in the event a Director's service to the Company terminates prior to a Change in
Control (as defined in Section VII) and before the shares have vested, then all
shares granted to such Director which have not vested shall be canceled and such
shares shall be forfeited and retransferred to the Company, with the Director
having no further right or interest in such forfeited and retransferred shares.
Notwithstanding anything contained in this Paragraph A to the contrary, in the
event of a Change in Control, all shares previously granted to a Director
pursuant to Paragraph C of Section IV shall immediately vest.
2
<PAGE> 3
B. Restrictions on Transfer -- Shares of Common Stock granted to a
participating Director pursuant to Section IV may not be assigned, transferred,
pledged, hypothecated or otherwise disposed of before they have vested in
accordance with Paragraph A of this Section V.
C. Change in Control Prior to Grant Date -- If (i) in any calendar year
a Change in Control occurs prior to the Grant Date for that calendar year, and
(ii) on or prior to the Grant Date the Common Stock is no longer listed and
registered on a national securities exchange or quoted on the automated
quotation system of a national securities association, in lieu of receiving the
shares of Common Stock the participating Director would otherwise have been
entitled to receive on the Grant Date pursuant to Paragraph C of Section IV, the
participating Director shall be entitled to receive an amount in cash equal to
the then-current Share Value. The cash amount shall be paid to the participating
Director on the earlier of (i) the January 1st immediately following the date on
which the Change in Control occurred and (ii) the date on which the service of
the participating Director as a member of the Board of Directors of the Company
terminates for any reason. If (i) in any calendar year a Change in Control
occurs prior to the Grant Date for that calendar year, and (ii) on the Grant
Date the Common Stock is listed and registered on a national securities exchange
or quoted on the automated quotation system of a national securities
association, the shares of Common Stock the participating Director is entitled
to receive on the Grant Date pursuant to Paragraph C of Section IV shall be
vested on the Grant Date. The participating Director shall be entitled to
receive such shares as of the Grant Date notwithstanding that the service of the
Director as a member of the Board of Directors of the Company terminates for any
reason prior to the Grant Date.
SECTION VI
STOCK OPTION GRANTS
A. The Board may, from time to time and upon such terms and conditions
as it may determine, authorize the granting to an Eligible Director of rights to
purchase shares of Common Stock upon the exercise of an option granted pursuant
to this Section VI ("Option Rights"). Notwithstanding anything in this Section
VI or elsewhere in this Plan to the contrary and subject to adjustment as
provided in Section IX, no Director shall be granted Option Rights for more than
3,000 shares of Common Stock during any fiscal year of the Company.
B. Grants of Option Rights awarded pursuant to this Section VI may be
made on any Grant Date to any Eligible Director then serving on the Board and
shall be evidenced by an agreement in such form as shall be approved by the
Board. Each grant shall specify a purchase price per share payable on exercise
of an Option Right (the "Option Price"), which shall not be less than the Fair
Market Value per share of Common Stock on the Grant Date. Each such Option Right
granted under the Plan shall expire not more than 10 years from the Grant Date
and shall be subject to earlier termination as hereinafter provided. Unless
otherwise determined by the Board, such Option Rights shall be subject to the
following additional terms and conditions:
(i) Each grant shall specify the number of shares of Common
Stock to which it pertains subject to the limitation set forth in
Paragraph A of this Section VI.
(ii) Each such Option Right shall become exercisable in full
on such date or dates not less than six months nor more than five years
from the Grant Date, so long as the Director has served continuously as
a director of the Company during the intervening period, and shall
become exercisable in full immediately in the event of a Change in
Control, as defined in Section VII.
(iii) In the event of the termination of service on the Board
by the holder of any such Option Rights other than by reason of
disability or death, the then outstanding Option Rights of such holder
may be exercised to the extent that they would be exercisable on the
date that is six months and one day after the date of such termination
and shall expire six months and one day after such termination, or on
their stated expiration date, whichever occurs first.
3
<PAGE> 4
(iv) In the event of the death or disability of the holder of
any such Option Rights, each of the then outstanding Option Rights of
such holder shall become exercisable in full and may be exercised at
any time within one year after such death or disability, but in no
event after the expiration date of the term of such Option Rights.
(v) If a Director subsequently becomes an employee of the
Company while remaining a member of the Board, any Option Rights held
under the Plan by such individual at the time of such commencement of
employment shall not be affected thereby.
(vi) Option Rights may be exercised by a Director only upon
payment to the Company in full of the Option Price of the shares of
Common Stock to be delivered. Such payment shall be made (a) in cash or
by check acceptable to the Company, (b) by the actual or constructive
transfer to the Company of shares of Common Stock then owned by the
Director for at least six months having a value at the time of exercise
equal to the total Option Price, or (c) by a combination of such
methods of payment. In addition, any grant of Option Rights may provide
for deferred payment of the Option Price from the proceeds of sale
through a bank or broker on a date satisfactory to the Company of some
or all of the shares to which such exercise relates.
(vii) Successive grants may be made to the same Director
whether or not Option Rights previously granted to such Director remain
unexercised.
SECTION VII
CHANGE IN CONTROL
For purposes of this Plan, except as may be otherwise prescribed by the
Board in an agreement evidencing a grant or award made under the Plan, a "Change
in Control" shall mean if at any time any of the following events shall have
occurred:
(i) The Company is merged or consolidated or reorganized into
or with another corporation or other legal person, and as a result of
such merger, consolidation or reorganization less than a majority of
the combined voting power of the then-outstanding securities of such
corporation or person immediately after such transaction are held in
the aggregate by the holders of securities entitled to vote generally
in the election of Directors immediately prior to such transaction;
(ii) The Company sells or otherwise transfers all or
substantially all of its assets to any other corporation or other legal
person, and less than a majority of the combined voting power of the
then-outstanding securities of such corporation or person immediately
after such sale or transfer is held in the aggregate by the holders of
shares of Common Stock immediately prior to such sale or transfer;
(iii)There is a report filed on Schedule 13D or Schedule 14D-1
(or any successor schedule, form or report), each as promulgated
pursuant to the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder, as such statute, rules and
regulations may be amended from time to time (the "Exchange Act"),
disclosing that any person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the
beneficial owner (as the term "beneficial owner" is defined under Rule
13d-3 or any successor rule or regulation promulgated under the
Exchange Act) of securities representing 20% or more of the total votes
relating to the then-outstanding securities entitled to vote generally
in the election of Directors (the "Voting Power");
(iv) The Company files a report or proxy statement with the
Securities and Exchange Commission pursuant to the Exchange Act
disclosing in response to Form 8-K or Schedule 14A (or any successor
schedule, form or report or item therein) that a change in control of
the Company has or may have occurred or will or may occur in the future
pursuant to any then-existing contract or transaction; or
4
<PAGE> 5
(v) If during any period of two consecutive years, individuals
who at the beginning of any such period constitute the Directors cease
for any reason to constitute at least a majority thereof, unless the
election, or the nomination for election by the Company's stockholders,
of each Director first elected during such period was approved by a
vote of at least two-thirds of the Directors then still in office who
were Directors at the beginning of any such period.
Notwithstanding the foregoing provisions of Paragraphs (iii) and (iv)
of this Section VII, a "Change in Control" shall not be deemed to have occurred
for purposes of this Plan (x) solely because (a) the Company; (b) a Subsidiary;
or (c) any Company-sponsored employee stock ownership plan or other employee
benefit plan of the Company either files or becomes obligated to file a report
or proxy statement under or in response to Schedule 13D, Schedule 14D-1, Form
8-K or Schedule 14A (or any successor schedule, form or report or item therein)
under the Exchange Act, disclosing beneficial ownership by it of shares, whether
in excess of 20% of the Voting Power or otherwise, or because the Company
reports that a change of control of the Company has or may have occurred or will
or may occur in the future by reason of such beneficial ownership or (y) solely
because of a change in control of any Subsidiary. For purposes of this Section
VII, a "Subsidiary" means a corporation, company or other entity (i) more than
50 percent of whose outstanding shares or securities (representing the right to
vote generally in the election of directors or other managing authority) are, or
(ii) which does not have outstanding shares or securities (as may be the case in
a partnership, joint venture or unincorporated association), but more than 50
percent of whose ownership interest representing the right generally to make
decisions for such other entity is, now or hereafter, owned or controlled,
directly or indirectly, by the Company.
SECTION VIII
COMPLIANCE WITH LAW AND OTHER CONDITIONS
A. Restrictions Upon Grant of Common Stock -- The listing upon the New
York Stock Exchange, or any other stock exchange, or the registration or
qualification under any federal or state law of any shares of Common Stock that
may be subject to grants or awards pursuant to the Plan may be necessary or
desirable as a condition of, or in connection with, such grant or award and, in
any such event, delivery of the certificates for such shares of Common Stock
shall, if the Board, in its sole discretion, shall determine, not be made until
such listing, registration or qualification shall have been completed.
B. Restrictions Upon Resale of Unregistered Stock -- If the issuances
of the shares of Common Stock that have been subject to a grant or award to a
participating Director pursuant to the terms of the Plan are not registered
under the Securities Act of 1933, as amended (the "Act"), pursuant to an
effective registration statement, such Director, if the Board shall deem it
advisable, may be required to represent and agree in writing:
(i) that any shares of Common Stock acquired by such Director
pursuant to the Plan will not be sold, except pursuant to an effective
registration statement under the Act or pursuant to an exemption from
registration under the Act, and
(ii) that such Director is acquiring such shares of Common
Stock for his own account and not with a view to the distribution
thereof.
SECTION IX
ADJUSTMENT
The number of shares of Common Stock of the Company reserved for grants
under the Plan, the maximum number of shares specified in Paragraph A of Section
VI, the number of shares of Common Stock covered by outstanding Option Rights,
and the Option Price and kind of shares specified therein, shall be subject to
adjustment by the Board to reflect any stock split, stock dividend,
recapitalization, merger, consolidation, reorganization, combination or exchange
of shares or similar event.
5
<PAGE> 6
SECTION X
MISCELLANEOUS PROVISIONS
A. Nothing in the Plan shall be construed to give any Director of the
Company any right to a grant of Common Stock or award of Option Rights under the
Plan unless all conditions described within the Plan are met as determined in
the sole discretion of the Board.
B. Neither the Plan, nor the granting of Common Stock or award of
Option Rights nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain a Director for any period of time. Nothing in the Plan shall
in any manner be construed to limit in any way the right of the Company or its
stockholders to reelect or not reelect or renominate or not renominate a
participating Director.
C. Any shares of Common Stock of the Company issued as a stock
dividend, or as a result of stock splits, combinations, exchanges of shares,
reorganizations, mergers, consolidations or otherwise with respect to shares of
Common Stock granted pursuant to Section IV of the Plan shall have the same
status and be subject to the same restrictions as the shares granted.
D. The costs and expenses of administering the Plan shall be borne by
the Company and not charged to any grant of Common Stock or Option Right nor to
any participating Director.
E. The Company may make such provisions and take such steps as it may
deem necessary or appropriate for the withholding of any taxes which the Company
is required by any law or regulation of any governmental authority, whether
federal, state or local, to withhold in connection with any event or action
under the Plan.
SECTION XI
AMENDMENT
The Board may suspend or terminate the Plan at any time. In addition,
the Board may, from time to time, amend the Plan in any manner; provided
however, that the Board shall not amend Paragraph B of Section III to increase
the total number of shares of Common Stock that may be granted under the Plan
without the approval of the Company's stockholders. Notwithstanding the
foregoing (i) an adjustment increasing the total number of shares of Common
Stock reserved for grants under the Plan pursuant to Section IX shall not
require stockholder approval, and (ii) the suspension, termination or amendment
of the Plan shall not, without the consent of any participant involved,
adversely affect rights under a previous grant of Common Stock or Option Rights.
SECTION XII
GOVERNING LAW
The Plan and all determinations made and actions taken pursuant thereto
shall be governed by the laws of the State of Texas and construed accordingly.
SECTION XIII
APPROVAL BY STOCKHOLDERS
The Plan was approved by the stockholders of the Company on May 22,
1998.
6
<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, 33-90722 and
333-62633) of Aviall, Inc. of our report dated January 27, 1999 appearing on
page F-2 of this Form 10-K.
PricewaterhouseCoopers LLP
Dallas, Texas
March 16, 1999
<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, Jacqueline K. Collier, James E. O'Bannon and Catherine L. Dawson 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 his or her 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, 1998, 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, the undersigned has executed this Power of Attorney
effective as of March 15, 1999.
/s/ Richard J. Schnieders
- -------------------------------------
Richard J. Schnieders
<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, Jacqueline K. Collier, James E. O'Bannon and Catherine L. Dawson 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 his or her 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, 1998, 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, the undersigned has executed this Power of Attorney
effective as of March 15, 1999.
/s/ Donald R. Muzyka
- -------------------------------------
Donald R. Muzyka
<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, Jacqueline K. Collier, James E. O'Bannon and Catherine L. Dawson 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 his or her 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, 1998, 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, the undersigned has executed this Power of Attorney
effective as of March 15, 1999.
/s/ Henry A. McKinnell
- -------------------------------------
Henry A. McKinnell
<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, Jacqueline K. Collier, James E. O'Bannon and Catherine L. Dawson 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 his or her 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, 1998, 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, the undersigned has executed this Power of Attorney
effective as of March 15, 1999.
/s/ Robert G. Lambert
- -------------------------------------
Robert G. Lambert
<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, Jacqueline K. Collier, James E. O'Bannon and Catherine L. Dawson 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 his or her 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, 1998, 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, the undersigned has executed this Power of Attorney
effective as of March 15, 1999.
/s/ Bruce N. Whitman
- -------------------------------------
Bruce N. Whitman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AVIALL,
INC.'S ANNUAL 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH ANNUAL 1998 FORM 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,136
<SECURITIES> 0
<RECEIVABLES> 62,632
<ALLOWANCES> 3,275
<INVENTORY> 84,078
<CURRENT-ASSETS> 156,094
<PP&E> 40,432
<DEPRECIATION> 30,101
<TOTAL-ASSETS> 304,646
<CURRENT-LIABILITIES> 80,177
<BONDS> 32,000
0
0
<COMMON> 202
<OTHER-SE> 168,387
<TOTAL-LIABILITY-AND-EQUITY> 304,646
<SALES> 400,032
<TOTAL-REVENUES> 400,032
<CGS> 299,017
<TOTAL-COSTS> 299,017
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,681
<INCOME-PRETAX> 29,561
<INCOME-TAX> (32,175)
<INCOME-CONTINUING> 61,736
<DISCONTINUED> 2,821
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64,557
<EPS-PRIMARY> 3.37
<EPS-DILUTED> 3.32
</TABLE>
