<PAGE>
<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1997
[ ] 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 0-23764
KELLSTROM INDUSTRIES, INC.
--------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3753725
- -------- ------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
14000 N.W. 4TH ST., SUNRISE, FLORIDA 33325
- ------------------------------------- --------
(Address of principal executive offices) Zip Code
(954) 845-0427
- --------------
(Issuer's telephone number)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES X NO
---- ----
State the number of shares of common stock outstanding as of August 8,
1997: 7,878,774 shares.
Transitional Small Business Disclosure Format (check one):
YES NO X
---- ----
<PAGE>
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KELLSTROM INDUSTRIES, INC.
QUARTERLY REPORT FORM 10-QSB
INDEX
Page
----
PART I
------
Item 1 - Financial Statements:
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Earnings 4
Consolidated Condensed Statements of Cash Flows 6
Notes to Consolidated Condensed Financial Statements 8
Pro Forma Consolidated Condensed Statements of Earnings 12
Item 2 - Management's Discussion and Analysis of 17
Financial Condition and Results of Operations
PART II
-------
Item 6 - Exhibits and Reports on Form 8-K 21
Signatures 21
2
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ITEM I FINANCIAL STATEMENTS
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 3,899,970 $ 154,254
Trade receivables, net of allowances for returns and
doubtful accounts of $179.851 and $150.000
in 1997 and 1996 respectively 7,648,486 4,023,298
Inventory 43,904,873 15,723,370
Prepaid expenses and other current assets 1,335,292 588,286
Deferred tax asset 500,351 57,176
Investment in securities 729,286 1,829,532
------------ ------------
Total current assets $ 58,018,258 $ 22,375,916
Property, plant and equipment, net 3,056,993 2,943,077
Intangible assets, net 17,216,432 3,618,862
Deferred tax asset 170,939 306,079
Other assets 3,050,879 376,791
------------ ------------
Total Assets $ 81,513,501 $ 29,620,725
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term notes payable $ 16,137,836 $ 5,157,302
Current maturities of long-term debt 123,402 211,068
Accounts payable 1,605,537 1,651,405
Accrued expenses 2,514,599 1,290,393
Income taxes payable 489,959 157,212
Deferred tax liability 71,990 173,379
------------ ------------
Total current liabillties $ 20,943,323 $ 8,640,759
Long-term debt, less current maturities 16,015,245 2,819,225
------------ ------------
Total Liabilities $ 36,958,568 $ 11,459,984
Stockholders' Equity:
Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
7,852,081 shares and 3,315,308 shares issued
and outstanding in 1997 and 1996 respectively 7,852 3,315
Additional paid-in capital 38,164,973 14,871,559
Retained earnings 6,613,224 3,012,642
Net unrealized gain (loss) on investment securities, net (231,116) 273,225
------------ ------------
Total Stockholders' Equity $ 44,554,933 $ 18,160,741
------------ ------------
Total Liabilities and Stockholders' Equity $ 81,513,501 $ 29,620,725
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
3
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<PAGE>
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
------------------------------
1997 1996
----------- ------------
<S> <C> <C>
Net revenues $ 17,949,910 $ 5,917,832
Cost of goods sold (11,807,639) (3,630,968)
Selling, general and administrative expenses (1,914,440) (729,330)
Depreciation and amortization (351,279) (110,631)
------------ ------------
Operating income $ 3,876,552 $ 1,446,903
Interest expense, net of interest income (791,764) (136,033)
------------ ------------
Income before income taxes $ 3,084,788 $ 1,310,870
Income taxes (1,143,574) (482,461)
------------ ------------
Net income $ 1,941,214 $ 828,409
============ ============
Net income per share $ 0.22 $ 0.13
============ ============
Weighted average number of common shares outstanding 9,036,639 8,050,454
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
4
<PAGE>
<PAGE>
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net Revenues $ 34,415,983 $ 11,188,827
Cost of goods sold (22,534,624) (7,112,983)
Selling, general and administrative expenses (3,684,769) (1,477,431)
Depreciation and amortization (640,158) (215,496)
------------ ------------
Operating income $ 7,556,432 $ 2,382,917
Interest expense, net of interest income (1,827,622) (252,007)
------------ ------------
Income before income taxes $ 5,728,810 $ 2,130,910
Income tax (2,128,228) (785,794)
------------ ------------
Net income $ 3,600,582 $ 1,345,116
============ ============
Net income per share $ 0.42 $ 0.23
============ ============
Weighted average number of common shares outstanding 9,208,297 8,050,454
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements
5
<PAGE>
<PAGE>
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------------
1997 1996
------------ ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,600,582 $ 1,345,116
------------ ------------
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization $ 640,158 $ 203,623
Amortization of deferred financing costs 402,586 11,873
Deferred income taxes (114,519) 23,188
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables, net (2,003,524) 1,006,444
Increase in inventory (905,642) (2,422,167)
Decrease (increase) in prepaid expenses and other current assets 385,394 (271,574)
(Increase) decrease in other assets (212,266) 31,770
Decrease in accounts payable (1,576,654) (618,707)
Decrease in accrued expenses (1,126,074) (300,797)
Increase (decrease) in income taxes payable 332,747 (359,894)
------------ ------------
Net cash used in operating activities $ (577,212) $ (1,351,125)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of IASI assets $(25,053,141) --
Sale of investment securities 301,000 --
Purchase of property, plant and equipment (220,107) $ (788,844)
------------ ------------
Net cash used in investing activities $(24,972,248) $ (788,844)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments)/borrowings under line of credit agreements $ (3,098,264) $ 2,030,000
Debt proceeds 21,000,000 501,221
Debt repayment, including capital lease obligations (7,891,646) (372,271)
Common stock issued 20,794,370 --
Loans to corporate directors (200,000) --
Deferred financing costs (1,309,284) (24,375)
------------ ------------
Net cash provided by financing activities $ 29,295,176 $2,134,575
------------ ------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS $ 3,745,716 $ (5,394)
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 154,254 210,871
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 3,899,970 $ 205,477
============ ============
</TABLE>
(continued)
See accompanying notes to consolidated condensed financial statements
6
<PAGE>
<PAGE>
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Supplemental disclosures of non-cash investing and financing activities:
IASI assets acquired for warrants $ 1,173,134 $ --
=========== ===========
Deferred financing costs paid through the issuance of warrants $ 1,530,446 $ --
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 882,061 $ 194,301
=========== ===========
Income taxes $ 1,905,285 $ 1,128,500
=========== ===========
Supplemental disclosures of purchase of IASI assets, net of liabilities:
Cash $ 36,709
Receivables 1,621,664
Inventory 27,275,861
Prepaid expenses and other current assets 1,132,700
Property, plant and equipment 74,865
Goodwill 14,055,172
Other assets 26,177
-----------
Total assets $44,222,848
===========
Accrued expenses $ 2,350,280
Accounts payable 1,530,786
Notes payable 14,078,798
-----------
Total liabilities $17,959,864
===========
Net acquisition cost $26,262,984
Less warrants issued to seller 1,173,134
-----------
Cash paid to seller at closing $25,089,850
Less cash acquired 36,709
-----------
Net cash used in acquisition $25,053,141
===========
</TABLE>
See accompanying notes to consolidated condensed financial statements
7
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<PAGE>
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission ("SEC"). The
condensed balance sheet as of December 31, 1996 has been derived from
audited financial statements. Certain information and footnote
disclosures, normally included in financial statements prepared in
accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to such rules and regulations of the SEC.
These consolidated condensed financial statements should be read in
conjunction with the financial statements and notes thereto included in
the Company's latest annual report on Form 10-KSB.
In the opinion of management of the Company, the consolidated condensed
financial statements reflect all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the consolidated
condensed financial position of Kellstrom Industries, Inc. as of June 30,
1997, and the consolidated condensed results of earnings for the three and
six month periods ended June 30, 1997 and 1996 and the consolidated
condensed statements of cash flows for the six month periods ended
June 30, 1997 and 1996. The results of operations for such interim periods
are not necessarily indicative of the results for the full year.
NOTE 2 - ACQUISITION
On January 15, 1997, the Company through its 100% subsidiary, IASI, Inc.,
completed the acquisition of substantially all of the assets and assumed
certain of the liabilities of International Aircraft Support, L.P.
("IASI"), a California limited partnership, for a cash purchase
consideration of $25.1 million and issued warrants, with an expiration
date of two years from January 15, 1997, to purchase 500,000 shares of the
Company's Common Stock, par value $.001 per share (the "Common Stock") at
$9.25 per share. The acquisition was financed through the issuance of $15
million in senior subordinated debt and warrants, along with the proceeds
of a $6 million subordinated bridge loan and warrants ("Bridge Loan") with
the balance from the Company's working capital. The acquisition was
accounted for using the purchase method of accounting for business
combinations. The Company also assumed IASI's existing debt including
IASI's various credit facilities, which provided for credit up to a
maximum of approximately $20 million as of the date of the acquisition.
The Bridge Loan matured on April 15, 1997 and was paid in full by the
Company. The interest rate on the Bridge Loan was 10% and, additionally,
85,625 warrants that are exercisable at $10 and expire on April 15, 2000
were issued to the Bridge Loan lenders. The interest rate on the $15
million senior subordinated debt is 11.75%, payable semi-annually.
Additionally, 305,660 warrants were issued to this lender, such warrants
are exercisable at $10 and expire on January 15, 2004. Principal on this
debt is payable in three equal annual installments beginning January 15,
2002.
NOTE 3 - STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of preferred stock
with such designations, voting and other rights and preferences as may be
determined from time to time by the Board of Directors.
The Company is authorized to issue 20,000,000 shares of Common Stock. At
June 30, 1997 and December 31, 1996, the Company had 7,852,081 and
3,315,308 shares of Common Stock outstanding respectively.
On January 17, 1997, the Company's Board of Directors declared a dividend
of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock. Each right entitles the registered holder to
purchase from the Company one one-hundredth of a share a Series A Junior
Participating Cumulative Preferred Stock ("Series A Preferred Stock") at
an exercise price of $80.
The Rights are not exercisable, or transferable apart from the Common
Stock, until the earlier to occur of (i) ten days following a public
announcement that a person or group of affiliated or associated persons
have acquired beneficial ownership of more than 19% of the outstanding
Common Stock of the Company (such person being referred to as an
"Acquiring Person") or (ii) ten business days (or such later date, as
defined) following the commencement of, or announcement of an intention to
make, a tender offer or exchange offer, the consummation of which would
result in the beneficial ownership by a person or group of 19% or more of
the outstanding Common Stock of the Company. In the event that any person
or group of affiliated or associated persons
8
<PAGE>
<PAGE>
becomes an Acquiring Person, each holder of a Right, other than Rights
beneficially owned by the Acquiring Person and transferees of the
Acquiring Person (which will thereafter be void), will thereafter have the
right to receive upon exercise such number of one-hundredths of a share of
Series A Preferred Stock as shall equal the result obtained by (x)
multiplying the then current exercise price by the number of
one-hundredths of a share of Series A Preferred Stock for which a Right is
then exercisable and dividing that product by (y) 50% of the then current
per share market price of the Company's common stock. Furthermore, if the
Company enters into a consolidation, merger, or other business
combination, as defined, each Right would entitle the holder upon exercise
to receive, in lieu of shares of Series A Preferred Stock, that number of
shares of common stock of the acquiring company having a value of two
times the exercise price of the Right, as defined. The Rights contain
antidilutive provisions, are redeemable at the Company's option, subject
to certain restrictions, for $.01 per Right, and expire on January 14,
2007.
As a result of the Rights dividend, the Board designated 200,000 shares of
preferred stock as Series A Preferred Stock. Series A Preferred
Stockholders will be entitled to a preferential cumulative quarterly
dividend of the greater of $1.00 per share or 100 times the per share
dividend declared on the Company's Common Stock. The Series A Preferred
Stock has a liquidation preference, as defined. In addition, each share
will have 100 votes and will vote together with the shares of Common Stock
of the Company.
At June 30, 1997 and December 31, 1996, the Company had 1,332,530 and
4,576,510 warrants outstanding respectively. On February 4, 1997 the
Company called its publicly traded warrants (the "Public Warrants")
pursuant to their terms. There were 4,166,510 Public Warrants outstanding
at December 31, 1996. The Company received proceeds of $22,961,950 from
the exercise of Public Warrants during the period from October 1, 1996 to
March 21, 1997.
At June 30, 1997 and December 31, 1996 the Company had 0 and 200,000 unit
purchase options outstanding respectively. Each unit purchase option
entitled the holder to the purchase of one unit for $7.62 per unit. Each
unit consisted of one share of the Company's common stock, $.001 par
value, and two warrants (such warrants are exercisable as previously
defined). These unit purchase options were exercisable commencing on April
11, 1995 and expiring on April 11, 1999. During the second quarter,
pursuant to a negotiated agreement with the Company, 170,000 unit purchase
options were exercised for 351,000 common shares and $0 in proceeds.
NOTE 4 - EARNINGS PER SHARE
Net earnings per common and common equivalent share are computed by
dividing net earnings by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
assume the exercise of all dilutive stock options and warrants. Primary
and fully diluted earnings per common and common equivalent share are
essentially the same. 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.
9
<PAGE>
<PAGE>
NOTE 5 - ACCOUNTING PRONOUNCEMENTS
In February 1997, Statement of Financial Accounting Standard (SFAS)
No. 128, "Earnings per Share" was released and is effective for financial
statements for both interim and annual periods ending after December 15,
1997. Early application of this Statement is not permitted. Subsequent to
the effective date, all prior-period earnings per share data presented
will be restated to conform with the provisions of this Statement. The
following presents the pro forma earnings per share amounts computed using
this Statement.
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Basic EPS $ .26 $ .29
Diluted EPS $ .22 $ .17
</TABLE>
<TABLE>
<CAPTION>
For the Three Month Period Ended
June 30, 1997
--------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net Income $1,941,214
Basic EPS
Income available to
common stockholders $1,941,214 7,558,921 $ .26
Effect of Dilutive Securities
Warrants 722,155
Options 666,203
Diluted EPS
Income available to
common stockholders
+ assumed conversions $1,941,214 8,947,279 $ .22
</TABLE>
<TABLE>
<CAPTION>
For the Three Month Period Ended
June 30, 1996
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net Income $ 828,409
Basic EPS
Income available to
common stockholders $ 828,409 2,881,818 $ .29
Effect of Dilutive Securities
Warrants 1,688,427
Options 80,811
Unit Purchase Options 137,565
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 828,409 4,788,621 $ .17
</TABLE>
10
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Basic EPS $ .53 $ .47
Diluted EPS $ .42 $ .31
</TABLE>
<TABLE>
<CAPTION>
For the Six Month Period Ended
June 30, 1997
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net Income $ 3,600,582
Basic EPS
Income available to
common stockholders $ 3,600,582 6,758,977 $ .53
Effect of Dilutive Securities
Warrants 859,272
Options 793,174
Unit Purchase Options 140,568
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 3,600,582 8,551,991 $ .42
</TABLE>
<TABLE>
<CAPTION>
For the Six Month Period Ended
June 30, 1996
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Net Income $ 1,345,116
Basic EPS
Income available to
common stockholders $ 1,345,116 2,881,818 $ .47
Effect of Dilutive Securities
Warrants 1,351,967
Options 64,161
Unit Purchase Options 111,518
Diluted EPS
Income available to common
stockholders + assumed
conversions $ 1,345,116 4,409,464 $ .31
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related
Information" were issued and are effective for fiscal periods beginning
after December 15, 1997 with early adoption permitted. Currently, the
Company is evaluating the effects these Statements will have on its
financial reporting and disclosures.
</TABLE>
11
<PAGE>
<PAGE>
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS - UNAUDITED
Set forth herein is the unaudited consolidated condensed statement of earnings,
for the six month period ended June 30, 1997, and the unaudited pro forma
consolidated condensed statement of earnings, for the six month period ended
June 30, 1996, assuming that the acquisition of substantially all of the assets
and certain liabilities of IASI had been consummated on January 1, 1996. An
unaudited pro forma consolidated condensed statement of earnings for the six
month period ended June 30, 1997 was not deemed necessary as the actual results
for the six month period adequately reflect the operations of the combined
entity for the entire period, since the acquisition was completed on January 15,
1997.
12
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<PAGE>
KELLSTROM INDUSTRIES, INC.
ACTUAL and PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
June 30, 1997 June 30, 1996
Pro Forma
Actual Combined
------------ --------------
<S> <C> <C>
Net Revenues $ 34,415,983 $ 23,720,862
Cost of goods sold (22,534,624) (14,799,815)
Selling, general and administrative expenses (3,684,769) (2,463,096)
Depreciation and amortization (including goodwill) (640,158) (586,530)
------------ ------------
Operating income $ 7,556,432 $ 5,871,421
Interest income (expense) (1,827,622) (1,605,940)
------------ ------------
Income before income taxes $ 5,728,810 $ 4,265,481
Income tax expense (2,128,228) (1,599,554)
------------ ------------
Net income $ 3,600,582 $ 2,665,927
============ ============
Net income per share $ 0.42 $ 0.33
============ ============
Weighted average number of common shares outstanding 9,208,297 8,132,370
============ ============
</TABLE>
See accompanying notes to consolidated condensed
and pro forma consolidated condensed statements of earnings
13
<PAGE>
<PAGE>
KELLSTROM INDUSTRIES, INC.
PRO FORMA COMBINED CONDENSED STATEMENT OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1996
--------------------------------------------------------------------
HISTORICAL PRO FORMA PRO FORMA
KELLSTROM IASI ADJUSTMENTS COMBINED
----------------------------- ------------- ----------------
<S> <C> <C> <C> <C>
Net Revenues $ 11,188,827 $ 12,854,940 $ (322,905) $ 23,720,862
Cost of goods sold (7,112,983) (7,509,029) 248,588 (14,799,815)
(426,391)
Selling, general and administrative expenses (1,477,431) (1,332,403) 346,738 (2,463,096)
Depreciation and amortization (including goodwill) (215,496) (452,391) (345,034) (586,530)
426,391
------------ ------------ ------------ ------------
Operating income $ 2,382,917 $ 3,561,117 $ (72,613) $ 5,871,421
Interest income (expense) (252,007) (576,534) (1,309,249) (1,605,940)
531,850
------------ ------------ ------------ ------------
Income before income taxes $ 2,130,910 $ 2,984,583 $ (850,012) $ 4,265,481
Income tax expense (785,794) 0 (813,760) (1,599,554)
------------ ------------ ------------ ------------
Net income $ 1,345,116 $ 2,984,583 $ (1,663,772) $ 2,665,927
============ ============ ============ ============
Net income per share $ 0.23 $ 0.33
============ ============
Weighted average number of common shares outstanding 8,050,454 8,132,370
============ ============
</TABLE>
See accompanying notes to pro forma
consolidated condensed statement of earnings
14
<PAGE>
<PAGE>
KELLSTROM INDUSTRIES, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS
(Unaudited)
NOTES TO PRO FORMA STATEMENT OF EARNINGS
(A) For purposes of presenting the pro forma
condensed combined statement of earnings,
the following adjustments have been made:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
-------------------
<S> <C>
Increase (decrease) to income:
Decrease in net revenues due to intercompany sales $ (322,905)
Decrease in COGS due to intercompany sales 248,588
Reclassification entry to conform with current Kellstrom presentation (426,391)
Decrease in IASI selling, general and administrative expenses due to the elimination
of pension plan, bonus program and overall consolidation of functions 346,738
Amortization of goodwill related to IASI acquisition (345,034)
Reclassification entry to conform with current Kellstrom presentation 426,391
Interest expense on acquisition debt (1,309,249)
Reduction of bank interest expense - exercise of warrants 531,850
-----------
$ (850,012)
To adjust pro forma tax provision to 37% of income before taxes (813,760)
-----------
Net Adjustment $(1,663,772)
===========
</TABLE>
15
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<PAGE>
KELLSTROM INDUSTRIES, INC.
NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
(B) The following table reconciles net income to the amount used for purposes of
determining net income per share under the modified treasury stock method:
<TABLE>
<CAPTION>
Six Months Ended
June 30
==================================================================================
Actual Pro Forma
1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Net income $3,600,582 $2,665,927
Adjustments to pro forma net income for proceeds
from exercise of common stock equivalents:
Elimination of interest expense (net of tax) 259,319 0
- ----------------------------------------------------------------------------------
Adjusted net income $3,859,901 $2,665,927
Weighted average actual common shares outstanding 6,758,977 6,325,487
Weighted average common stock equivalents outstanding 2,449,320 1,806,883
- ----------------------------------------------------------------------------------
Weighted average shares outstanding 9,208,297 8,132,370
- ----------------------------------------------------------------------------------
Earnings per share $ .42 $ .33
==================================================================================
</TABLE>
16
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following should be read in conjunction with the Company's financial
statements and the related notes thereto included elsewhere herein.
This Report contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the Company's business, financial condition and results of operations. The words
"estimate," "project," "intend," "expect," and similar expressions are intended
to identify forward-looking statements. These forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements, including
those described below. Investors are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. The
Company undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
On January 15, 1997, the Company, through its wholly-owned subsidiary,
IASI, Inc., completed the acquisition of substantially all of the assets and
certain liabilities of IASI for $25.1 million in cash and warrants to purchase
500,000 shares of Common Stock at $9.25 per share. The warrants expire in
January 1999.
On February 4, 1997, the Company called its publicly traded warrants
(the "Public Warrants") pursuant to their terms. There were 4,166,510 Public
Warrants outstanding at December 31, 1996. The Company received proceeds of
$22,961,950 from the exercise of Public Warrants during the period from October
1, 1996 to March 21, 1997.
The Company has only a limited operating history upon which an
evaluation of the Company and its prospects can be based. Although the Company
has historically experienced increasing net sales and operating results, the
Company may experience significant fluctuations in its gross margins and
operating results in the future, both on an annual and a quarterly basis, caused
by various factors, including general economic conditions, specific economic
conditions in the commercial aviation industry, the availability and price of
surplus aviation material, the size and timing of customer orders, returns by
and allowances to customers and the cost of capital to the Company. In a
strategic response to a changing, competitive environment, the Company may elect
from time to time to make certain pricing, product or marketing decisions, and
any such decisions could have a material adverse effect on the Company's
periodic results of operations, including net sales and net income from quarter
to quarter. Therefore, comparisons of recent net sales and operating results of
the Company should not be taken as indicative of the results of operations that
can be expected in the future. There can be no assurance that the net sales and
operating results of the Company will continue at their current levels or will
grow, or that the Company will be able to achieve sustained profitability on a
quarterly or annual basis.
Results of Operations.
The Company reported revenues increased by 203% to $17,949,910 in the
second quarter of 1997, compared with $5,917,832 in last year's second quarter.
Revenues increased by 208% to $34,415,983 in the first half of 1997, compared
with $11,188,827 in the first half of 1996. The increase in net revenues is due
primarily to revenues from the IASI operation coupled with internal growth due
to additional inventory availability as a result of proceeds received from the
exercise of the Public Warrants which were called during the first quarter and
increases in working capital made available from the Company's combined bank
credit facilities.
17
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Also contributing to the increase in net revenues is the expansion of the
Company's sales department, which resulted in sales growth to existing customers
and expansion of the Company's customer base as a result of the IASI
acquisition.
Operating income increased by 168% to $3,876,552 in the second quarter
of 1997, compared with $1,446,903 in last year's second quarter. Operating
income increased by 217% to $7,556,432 in the first half of 1997, compared with
$2,382,917 in the first half of 1996.
Net income in the second quarter of 1997 increased by 134% to
$1,941,214, or $0.22 per common share, compared with $828,409, or $0.13 per
common share, in the second quarter of 1996. In the first half of 1997, net
income increased by 168% to $3,600,582, or $0.42 per common share, compared with
$1,345,116, or $0.23 per common share, in the first half of 1996.
Gross margins increased by 169% to $6,142,271 in the second quarter of
1997, compared with $2,286,864 in last year's second quarter. Gross margins
increased by 192% to $11,881,359 in the first half of 1997, compared with
$4,075,844 in the first half of 1996. Gross margins, as a percentage of net
revenue, were slightly lower in 1997 due to unusually high gross margins during
the second quarter of 1996, resulting in margins of 34.5% for the first six
months of 1997 compared with 36.4% for the corresponding period in 1996.
Total selling, general and administrative expenses increased to
$1,914,440 and $3,684,769 for the three and six month periods ended June 30,
1997 respectively, from $729,330 and $1,477,431 for the year ago periods, but
significantly decreased as a percentage of net revenues for both periods. The
increase in these expenses was primarily the result of 1) expenses related to
the continuing operations of IASI, 2) continued expansion of the Company's sales
and warehouse operations in order to support a higher level of revenue and a
corresponding greater number of whole engine and engine component transactions
and 3) the addition of marketing and management personnel necessary to achieve
and administer the revenue growth opportunities that are available due to the
Company's expanded level of inventory investment. Additionally, the integration
of the Kellstrom and IASI businesses is complete and the increased synergies
from the acquisition should continue and contribute to overhead reduction as a
percentage of net revenues for the remainder of 1997.
Depreciation and amortization expense increased to $351,279 and $640,158
for the three and six month periods ended June 30, 1997 respectively, from
$110,631 and $215,496 for the year ago periods, and remained essentially flat as
a percentage of net revenues for both periods. The increase in depreciation and
amortization is primarily the result of amortization of goodwill related to the
IASI acquisition, as well as purchases of property, plant and equipment since
June 30, 1996.
Interest expense (net of interest income) increased to $791,764 and
$1,827,622 for the three and six month periods ended June 30, 1997 respectively,
from $136,033 and $252,007 for the year ago periods due to interest expense
and related costs from the $21 million of debt related to the acquisition of
IASI, as well as, interest expense related to the existing debt of IASI.
Further increases in interest expense can be anticipated during the remainder
of 1997 as the Company expects to continue to expand its inventory levels and
facilities to support future growth in operations and to the extent the Company
expects to complete acquisitions funded by debt. There can be no assurance,
however, that the Company's operations will expand or that it will complete
any material acquisitions.
18
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<PAGE>
Net income per share is reported based upon the weighted average of the
common shares outstanding along with the inclusion of the effect of the dilutive
securities outstanding during the periods using the modified treasury stock
method in accordance with generally accepted accounting principles. The effect
of this is to increase the weighted average number of common shares outstanding
from 7,558,921 to 9,036,639 for the three months ended June 30, 1997, from
6,758,977 to 9,208,297 for the six months ended June 30, 1997, and from
2,881,818 to 8,050,454 shares for the three and six months ended June 30, 1996.
This increase to the number of common shares deemed outstanding was due to the
Company's outstanding options and warrants to purchase shares of common stock
having an exercise price of less than the market price which were, therefore,
deemed outstanding.
Liquidity and Capital Resources.
The Company's working capital was $37,074,935 as of June 30, 1997, an
increase of $23,339,778 since December 31, 1996. The principal reasons for the
increase in working capital were the increase in inventories stemming from both
internal growth and the acquisition of IASI, coupled with the increase in cash
resulting from the exercise of the Company's Public Warrants.
Total debt at June 30, 1997 was $32,276,483, compared with $8,187,595 at
December 31, 1996. The Company had contractual lines of credit totaling
$55,000,000 at June 30, 1997, of which $19,150,604 million was unused and
available.
Cash flow used in operating activities in the first six months of 1997
was $577,212, compared with $1,351,125 in the same period last year. The
decrease resulted primarily from higher net income for the period, offset by an
increase in cash required for working capital due mainly to an increase in
accounts receivable. The primary sources of funds utilized by the Company were
from certain debt proceeds and the exercise of the Company's Public Warrants.
The primary uses of funds were for the purchase of all assets and certain
liabilities of IASI ($25,053,141) and financing costs associated with the
acquisition ($1,309,284).
The Company's acquisition of IASI was primarily financed through the
issuance of $15,000,000 in senior subordinated debt (the "Senior Debt") and
warrants, as well as the proceeds of a $6,000,000 subordinated bridge loan
("Bridge Loan") and warrants with the balance from the Company's working
capital. The Company also assumed IASI's existing debt, including various credit
facilities with Union Bank of California ("Union Bank") secured by IASI's
assets, which facilities provided for credit of up to a maximum of approximately
$20,000,000 as of the date of the acquisition. The amount of credit outstanding,
as of the date of acquisition and June 30, 1997 was $14,078,798 and $0
respectively. Interest on the credit facilities accrued daily and ranged from
.50% to 1.00% above Union Bank's prime rate, and was payable monthly.
The Senior Debt is held by The Equitable Life Assurance Society of the
United States ("Equitable"). The interest rate on the Senior Debt is 11.75% per
annum, payable semi-annually. Additionally, warrants to purchase 305,660 shares
of Common Stock were issued to Equitable. The warrants are exercisable at $10
per share and expire on January 15, 2004. Principal on this debt is payable in
three equal installments beginning January 15, 2002. An advance principal
payment of up to $3,750,000 is permitted (along with a prepayment penalty of 1%)
prior to December 31, 1998 from the proceeds of the exercise of the Company's
Public Warrants. It is management's current intention that such an advance
payment will be made during this advance payment period. Moreover, the Company
may, at its option, redeem up to $4,500,000 (along with a prepayment penalty of
1%) of principal amount of Senior Debt concurrently or within five days after
the occurrence of any public offering of the Company's Common Stock as long as
the principal balance of the debt is not reduced below $10,500,000. The balance
due at June 30, 1997 on the Senior Debt was $15,000,000.
19
<PAGE>
<PAGE>
The Bridge Loan was due April 15, 1997 and was paid in full on that
date. In connection with the Bridge Loan, the Company issued warrants to
purchase 85,625 shares of Common Stock at an exercise price of $10 per share,
exercisable until three years from the repayment of the Bridge Loan.
On April 24, 1997, in order to modify and consolidate its current credit
facilities, the Company entered into a $55 million revolving loan agreement with
Barnett Bank, N.A. The loan, which bears interest at .25% below the bank's prime
rate (which was 8.25% at April 24, 1997), is due on April 24, 1998. On April 28,
1997, utilizing funds from the new facility, the Company paid $13,640,774 to
fully satisfy the existing credit lines outstanding with Union Bank. The new
loan agreement is secured by substantially all of the Company's assets.
The $1,015,245 first mortgage (including a $750,000
construction/mortgage loan) held by BankAtlantic and secured by the Company's
office and warehouse facilities remains in place. The interest on the mortgage
is 10.49% per annum. Principal and interest are payable in monthly installments
of $20,238. Principal is amortized over a ten-year period with a final payment
of $20,238 due May 2005.
The Company entered into certain short-term engine leases during 1996
and acquired certain other engines under lease as part of the IASI acquisition.
The Company continues to believe this activity should allow it to liquidate the
remaining maintenance value of jet engines on a profitable basis by realizing
both rental income as well as maintenance reserve fees charged to the Company's
engine lease customers for their utilization of such engines. Upon the full
consumption of the remaining maintenance value in each engine, the Company will
evaluate the engine's condition in order to determine if such engine should be
refurbished or should be disassembled into piece parts in support of the
Company's parts supply business. These leases are accounted for as operating
leases.
The Company's management believes that cash flow from operations, and
cash that became available as a result of the exercise of the publicly traded
warrants, combined with the Company's borrowing facilities should be sufficient
for the Company's current level of operations.
The Company plans to take advantage of growth opportunities that are
consistent with the Company's expansion and profit objectives. These growth
opportunities will require the investment of cash into inventories of jet
engines and jet engine parts. Greater availability of such inventories will
better enable the Company to continue to increase its revenues as well as to
encourage the development of strategic relationships with new customers. The
Company intends to finance its inventory expansion program through its current
credit facilities and through the employment of its cash flows along with the
management of trade credits. In the future, the Company may require additional
sources of capital to continue to fund its expansion.
20
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<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
(1) Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the second
quarter of 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 11, 1997 KELLSTROM INDUSTRIES, INC.
(Registrant)
/ s / John S. Gleason
--------------------------------
John S. Gleason
Executive Vice President
Chief Financial Officer
and Treasurer
21
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
KELLSTROM INDUSTRIES, INC. BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE
PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<PERIOD-TYPE> 6-MOS
<CASH> 3,900
<SECURITIES> 729
<RECEIVABLES> 7,648
<ALLOWANCES> 0
<INVENTORY> 43,905
<CURRENT-ASSETS> 58,018
<PP&E> 3,462
<DEPRECIATION> 405
<TOTAL-ASSETS> 81,514
<CURRENT-LIABILITIES> 20,943
<BONDS> 0
<COMMON> 8
0
0
<OTHER-SE> 44,547
<TOTAL-LIABILITY-AND-EQUITY> 81,514
<SALES> 34,416
<TOTAL-REVENUES> 34,416
<CGS> 22,535
<TOTAL-COSTS> 26,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,828
<INCOME-PRETAX> 5,729
<INCOME-TAX> 2,128
<INCOME-CONTINUING> 3,601
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,601
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.42
</TABLE>
