<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] 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 registrant 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
--------------
(Registrant's telephone number, including area code)
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 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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date: 11,761,431 shares of
common stock, $.001 par value per share, were outstanding as of October 31,
1998.
<PAGE> 2
KELLSTROM INDUSTRIES, INC.
--------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
PART I
------
<S> <C>
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Earnings 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
PART II
-------
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities and Use of Proceeds 20
Item 3 - Defaults Upon Senior Securities 20
Item 4 - Matters Submitted to a Vote of Security Holders 20
Item 5 - Other Information 20
Item 6 - Exhibits and Reports on Form 8-K 26
</TABLE>
<PAGE> 3
ITEM 1. Financial Statements.
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1998 Dececember 31, 1997
------------------ -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 895,054 $ 462,676
Trade receivables, net of allowances for returns and
doubtful accounts of $2,141,297 and $335,786 in 1998
and 1997, respectively 18,227,052 10,189,082
Notes receivable -- 2,475,856
Inventories 93,922,554 35,965,376
Prepaid expenses and other current assets 3,973,801 3,178,391
Deferred tax assets 2,105,699 636,115
Investments in securities -- 425,759
------------- -------------
Total current assets 119,124,160 53,333,255
Equipment under operating leases, net 117,762,431 39,932,388
Property, plant and eqipment, net 10,792,123 5,027,096
Goodwill, net 64,584,775 29,775,709
Other assets 10,243,551 6,293,050
------------- -------------
Total Assets $ 322,507,040 $ 134,361,498
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term notes payable $ 2,324,368 $ 6,759,013
Current maturities of long-term debt -- 1,079,787
Account payable 12,715,564 6,183,762
Accrued expenses 9,007,087 4,996,963
------------- -------------
Total current liabilities 24,047,019 19,019,525
Long-term debt, less current maturities 13,395,920 11,250,000
Convertible subordinated notes 140,250,000 54,000,000
Deferred tax liabilities 2,962,141 180,053
------------- -------------
Total Liabilites 180,655,080 84,449,578
Stockholders' Equity:
Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued -- --
Common stock, $.001 par value; 50,000,000 shares authorized;
11,761,431 and 7,879,356 shares issued and
outstanding in 1998 and 1997, respectively 11,761 7,879
Additional paid-in capital 118,852,119 39,027,053
Retained earnings 24,381,152 11,555,161
Loans receivable from directors and officers (1,393,072) (362,415)
Unrealized loss on investments securities, net -- (315,758)
------------- -------------
Total Stockholders' Equity 141,851,960 49,911,920
------------- -------------
Total Liabilities and Stockholders' Equity $ 322,507,040 $ 134,361,498
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales of aircraft and engine parts, net $ 42,750,180 $ 18,126,646 $ 98,263,721 $ 50,235,693
Rental revenues 10,056,337 2,225,795 21,696,484 4,532,731
------------- ------------- ------------- -------------
Total revenues 52,806,517 20,352,441 119,960,205 54,768,424
Cost of goods sold (28,607,924) (11,674,498) (65,601,702) (32,709,613)
Depreciation of equipment under operating leases (5,653,955) (1,446,767) (11,818,038) (2,946,276)
Selling, general and administrative expenses (5,082,717) (2,310,679) (12,837,670) (5,995,448)
Depreciation and amortization (886,938) (345,382) (2,148,240) (985,540)
------------- ------------- ------------- -------------
Total operating expenses (40,231,534) (15,777,326) (92,405,650) (42,636,877)
Operating income 12,574,983 4,575,115 27,554,555 12,131,547
Interest expense (2,880,481) (941,360) (7,421,709) (2,917,914)
Interest income 184,935 106,844 322,275 255,776
------------- ------------- ------------- -------------
Income before income taxes 9,879,437 3,740,599 20,455,121 9,469,409
Provision for income taxes (3,676,120) (1,413,947) (7,629,130) (3,542,175)
------------- ------------- ------------- -------------
Net income $ 6,203,317 $ 2,326,652 $ 12,825,991 $ 5,927,234
============= ============= ============= =============
Earnings per common share - basic $ 0.53 $ 0.30 $ 1.34 $ 0.83
============= ============= ============= =============
Earnings per common share - diluted $ 0.42 $ 0.25 $ 1.06 $ 0.67
============= ============= ============= =============
Weighted average number of common
shares outstanding - basic 11,646,801 7,850,976 9,553,238 7,122,903
============= ============= ============= =============
Weighted average number of common
shares outstanding - diluted 17,698,307 9,300,180 14,131,293 8,801,313
============= ============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE> 5
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,825,991 $ 5,927,234
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,148,240 985,540
Depreciation of equipment under operating leases 11,818,038 2,946,276
Amortization of deferred financing costs 948,508 537,347
Purchase of equipment under operating leases (79,533,864) (32,315,000)
Deferred income taxes 31,888 (68,158)
Other 561,683 --
Changes in operating assets and liabilities:
(Increase) decrease in trade receivables, net (2,013,983) 912,940
(Increase) decrease in inventory (18,912,522) 25,207,335
(Increase) decrease in prepaid expenses and other current assets 1,709,999 (1,096,919)
Increase in other assets (341,659) (67,702)
Increase in accounts payable 830,296 447,798
(Decrease) increase in accrued expenses 862,688 (2,122,506)
Increase in income taxes payable 2,512,622 212,314
------------- -------------
Net cash provided by (used in) operating activities (66,552,075) 1,506,499
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of IASI assets, net of cash acquired -- (25,053,141)
Purchase of Aero Support assets, net of cash acquired -- (2,656,289)
Purchase of ITC assets, net of cash acquired (20,519,903) --
Purchase of Aerocar assets, net of cash acquired (42,341,684) --
Proceeds from the sale of investment securities 812,553 406,350
Purchases of property, plant and equipment (5,790,465) (404,314)
Other (284,890) --
------------- -------------
Net cash used in investing activities (68,124,389) (27,707,394)
------------- -------------
Net borrowings (repayments) under line of credit agreements (5,150,390) 3,547,019
Proceeds from the issuance of debt -- 21,000,000
Debt repayment, including capital lease obligations (19,909,307) (16,920,143)
Proceeds from the issuance of common stock 77,522,522 20,794,371
Proceeds from the issuance of convertible subordinated notes 86,250,000 --
Proceeds from the exercise of options and warrants 909,463 --
Net borrowings for loans receivable (1,030,657) (362,415)
Payment of deferred financing costs (3,482,789) (1,309,284)
------------- -------------
Net cash provided by financing activities 135,108,842 26,749,548
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 432,378 548,653
------------- -------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 462,676 154,254
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 895,054 $ 702,907
============= =============
</TABLE>
(continued)
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------ --------------
<S> <C> <C>
Supplemental disclosures of non-cash investing and financing activities:
IASI assets acquired for warrants $ -- $ 1,173,134
============ ============
Aero Support assets acquired for warrants $ -- $ 680,058
============ ============
Aerocar assets acquired for warrants $ 1,405,000 $ --
============ ============
Deferred financing costs paid through the issuance of warrants $ -- $ 1,530,446
============ ============
Net transfer of equipment under operating leases to inventories $ 13,367,938 $ 19,903,968
============ ============
Unrealized gain/(loss) on investment securities, net $ 315,758 $ (326,856)
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 4,752,586 $ 2,166,546
============ ============
Income taxes $ 3,676,680 $ 3,394,999
============ ============
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 1,132,400
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>
(continued)
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 7
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Supplemental disclosures of purchase of Aero
Support assets, net of liabilities:
Cash $ 426,929
Receivables 2,152,064
Inventory 5,091,063
Prepaid expenses and other current assets 359,253
Property, plant and equipment 37,926
Goodwill 13,198,554
Intangible - Non-compete agreement 1,080,000
Other assets 4,014
-----------
Total assets $22,349,803
===========
Accrued expenses $ 238,803
Accounts payable 3,161,320
Notes payable 3,498,537
-----------
Total liabilities $ 6,898,660
===========
Net acquisition cost 15,451,143
Less warrants issued to sellers 680,058
Less notes payable to sellers 11,687,867
-----------
Cash paid to sellers at closing 3,083,218
Less cash acquired 426,929
-----------
Net cash used in acquisition $ 2,656,289
===========
Supplemental disclosures of purchase of ITC assets,
net of liabilities:
Cash $ 841,012
Receivables 6,095,225
Inventory 16,815,078
Prepaid expenses and other current assets 29,553
Engines under operating leases 4,594,456
Property, plant and equipment 33,121
Goodwill 5,440,340
Other assets 119,171
-----------
Total assets $33,967,956
===========
Accrued expenses $ 3,147,436
Accounts payable 3,109,605
Notes payable 6,350,000
-----------
Total liabilities $12,607,041
===========
Net acquisition cost 21,360,915
Less cash acquired 841,012
-----------
Net cash used in acquisition $20,519,903
===========
</TABLE>
(continued)
See accompanying notes to condensed consolidated financial statements
7
<PAGE> 8
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1998 1997
----------- ---------------
<S> <C> <C>
Supplemental disclosures of purchase of
Aerocar assets, net of liabilities:
Cash $ 227,855
Receivables 473,118
Inventory 9,683,625
Engines under operating leases 18,065,714
Property, plant and equipment 151,103
Goodwill 30,746,019
Other assets 39,532
-----------
Total assets $59,386,966
===========
Accounts payable $ 2,395,610
Notes payable 13,016,817
-----------
Total liabilities $15,412,427
===========
Net acquisition cost 43,974,539
Less warrants issued to seller 1,405,000
-----------
Cash paid to seller at closing 42,569,539
Less cash acquired 227,855
-----------
Net cash used in acquisition $42,341,684
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
8
<PAGE> 9
KELLSTROM INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Kellstrom Industries, Inc. and its subsidiaries (the
"Company") after elimination of intercompany accounts and transactions.
These statements have been prepared by the Company without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission ("SEC"). The condensed consolidated balance sheet as of
December 31, 1997 has been derived from audited financial statements. In
order to prepare the financial statements in conformity with generally
accepted accounting principles, management has made a number of estimates
and assumptions relating to the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities. Actual
results could differ from those estimates. 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 condensed consolidated 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-K.
In the opinion of management of the Company, the condensed consolidated
financial statements reflect all adjustments (which consist only of
normal recurring adjustments) necessary to present fairly the condensed
consolidated financial position of Kellstrom Industries, Inc. and its
subsidiaries as of September 30, 1998, and the condensed consolidated
results of earnings for the three and nine month periods ended September
30, 1998 and 1997 and the condensed consolidated statements of cash flows
for the three and nine month periods ended September 30, 1998 and 1997.
The results of operations for such interim periods are not necessarily
indicative of the results for the full year.
NOTE 2 - ACQUISITIONS
On April 1, 1998, the Company through a wholly-owned subsidiary,
Integrated Technology Holdings Corp., completed the acquisition of
substantially all of the assets and assumed certain liabilities of
privately held Integrated Technology Corp. ("ITC") for approximately
$20.2 million in cash plus an earn-out payable over a three-year period
based on certain specified criteria. In addition, the Company received a
three-year option to purchase a 49% interest in an related FAA-approved
overhaul facility. The Company funded the purchase from its current
banking facility. The acquisition was accounted for using the purchase
method of accounting for business combinations and accordingly, the
operating results have been included since the date of acquisition.
On June 17, 1998, the Company completed the acquisition of Aerocar
Aviation Corp. and Aerocar Parts, Inc., (collectively "Aerocar") for
approximately $44.3 million in cash, warrants to purchase an aggregate of
250,000 shares of the Company's common stock, exercisable at $26.00 per
share, plus an additional $5.0 million payable within a two-year period
after closing either in cash, or at the option of the Company, in shares
of common stock having an equivalent value as of the date of the
acquisition. The Company funded the cash portion of this acquisition with
a portion of the proceeds from its secondary public offering. The
acquisition was accounted for using the purchase method of accounting for
business combinations and accordingly, the operating results have been
included since the date of acquisition.
9
<PAGE> 10
NOTE 3 - EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share." Subsequent to
the effective date, all prior period earnings per share data presented
will be restated to conform with the provisions of SFAS No. 128. Basic
and diluted earnings per share for the three and nine months ended
September 30, 1998 and 1997 were calculated based on the following:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
Net income $ 6,203,317 $ 2,326,652 $12,825,991 $ 5,927,234
=========== =========== =========== ===========
Weighted average common shares outstanding 11,646,801 7,850,976 9,553,238 7,122,903
=========== =========== =========== ===========
Basic earnings per common share $ 0.53 $ 0.30 $ 1.34 $ 0.83
=========== =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Net income $ 6,203,317 $ 2,326,652 $12,825,991 $ 5,927,234
Income adjustment relating to reduction of
debt based on the if converted method 1,232,253 -- 2,196,679 --
----------- ----------- ----------- -----------
Net income available to common and common
equivalent shares $ 7,435,570 $ 2,326,652 $15,022,670 $ 5,927,234
=========== =========== =========== ===========
Weighted average common shares outstanding 11,646,801 7,850,976 9,553,238 7,122,903
Net effect of dilutive stock options and warrants
based on the treasury stock method 1,392,558 1,449,204 1,612,727 1,678,410
Net effect of dilutive convertible subordinated
notes based on the if converted method 4,658,948 -- 2,965,328 --
----------- ----------- ----------- -----------
Weighted average common shares outstanding
- diluted 17,698,307 9,300,180 14,131,293 8,801,313
=========== =========== =========== ===========
Diluted earnings per common share $ 0.42 $ 0.25 $ 1.06 $ 0.67
=========== =========== =========== ===========
</TABLE>
10
<PAGE> 11
NOTE 4 - COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires that all items recognized
under accounting standards as components of comprehensive income be
reported in an annual financial statement that is displayed with the same
prominence as other annual financial statements. The Company's total
comprehensive income, comprised of unrealized gain/(loss) on investment
securities, for the three and nine month periods ended September 30, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 6,203,317 $ 2,326,652 $12,825,991 $ 5,927,234
Other comprehensive income, net of taxes 64,513 177,485 390,787 (326,856)
----------- ----------- ----------- -----------
Total comprehensive income $ 6,267,830 $ 2,504,137 $13,216,778 $ 5,600,378
=========== =========== =========== ===========
</TABLE>
NOTE 5 - RECENT PUBLIC OFFERINGS
In June 1998, the Company completed a secondary public offering of
2,750,000 shares of its common stock resulting in net proceeds of
$67,358,522. On July 2, 1998, the Company's underwriters exercised
their overallotment option to purchase an additional 412,500 shares of
common stock at $26.00. The net proceeds to the Company from this sale
were $10,164,000. Proceeds of the offering were used to repay
outstanding borrowings under its revolving credit facility, to finance
the Aerocar acquisition and for general corporate purposes.
In June 1998, the Company completed a public offering of $75,000,000
aggregate principal amount of 5 1/2% Convertible Subordinated Notes due
2003 (the "Notes"), resulting in net proceeds of $72,750,000. On July
2, 1998, the Company's underwriters exercised their overallotment
option to purchase an additional $11,250,000 aggregate principal amount
of Notes. The net proceeds to the Company from this sale were
$10,938,281. Proceeds of the offering were used to repay outstanding
borrowings under its revolving credit facility and for general
corporate purposes.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS 132
standardizes the disclosure requirements of SFAS 87 and SFAS 106 to the
extent practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits. SFAS 132
is effective for fiscal years beginning after December 15, 1997.
Management does not anticipate a significant impact of the adoption of
SFAS 132 on the Company's consolidated financial position, results of
operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires companies to
record derivatives on the balance sheet as assets and liabilities,
measured at fair value. Gains and losses resulting from changes in the
values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. SFAS
133 is effective for fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. Management does not anticipate a
significant
11
<PAGE> 12
impact of the adoption of SFAS 133 on the Company's consolidated
financial position, results of operations or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following should be read in conjunction with the Kellstrom
Industries, Inc. (the "Company") consolidated financial statements and the
related notes thereto included elsewhere herein.
This quarterly report on Form 10-Q contains or may contain 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.
GENERAL
The Company is a leader in the airborne equipment segments of the
international aviation services after-market. The Company's principal business
is the purchase, overhaul (through subcontractors), resale and lease of
aircraft, engines and engine parts. The Company's historical growth has resulted
from a number of factors, including the expansion of the Company's product
lines, customer base and market share, increases in the Company's internal
growth, cost controls and overall operating efficiencies, acquisitions in
existing and adjacent markets and significant capital investments. In accordance
with its acquisition strategy, the Company acquired Aero Support USA, Inc.,
("Aero Support") on September 10, 1997, Integrated Technology Corporation
("ITC") on April 1, 1998, and Aerocar Aviation Corp. and Aerocar Parts, Inc.,
(collectively "Aerocar") on June 17, 1998. Accordingly, the results of
operations have been included since the date of acquisition. Consequently, the
results of operations for the three and nine months ended September 30, 1998 are
not comparable to the corresponding periods of the prior year in certain
material respects.
On April 1, 1998, the Company through a wholly-owned subsidiary,
Integrated Technology Holdings Corp., completed the acquisition of substantially
all of the assets and assumed certain liabilities of privately held ITC for
approximately $20.2 million in cash plus an earn-out payable over a three-year
period based on certain specified criteria. In addition, the Company received a
three-year option to purchase a 49% interest in an related FAA-approved overhaul
facility. The acquisition was accounted for using the purchase method of
accounting for business combinations and accordingly, the operating results have
been included since the date of acquisition. The Company funded the purchase
from its current banking facility.
On June 17, 1998, the Company completed the acquisition of Aerocar for
approximately $44.3 million in cash, warrants to purchase an aggregate of
250,000 shares of the Company's common stock, exercisable at $26.00 per share,
plus an additional $5.0 million payable within a two-year period after closing,
either in cash, or at the option of the Company, in shares of common stock
having an equivalent value as of the date of the acquisition. The acquisition
was accounted for using the purchase method of accounting for business
combinations and accordingly, the operating results have been included since the
12
<PAGE> 13
date of acquisition. The Company funded the cash portion of this acquisition
with a portion of the proceeds of its secondary public offering.
On June 17, 1998, the Company completed a secondary public offering of
2,750,000 shares of common stock at $26.00 per share, resulting in net proceeds
of $67,358,522. On July 2, 1998, the Company's underwriters exercised their
overallotment option to purchase an additional 412,500 shares of common stock at
$26.00. The net proceeds to the Company from this sale were $10,164,000.
Proceeds of the offering were used to repay outstanding borrowings under its
revolving credit facility, to finance the Aerocar acquisition and for general
corporate purposes.
On June 17, 1998, the Company completed an underwritten public offering
of $75,000,000 aggregate principal amount of 5 1/2% Convertible Subordinated
Notes due 2003 (the "Notes"), resulting in net proceeds of $72,750,000. On July
2, 1998, the Company's underwriters exercised their overallotment option to
purchase an additional $11,250,000 aggregate principal amount of Notes. The net
proceeds to the Company from this sale were $10,938,281. Proceeds of the
offering were used to repay outstanding borrowings under its revolving credit
facility and for general corporate purposes.
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, package size
and price of surplus aviation material, the size and timing of customer orders,
returns by and allowances to customers and the cost of acquisitions and 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. A large portion of the Company's operating
expenses are relatively fixed. Since the Company typically does not obtain
long-term purchase orders or commitments from its customers with respect to the
sale of engines or engine parts, it must anticipate the future volume of orders
based upon the historic purchasing patterns of its customers and upon its
discussions with its customers as to their future requirements. Cancellations,
reductions or delays in orders by a customer or group of customers could have a
material adverse effect on the Company's business, consolidated financial
condition, results of operations or cash flows. 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.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net sales of aircraft and engine parts increased by 136% to $42,750,180
for the three months ended September 30, 1998 as compared with $18,126,646 for
the three months ended September 30, 1997. The increase in net sales of aircraft
and engine parts was primarily due to (i) growth of sales of approximately
$14,060,000 primarily due to additional inventory availability as a result of
the Company's increased capital resources as well as the acquisition of Aerocar
being combined into Kellstrom, and (ii) incremental sales of approximately
$10,564,000 related to the acquisitions of the Aero Support and ITC operations.
13
<PAGE> 14
Rental revenues increased by 352% to $10,056,337 for the three months
ended September 30, 1998 as compared with $2,225,795 for the three months ended
September 30, 1997. The increase in rental revenues was primarily due to (i) the
Company's continued expansion into the short-term leasing business through
purchases of individual leased assets as well as the acquisition of Aerocar
being combined into Kellstrom resulting in increased rental revenues of
approximately $6,364,000, and (ii) incremental rental revenues of approximately
$1,467,000 related to the acquisition of the ITC operations.
Cost of goods sold increased by 145% to $28,607,924 for the three
months ended September 30, 1998 as compared to $11,674,498 for the three months
ended September 30, 1997; however, the gross profit margin decreased to 33.1% in
1998 from 35.6% in 1997. The increase in cost of goods sold was primarily due to
increased sales volume driven by internal sales growth and the acquisitions of
Aero Support, ITC and Aerocar. The decrease in the gross profit margin was
primarily due to the mix of product sales which resulted in a lower gross profit
margin. However, despite the decrease in the gross profit margin during the
third quarter of 1998, the gross profit margin remains in the range of the
Company's historical gross profit margin.
Depreciation of equipment under operating leases increased by 291% to
$5,653,955 for the three months ended September 30, 1998 as compared with
$1,446,767 for the three months ended September 30, 1997. The increase in
depreciation of equipment under operating leases was primarily due to (i) the
Company's continued expansion into the short-term leasing business through
purchases of individual leased assets as well as the acquisition of Aerocar
being combined into Kellstrom resulting in increased depreciation expense of
approximately $3,343,000, and (ii) incremental depreciation of approximately
$864,000 related to the leased assets acquired from the ITC operations.
Selling, general and administrative expenses increased by 120% to
$5,082,717 for the three months ended September 30, 1998 as compared to
$2,310,679 for the three months ended September 30, 1997, which resulted in a
decrease as a percentage of total revenues to 9.6% in 1998 from 11.4% in 1997.
The increase in selling, general and administrative expenses was primarily the
result of (i) expenses of approximately $1,454,000 related to the continuing
operations of Aero Support and ITC, and (ii) expenses of approximately
$1,318,000 from the 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 the
continued 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 as well as the acquisition of
Aerocar being combined into Kellstrom. The Company expects selling, general and
administrative expenses to continue to increase due to the Company's growth
plans and need for additional personnel and facilities to support the Company's
operations.
Depreciation and amortization expense increased by 157% to $886,938 for
the three months ended September 30, 1998 as compared with $345,382 for the
three months ended September 30, 1997, which resulted in depreciation and
amortization expense as a percentage of total revenues to remain flat at 1.7% in
1998 and 1997. The increase in depreciation and amortization expense is
primarily the result of amortization of goodwill related to the Aero Support,
ITC, and Aerocar acquisitions.
Interest expense (net of interest income) increased by 223% to
$2,695,546 for the three months ended September 30, 1998 as compared to $834,516
for the three months ended September 30, 1997. The increase in interest expense
was primarily due to (i) interest expense and related costs of approximately
$417,000 from the debt incurred related to the acquisition of ITC, (ii)
amortization of deferred financing costs of approximately $416,000, and (iii)
increased borrowings by the Company during 1998 necessary to expand the
Company's inventory levels which resulted in approximately $1,028,000 of
interest
14
<PAGE> 15
expense. The Company expects interest expense to continue to increase as the
Company continues to expand its inventory levels and facilities to support
future growth in operations and completes 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.
Provision for income taxes increased 160% to $3,676,120 for the three
months ended September 30, 1998 as compared to $1,413,947 for the three months
ended September 30, 1997, which resulted in a slight decrease as a percentage of
income before income taxes of 37.2% in 1998 from 37.8% in 1997. The increase in
income taxes is due to higher levels of pre-tax income for the three months
ended September 30, 1998. The Company's effective tax rate differs from the
statutory rate primarily due to state income taxes offset by the use of a
foreign sales corporation.
Net income increased by 167% to $6,203,317 for the three months ended
September 30, 1998 as compared to $2,326,652 for the three months ended
September 30, 1997. Basic earnings per common share increased by 77% to $0.53
for the three months ended September 30, 1998 as compared to $0.30 for the three
months ended September 30, 1997. Diluted earnings per common share increased by
68% to $0.42 for the three months ended September 30, 1998 as compared to $0.25
for the three months ended September 30, 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net sales of aircraft and engine parts increased by 96% to $98,263,721
for the nine months ended September 30, 1998 as compared with $50,235,693 for
the nine months ended September 30, 1997. The increase in net sales of aircraft
and engine parts was primarily due to (i) growth of sales of approximately
$21,978,000 primarily due to additional inventory availability as a result of
the Company's increased capital resources as well as the acquisition of Aerocar
being combined into Kellstrom, and (ii) incremental sales of approximately
$26,050,000 related to the acquisitions of the Aero Support and ITC operations.
Rental revenues increased by 379% to $21,696,484 for the nine months
ended September 30, 1998 as compared with $4,532,731 for the nine months ended
September 30, 1997. The increase in rental revenues was primarily due to (i) the
Company's continued expansion into the short-term leasing business through
purchases of individual leased assets as well as the acquisition of Aerocar
being combined into Kellstrom resulting in increased rental revenues of
approximately $14,421,000, and (ii) incremental rental revenues of approximately
$2,743,000 related to the acquisition of the ITC operations.
Cost of goods sold increased by 101% to $65,601,702 for the nine months
ended September 30, 1998 as compared to $32,709,613 for the nine months ended
September 30, 1997; however, the gross profit margin decreased to 33.2% in 1998
from 34.9% in 1997. The increase in cost of goods sold was primarily due to
increased sales volume across all product lines. The decrease in the gross
profit margin was primarily due to the mix of product sales during the first
nine months of 1998, resulting in a lower gross profit margin. However, despite
the decrease in the gross profit margin during the first nine months of 1998,
the gross profit margin remains in the range of the Company's historical gross
profit margin.
Depreciation of equipment under operating leases increased by 301% to
$11,818,038 for the nine months ended September 30, 1998 as compared with
$2,946,276 for the nine months ended September 30, 1997. The increase in
depreciation of equipment under operating leases was primarily due to (i) the
Company's continued expansion into the short-term leasing business through
purchases of individual leased assets as well as the acquisition of Aerocar
being combined into Kellstrom resulting in increased
15
<PAGE> 16
depreciation of approximately $7,269,000, and (ii) incremental depreciation of
$1,603,000 related to the acquisition of the ITC operations.
Selling, general and administrative expenses increased by 114% to
$12,837,670 for the nine months ended September 30, 1998 as compared to
$5,995,448 for the nine months ended September 30, 1997, which resulted in a
slight decrease as a percentage of total revenues to 10.7% in 1998 from 10.9% in
1997. The increase in selling, general and administrative expenses was primarily
the result of (i) expenses of approximately $3,394,000 related to the continuing
operations of Aero Support and ITC, and (ii) expenses of approximately
$3,448,000 from the 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 the
continued 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 as well as the acquisition of
Aerocar being combined into Kellstrom. The Company expects selling, general and
administrative expenses to continue to increase due to the Company's growth
plans and need for additional personnel and facilities to support the Company's
operations.
Depreciation and amortization expense increased by 118% to $2,148,240
for the nine months ended September 30, 1998 as compared with $985,540 for the
nine months ended September 30, 1997, which resulted in depreciation and
amortization as a percentage of total revenues remaining flat at 1.8% for 1998
and 1997. The increase in depreciation and amortization expense is primarily the
result of amortization of goodwill related to the Aero Support, ITC, Aerocar
acquisitions.
Interest expense (net of interest income) increased by 167% to
$7,099,434 for the nine months ended September 30, 1998 as compared to
$2,662,138 for the nine months ended September 30, 1997. The increase in
interest expense was primarily due to (i) interest expense and related costs of
approximately $834,000 from the debt incurred related to the acquisition of ITC,
(ii) amortization of deferred financing costs of approximately $949,000, and
(iii) increased borrowings by the Company during 1998 necessary to expand the
Company's inventory levels which resulted in approximately $2,654,000 of
interest expense. The Company expects interest expense to continue to increase
as the Company continues to expand its inventory levels and facilities to
support future growth in operations and completes 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.
Provision for income taxes increased 115% to $7,629,130 for the nine
months ended September 30, 1998 as compared to $3,542,175 for the nine months
ended September 30, 1997, which resulted in a slight decrease as a percentage of
income before income taxes of 37.3% in 1998 from 37.4% in 1997. The increase in
income taxes is due to higher levels of pre-tax income for the nine months ended
September 30, 1998. The Company's effective tax rate differs from the statutory
rate primarily due to state income taxes offset by the use of a foreign sales
corporation.
Net income increased by 116% to $12,825,991 for the nine months ended
September 30, 1998 as compared to $5,927,234 for the nine months ended September
30, 1997. Basic earnings per common share increased by 61% to $1.34 for the nine
months ended September 30, 1998 as compared to $0.83 for the nine months ended
September 30, 1997. Diluted earnings per common share increased by 58% to $1.06
for the nine months ended September 30, 1998 as compared to $0.67 for the nine
months ended September 30, 1997.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES.
As of September 30, 1998, the Company's liquidity and capital resources
included cash and cash equivalents of $895,054 and working capital of
$95,077,141. As of September 30, 1998, total outstanding debt was $155,970,288
as compared to $73,088,800 as of December 31, 1997. As of September 30, 1998,
the outstanding principal balance on the Company's convertible subordinated
notes was $140,250,000 and the Company had contractual lines of credit totaling
$100,000,000 of which $100,000,000 was available.
Cash flows used in operating activities for the nine months ended
September 30, 1998 was $66,552,075 as compared to cash flows provided by
operating activities of $1,506,499 for the nine months ended September 30, 1997.
The primary uses of cash for operating activities during the nine months ended
September 30, 1998 were due to (i) purchases of equipment under operating leases
of $79,533,864, and (ii) an increase in inventory and trade receivables which
amounted to $20,926,505. The primary sources of cash for operating activities
for the nine months ended September 30, 1998 were due to an increase in accounts
payable, accrued expenses and income taxes payable of $4,205,606, coupled with
net income of $12,825,991 and total depreciation and amortization of
$14,914,786.
Cash flows used in investing activities for the nine months ended
September 30, 1998 was $68,124,389 compared to $27,707,394 for the nine months
ended September 30, 1997. The primary uses of cash for investing activities for
the nine months ended September 30, 1998 related to (i) the purchases of ITC and
Aerocar for an aggregate of $62,861,587, and (ii) purchases of property, plant
and equipment of $5,790,465. The primary sources of cash for investing
activities for the nine months ended September 30, 1998 related to proceeds from
the sales of investment securities of $812,553.
Cash flows provided by financing activities for the nine months ended
September 30, 1998 was $135,108,842 compared to $26,749,548 for the nine months
ended September 30, 1997. The primary uses of cash for financing activities for
the nine months ended September 30, 1998 related to debt repayments of
$25,059,697 and payments of deferred financing costs of $3,482,789. The primary
sources of cash for financing activities for the nine months ended September 30,
1998 related to net proceeds from the issuance of common stock of $77,522,522
and proceeds from the sale of convertible subordinated notes of $86,250,000.
On March 11, 1998, in order to expand its current credit facility, the
Company entered into a three year $100,000,000 revolving loan agreement with
Barnett Bank, N.A., a wholly-owned subsidiary of NationsBank Corp. The loan
bears interest at 1/4% below Barnett Bank's prime rate (which was 8% at October
31, 1998), or at the Company's option, LIBOR plus 175 - 275 basis points. The
expanded credit facility is secured by substantially all of the Company's
assets.
17
<PAGE> 18
During the nine months ended September 30, 1998, the Company's highest
utilization of its Barnett Bank $100,000,000 line of credit was $98,182,099. As
a result of the recent public offerings, the Company had no borrowings on the
Barnett Bank revolving credit facility as of September 30, 1998.
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 inventory including jet
engines and jet engine parts. The Company believes that greater availability of
such inventory 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 credit facility, which were expanded in March 1998, proceeds from
the recently completed public offerings 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.
The Company believes that cash flow from operations, combined with the
Company's borrowing facilities should be sufficient for the Company's current
level of operations. In addition, the Company continues to evaluate the
expansion of its credit facility. However, the Company may elect to seek equity
capital in the future depending upon market conditions and the needs of the
Company.
YEAR 2000 ISSUE
The Year 2000 problem is primarily the result of computer programs
being written using two digits rather than four to define the applicable year.
Such programs will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, including possible
miscalculations, and a disruption in the operation of such systems. This is
commonly referred to as the Year 2000 issue.
The Company and each of its operating subsidiaries have developed a
plan to address any possible business issues related to the impact of the Year
2000 problem on both its information technology ("IT") and non-IT systems (e.g.,
embedded technology). This plan addresses the Year 2000 issue in multiple
phases, including (i) determining an initial inventory of the Company's systems,
equipment, vendors, customers and third party administrators that may be
vulnerable to system failures or processing errors as a result of Year 2000
issues, (ii) assessment and prioritization of inventoried items to determine
risks associated with their failure to be Year 2000 compliant, (iii) testing of
systems and equipment to determine Year 2000 compliance, (iv) remediation and
implementation of systems and equipment, and (v) contingency planning to assess
reasonably likely worst case scenarios. As part of the Company's plan, the
Company has retained a third party Year 2000 solution provider to assist with a
risk analysis of the Company's Year 2000 issue. For those systems which the
Company determines are not currently Year 2000 compliant, implementation of the
required changes is expected to be completed during fiscal 1999.
18
<PAGE> 19
Incremental costs, which include consulting costs and costs associated
with internal resources to modify existing systems in order to achieve Year
2000 compliance are charged to expense as incurred. The Company does not expect
the financial impact of making the required system changes to be material to
the Company's consolidated financial position, results of operations or cash
flows which are being funded through operating cash flows. The anticipated
costs of the project and the dates on which the Company believes it will
complete the Year 2000 modifications and assessments are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources. There can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause
such material differences include, but are not limited to, the availability and
cost of personnel trained in this area and the ability to locate and correct
all relevant systems.
With respect to the Company's suppliers and vendors, the Company is in
the process of contacting suppliers and vendors to assess the potential impact
on operations if such third parties are not successful in ensuring that their
systems are Year 2000 compliant in a timely manner. The Company's Year 2000
issues and any potential business interruptions, costs, damages or losses
related thereto, are also dependent upon the Year 2000 compliance of other
third parties such as governmental agencies (e.g., Federal Aviation
Administration). To date, the Company is unable to determine at this time
whether it will be materially affected by the failure of any of its suppliers,
vendors or other third parties to be Year 2000 compliant. The Company believes
that its compliance efforts have and will reduce the impact on the Company of
any such failures. Failure of any third parties with which the Company
interacts to achieve Year 2000 compliance could have a material adverse effect
on the Company's business, financial condition and results of operations.
Risk assessment, readiness evaluation, action plans and contingency
plans related to the Company's suppliers, vendors and other third parties are
expected to be completed by June 1999. The Company's risk management program
includes emergency backup and recovery procedures to be followed in the event
of failure of a business critical system. These procedures will be expanded to
include specific procedures for the potential Year 2000 issue. Contingency
plans to protect the Company from Year 2000 related interruptions are also
being developed and are expected to be completed by August 1999. These plans
will include development of backup procedures, identification of alternate
suppliers, possible increases in inventory levels and other appropriate
measures.
RECENT ACCOUNTING PRONOUNCEMENTS.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS 132 standardizes the
disclosure requirements of SFAS 87 and SFAS 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. SFAS 132 is effective for fiscal years beginning after
December 15, 1997. Management does not anticipate a significant impact of the
adoption of SFAS 132 on the Company's consolidated financial position, results
of operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains and losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS 133 is effective for fiscal
years beginning after June 15, 1999, with earlier adoption encouraged.
Management does not anticipate a significant impact of the adoption of SFAS 133
on the Company's consolidated financial position, results of operations or cash
flows.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
PRO FORMA CONSOLIDATED COMBINED STATEMENTS OF EARNINGS - UNAUDITED
The consolidated combined statement of earnings of the Company for the
nine months ended September 30, 1998 and 1997 are based on historical
financial statements of the Company and have been adjusted to reflect
the acquisitions of Aero Support Holdings, Inc. ("Aero Support"),
Integrated Technology Holdings Corp. ("ITHC"), and Aerocar Aviation
Corp. and Aerocar Parts, Inc. (collectively "Aerocar") as though the
companies had combined at the beginning of the periods being reported.
The Company acquired substantially all of the assets and operations of
Aero Support USA, Inc. on September 10, 1997, Integrated Technology
Corp. on April 1, 1998, and Aerocar Aviation Corp. and Aerocar Parts,
Inc. on June 17, 1998. The pro forma condensed consolidated statement
of earnings do not purport to be indicative of results that would have
occurred had the acquisition been in effect for the periods presented,
nor do they purport to be indicative of the results that will be
obtained in the future. The pro forma consolidated combined financial
information is based on certain assumptions and adjustments described
in the notes hereto and should be read in conjunction therewith.
The following pro forma consolidated combined statement of earnings for
the nine months ended September 30, 1997 reflect the effect of the
Company's recent secondary public offerings of common stock and
convertible subordinated notes.
20
<PAGE> 21
KELLSTROM INDUSTRIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------
Nine Months Ended September 30,
1998 1997
------------- -------------
Pro Forma Pro Forma
Combined Combined
------------- -------------
<S> <C> <C>
Sales of aircraft and engine parts, net $ 109,758,809 $ 93,164,859
Rental revenues 25,688,831 13,175,130
------------- -------------
Total revenues 135,447,640 106,339,989
Cost of goods sold (72,324,021) (58,695,110)
Depreciation of equipment under operating leases (12,865,250) (5,133,944)
Selling, general and administrative expenses (14,746,746) (14,674,530)
Depreciation and amortization (2,725,522) (2,384,642)
------------- -------------
Total operating expenses (102,661,539) (80,888,226)
Operating income 32,786,101 25,451,763
Interest expense (9,693,295) (8,177,889)
Interest income 132,376 840
------------- -------------
Income before income taxes 23,225,182 17,274,714
Income taxes (8,639,768) (6,426,194)
------------- -------------
Net income 14,585,414 10,848,520
============= =============
Earnings per common share - basic $ 1.27 $ 1.05
============= =============
Earnings per common share - diluted $ 1.14 $ 0.96
============= =============
Weighted average number of common shares outstanding - basic 11,508,777 10,285,403
============= =============
Weighted average number of common shares outstanding - diluted 15,824,913 14,944,351
============= =============
</TABLE>
Unaudited - See accompanying notes to pro forma condensed consolidated
statements of earnings
21
<PAGE> 22
KELLSTROM INDUSTRIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------
Historical
--------------------------------------------- Pro Forma Pro Forma Pro Forma
Kellstrom ITC Aerocar Adjustments(A) Adjustments(B) Combined
------------- ------------- ------------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales of aircraft and engine
parts, net $ 98,263,721 $ 18,409,842 $ 3,458,512 $ (10,373,266) $ -- $ 109,758,809
Rental revenues 21,696,484 3,281,657 3,454,041 (2,743,351) -- 25,688,831
------------- ------------- ------------- ------------- ---------- -------------
Total revenues 119,960,205 21,691,499 6,912,553 (13,116,617) -- 135,447,640
Cost of goods sold (65,601,702) (11,741,726) (1,724,577) 6,743,984 -- (72,324,021)
Depreciation of equipment under
operating leases (11,818,038) (1,892,119) (757,895) 1,602,802 -- (12,865,250)
Selling, general and administrative
expenses (12,837,670) (1,632,051) (1,443,646) 991,460 132,000 (14,746,746)
43,161
Depreciation and amortization (2,148,240) (98,558) -- 95,060 (431,194) (2,725,522)
(142,590)
------------- ------------- ------------- ------------- ---------- -------------
Total operating expenses (92,405,650) (15,364,454) (3,926,118) 9,333,877 (299,194) (102,661,539)
Operating income 27,554,555 6,327,045 2,986,435 (3,782,740) (299,194) 32,786,101
Interest expense (7,099,434) (180,407) (219,633) 180,407 219,633 (9,693,295)
(532,331) (2,061,530)
Interest income -- -- 132,376 -- -- 132,376
------------- ------------- ------------- ------------- ---------- -------------
Income before income taxes 20,455,121 6,146,638 2,899,178 (4,134,664) (2,141,091) 23,225,182
Income taxes (7,629,130) (1,391,032) -- 1,391,032 (1,010,638) (8,639,768)
------------- ------------- ------------- ------------- ---------- -------------
Net income $ 12,825,991 $ 4,755,606 $ 2,899,178 $ (2,743,632) $ (3,151,729) $ 14,585,414
============= ============= ============= ============= ========== =============
Earnings per common share - basic $ 1.34 $ 1.27
============= =============
Earnings per common share - diluted $ 1.06 $ 1.14
============= =============
Weighted average number of common
shares outstanding - basic 9,553,238 11,508,777
============= =============
Weighted average number of common
shares outstanding - diluted 14,131,293 15,824,913
============= =============
</TABLE>
22
<PAGE> 23
KELLSTROM INDUSTRIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------
Historical
---------------------------------------------------------
Kellstrom Aero Support ITC Aerocar
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales of aircraft and engine parts,
net $ 50,235,693 $ 14,942,734 $ 21,160,606 $ 28,844,848
Rental revenues 4,532,731 -- 553,977 8,088,422
------------ ------------ ------------ ------------
Total revenues 54,768,424 14,942,734 21,714,583 36,933,270
Cost of goods sold (32,709,613) (9,640,013) (12,776,247) (10,039,943)
Depreciation of equipment under
operating leases (2,946,276) -- (337,255) (2,268,821)
Selling, general and administrative
expenses (5,995,448) (3,414,461) (4,211,886) (3,450,052)
Depreciation and amortization (985,540) (61,098) (9,569) (23,694)
------------ ------------ ------------ ------------
Total operating expenses (42,636,877) (13,115,572) (17,334,957) (15,782,510)
Operating income 12,131,547 1,827,162 4,379,626 21,150,760
Interest expense (2,662,138) (208,063) (361,359) (69,081)
Interest income -- -- -- --
------------ ------------ ------------ ------------
Income before income taxes 9,469,409 1,619,099 4,018,267 21,081,679
Income taxes (3,542,175) -- -- --
------------ ------------ ------------ ------------
Net income $ 5,927,234 $ 1,619,099 $ 4,018,267 $ 21,081,679
============ ============ ============ ============
Earnings per common share - basic $ 0.83
============
Earnings per common share - diluted $ 0.67
============
Weighted average number of common
shares outstanding - basic 7,122,903
============
Weighted average number of common
shares outstanding - diluted 8,801,313
============
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma Pro Forma Pro Forma
Adjustments(A) Adjustments(B) Adjustments(C) Combined
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales of aircraft and engine parts,
net $ (1,719,022) $ -- $(20,300,000) $ 93,164,859
Rental revenues -- -- -- 13,175,130
------------ ------------ ------------ ------------
Total revenues (1,719,022) -- (20,300,000) 106,339,989
Cost of goods sold 982,999 -- 4,286,710 (58,695,110)
1,200,997
Depreciation of equipment underder
operating leases -- -- 418,408 (5,133,944)
Selling, general and administrative
expenses 179,816 114,204 2,103,297 (14,674,530)
Depreciation and amortization 4,167 (158,890) (703,694) (2,384,642)
(604,760)
158,436 --
------------ ------------ ------------ ------------
Total operating expenses 720,658 (44,686) 7,305,718 (80,888,226)
Operating income (998,364) (44,686) (12,994,282) 25,451,763
Interest expense (998,478) 361,359 241,096 (8,177,889)
208,063 (1,596,994) (3,092,294)
Interest income 840 -- -- 840
------------ ------------ ------------ ------------
Income before income taxes (1,787,939) (1,280,321) (15,845,480) 17,274,714
Income taxes 54,462 (1,048,895) (1,889,586) (6,426,194)
------------ ------------ ------------ ------------
Net income $ (1,733,477) $ (2,329,216) $(17,735,066) $ 10,848,520
============ ============ ============ ============
Earnings per common share - basic $ 1.05
============
Earnings per common share - diluted $ 0.96
============
Weighted average number of common
shares outstanding - basic 10,285,403
============
Weighted average number of common
shares outstanding - diluted 14,944,351
============
</TABLE>
23
<PAGE> 24
KELLSTROM INDUSTRIES, INC.
NOTES TO PRO FORMA CONSOLIDATED COMBINED STATEMENT OF EARNINGS
(Unaudited)
(A) For purposes of presenting the pro forma consolidated combined statement
of earnings, the following adjustments have been made for the ITC
acquisition:
<TABLE>
<CAPTION>
Nine months ended
September 30, 1998
------------------
<S> <C>
Increase (decrease) in income:
Reversal of ITC sales of aircraft parts for the period April 1, 1998
to September 30, 1998 $(10,373,266)
Reversal of ITC rental revenues for the period April 1, 1998 to
September 30, 1998 (2,743,351)
Reversal of ITC cost of goods sold for the period April 1, 1998 to
September 30, 1998 6,743,984
Reversal of ITC depreciation of equipment under operating leases for
the period April 1, 1998 to September 30, 1998 1,602,802
Reversal of ITC selling, general and administrative expense for the
period April 1, 1998 to September 30, 1998 991,460
Elimination of pension expense 43,161
Reversal of ITC depreciation and amortization expense for the period April 1,
1998 to September 30, 1998 95,060
Amortization of goodwill and non-compete agreement related to
ITC acquisition (142,890)
Reduction in interest expense due to pay-off of debt on ITC line of credit 180,407
Interest expense on acquisition debt and debt incurred to repay existing
ITC line of credit (532,331)
------------
(4,134,664)
Tax effect of pro forma adjustments 1,391,032
------------
Net adjustment $ (2,743,632)
============
</TABLE>
(B) For purposes of presenting the pro forma consolidated combined statement
of earnings, the following adjustments have been made for the Aerocar
Aviation and Aerocar Parts acquisitions:
<TABLE>
<CAPTION>
Nine months ended
September 30, 1998
------------------
<S> <C>
Increase (decrease) in income:
Elimination of Aerocar Aviation and Aerocar Parts officer's salary $ 132,000
Amortization of goodwill related to Aerocar Aviation and Aerocar
Parts acquisitions (431,194)
Reduction in interest expense due to pay-off of debt on Aerocar
Aviation and Aerocar Parts line of credit 219,633
Interest expense on acquisition debt and debt incurred to repay existing
Aerocar Aviation and Aerocar Parts line of credit (2,061,530)
-----------
(2,141,091)
Tax effect of pro forma adjustments (1,010,638)
-----------
Net adjustment $(3,151,729)
===========
</TABLE>
24
<PAGE> 25
KELLSTROM INDUSTRIES, INC.
NOTES TO PRO FORMA CONSOLIDATED COMBINED STATEMENT OF EARNINGS
(Unaudited)
(A) For purposes of presenting the pro forma consolidated combined statement of
earnings, the following adjustments have been made for the Aero Support
acquisition:
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997
------------------
<S> <C>
Increase (decrease) in income:
Reversal of Aero Support net revenues for the period
September 10, 1997 to September 30, 1997 $ (1,719,022)
Reversal of Aero Support cost of goods sold for the period
September 10, 1997 to September 30, 1997 982,999
Reversal of Aero Support selling, general, and administrative
expenses for the period September 10, 1997 to September 30, 1997 179,816
Reversal of Aero Support depreciation for the period
September 10, 1997 to September 30, 1997 4,167
Amortization of goodwill and non-compete agreement related to
Aero Support acquisition (604,760)
Elimination of leasehold amortization expense for assets not acquired 158,436
Reversal of Aero Support interest expense for the period
September 10, 1997 to September 30, 1997 840
Reduction in interest expense due to pay-off of debt on Aero Support
line of credit 208,063
Interest expense on acquisition debt and debt incurred to repay existing
Aero Support line of credit (998,478)
------------
(1,787,939)
Tax effect of pro forma adjustments 54,462
------------
Net adjustment $ (1,733,477)
============
</TABLE>
(B) For purposes of presenting the pro forma consolidated combined statement
of earnings, the following adjustments have been made for the ITC
acquisition:
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997
------------------
<S> <C>
Increase (decrease) in income:
Amortization of goodwill and non-compete agreement related to
ITC acquisition $ (158,890)
Reduction in selling, general and administrative expense due to
elimination of pension expense 114,204
Reduction in interest expense due to pay-off of debt on ITC
line of credit 361,359
Interest expense on acquisition debt and debt incurred to repay existing
ITC line of credit (1,596,994)
-----------
(1,280,321)
Tax effect of pro forma adjustments (1,048,895)
-----------
Net adjustment $(2,329,216)
===========
</TABLE>
25
<PAGE> 26
(C) For purposes of presenting the pro forma consolidated combined statement
of earnings, the following adjustments have been made for the Aerocar
Aviation and Aerocar Parts acquisitions:
<TABLE>
<CAPTION>
Nine months ended
September 30, 1997
------------------
<S> <C>
Increase (decrease) in income:
Reversal of Aerocar Aviation revenues for sales to Kellstrom
Industries, Inc. $(20,300,000)
Reversal in cost of goods sold for sales to Kellstrom Industries, Inc. 4,286,710
Reduction in cost of goods sold for sale of equipment previously
owned by Aerocar Aviation 1,200,997
Reduction in depreciation of equipment under operating leases from sales to
Kellstrom Industries, Inc. 418,408
Amortization of goodwill related to Aerocar Aviation and
Aerocar Parts acquisitions (703,694)
Elimination of Aerocar Aviation and Aerocar Parts officer's salary 2,103,297
Reduction in interest expense due to pay-off of debt on Aerocar
Aviation and Aerocar Parts line of credit 241,096
Interest expense on acquisition debt and debt incurred to repay existing
Aerocar Aviation and Aerocar Parts line of credit (3,092,294)
-------------
(15,845,480)
Tax effect of pro forma adjustments (1,168,531)
-------------
Net adjustment $(17,014,011)
=============
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 - Amendment No. 1 to the Agreement with Helix Management
Company II, LLC, dated August 25, 1998, by and among the Company
and Helix Management Company II, LLC.
10.2 - Amendment No. 1, dated March 13, 1998, to the Asset Purchase
Agreement, dated February 27, 1998, by and among the Company,
Integrated Technology Holdings Corp., Integrated Technology
Corporation, and Gideon Vaisman.
10.3 - Amendment No. 2, dated March 13, 1998, to the Asset Purchase
Agreement, as amended by Amendment No. 1, dated March 13, 1998,
by and among the Company, Integrated Technology Holdings Corp.,
Integrated Technology Corporation, and Gideon Vaisman.
10.4 - Amendment No. 1 to the Employment Agreement, dated September 15,
1998, by and among Integrated Technology Holdings Corp., and
Gideon Vaisman.
27.1 - Financial Data Schedule for the Nine Months Ended September 30,
1998.
27.2 - Financial Data Schedule for the Nine Months Ended September 30,
1997 (Restated).
26
<PAGE> 27
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter of 1998.
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.
November 12, 1998 KELLSTROM INDUSTRIES, INC.
(Registrant)
/s/ Michael W. Wallace
------------------------------
Michael W. Wallace
Chief Financial Officer
27
<PAGE> 1
EXHIBIT 10.1
HELIX
(LOGO) CAPITAL
November 6, 1998
John Gleason
Executive Vice-President
Michael Wallace
Chief Financial Officer
Kellstrom Industries, Inc.
14000 NW 4th Street
Sunrise, FL 33325
Re: FIRST AMENDMENT TO AGREEMENT WITH HELIX MANAGEMENT COMPANY II, LLC,
DATED MARCH 28, 1997.
Gentlemen,
Further to the recent resolution of Kellstrom's Board of Directors
concerning the amendment of the Engagement Agreement between Kellstrom and Helix
Management Company II, LLC, dated March 28, 1997 ("Engagement Agreement"),
described below are the revised terms of the Engagement Agreement which were
authorized by the Board:
The second sentence of Section 2.3.3.1 of the Agreement shall be
deleted in its entirety and shall be replaced by the following:
"Success fees for any Transaction, as defined above, will be determined
on a per Transaction basis, based upon the size of each Transaction.
The success fee for each Transaction shall be in an amount equal to the
following percentages of total Consideration Paid in such Transaction:
A. For Transactions in which total Consideration Paid is less than
$50 million:
5.0% of the first $5 million of Consideration Paid, plus
2.5% of the next $10 million of Consideration Paid, plus
0.75% of Consideration Paid in excess of $15 million.
B. For Transactions in which total Consideration Paid is $50 million
or more, up to $1,000 million:
1.50% of the first $50 million of Consideration Paid, plus
0.75% of the next $200 million of Consideration Paid, plus
0.50% of Consideration Paid in excess of $250 million,
up to $1,000 million.
C. For Transactions in which total Consideration Paid is in excess of
$1,000 million, the success fee shall be determined by mutual
agreement between the Company and Helix.
Except as specifically described above, all terms of the Engagement Agreement
shall remain unchanged.
Helix Management Company II, LLC
98 Battery Street/Suite 600
San Francisco, CA 94111
(415) 956-9944 Fax (415) 956-9951
<PAGE> 2
(LOGO) Messrs. Gleason and Wallace
6 November, 1998:
Page 2 of 2
Please execute, on behalf of Kellstrom, the additional copy of this letter
enclosed herewith and return it to me at your earliest convenience. When so
executed by you, this letter shall constitute the First Amendment to the
Agreement.
I look forward to receiving from you the executed Amendment, and continuing to
work with you and the entire Kellstrom team.
Very truly yours,
Helix Management Company II, LLC
(Sig Cut)
Yoav Stern, Principal
The foregoing terms of the First Amendment to the Engagement Agreement between
Kellstrom Industries, Inc. and Helix Management Company II, LLC, dated March 28,
1997 are accepted and agreed to.
Executed as of August 25, 1998.
Kellstrom Industries, Inc.
- --------------------------
/s/ John Gleason
- ------------------------------------------
By: John Gleason, Executive Vice-President
/s/ Michael Wallace
- ---------------------------------------
By: Michael Wallace, Chief Financial Officer
Helix Management Company II, LLC
98 Battery Street/Suite 600
San Francisco, CA 94111
(415) 956-9944 Fax (415) 956-9951
<PAGE> 1
EXHIBIT 10.2
AMENDMENT (NO.1)
TO THE ASSET PURCHASE AGREEMENT
Amendment (No. 1), dated as of March 13, 1998, to the ASSET PURCHASE
AGREEMENT, dated as of February 27, 1998 (the "AGREEMENT"), by and among (i)
Kellstrom Industries, Inc., a Delaware corporation ("KELLSTROM"), (ii)
Integrated Technology Holdings Corp., a Delaware corporation and a wholly-owned
subsidiary of Kellstrom ("KELLSTROM SUBSIDIARY"), (iii) Integrated Technology
Corp., a New Jersey corporation (the "COMPANY"), and (iv) Gideon Vaisman, an
individual residing at 22 Woodland Drive, Tenafly, New Jersey 07670 (the
"PRINCIPAL").
WHEREAS, Kellstrom, Kellstrom Subsidiary, the Company and the Principal
have determined that it is in the best interest of the parties, and in
furtherance of their purposes, to amend the Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements
hereinafter contained, the parties hereto agree as follows:
1. Kellstrom and Kellstrom Subsidiary hereby waive the
requirement of the Company and the Principal to deliver the Interim Financial
Statements (as defined in the Agreement). Accordingly, the Agreement is amended
as follows:
(a) The defined term "Interim Balance Sheet" shall be deleted
in its entirety and a new term "Balance Sheet" shall be added and shall have the
meaning set forth in Section 3.07 of the Agreement.
(b) The third sentence of Section 3.06 shall be deleted in its
entirety; and the term "Financial Statements" set forth in Section 3.06 shall
mean the December 31 Financial Statements (as defined in Section 3.06).
(c) The first and second sentences of Section 3.07 shall be
amended by deleting them in their entirety and replacing them with the
following:
"Except as set forth in the Financial Statements or
on SCHEDULE 3.07 hereto, the Liabilities on the balance sheet
included in the Financial Statements (the "Balance Sheet")
consist solely of accrued obligations and Liabilities incurred
by the Company in the ordinary course of business to Persons
which are not Affiliates of the Company. There are no
Liabilities of the Company of any kind whatsoever, whether or
not accrued and whether or not contingent or absolute,
determined or determinable or otherwise, including without
limitation documentary or standby letters of credit, bid or
performance bonds, or customer or third party guarantees, and
no existing condition, situation or set of circumstances that
could reasonably result in
<PAGE> 2
such a Liability, other than (i) Liabilities disclosed on
SCHEDULE 3.07, or in the Financial Statements and (ii)
Liabilities which have arisen after December 31, 1997 (the
"Balance Sheet Date") in the ordinary course of business and
consistent with past practice (none of which is a Liability
for breach of contract, breach of warranty, tort, infringement
claim or lawsuit) which, whether individually or in the
aggregate, could or could reasonably be expected to have a
Material Adverse Effect."
(d) The term "Interim Balance Sheet" set forth in Section 3.16
and in the first sentence of Section 3.27 shall be replaced with the term
"Balance Sheet". The term "Interim Financial Statements" set forth in the third
sentence of Section 3.27 shall be replaced with the term "Financial Statements."
The first sentence of the second paragraph of Section 3.27 shall be amended by
adding the following words after the term "Closing Date" the first time such
term appears: "or one hundred eighty (180) days after each installment of the
account is due, with respect to the receivable due from Air Jamaica described on
Schedule 3.09."
2. Section 10.02 of the Agreement is hereby amended by
deleting it and restating it in its entirety as follows:
"SECTION 10.02. INDEMNIFICATION PROVISIONS FOR BENEFIT OF KELLSTROM AND
KELLSTROM SUBSIDIARY. In the event the Company or the Principal breaches (or in
the event any third party alleges facts that, if true, would mean the Company,
or the Principal has breached) any of their representations, warranties,
agreements and covenants contained herein, then the Company and the Principal,
jointly and severally, agree to indemnify Kellstrom and Kellstrom Subsidiary
from and against all damages, costs, liabilities, losses and expenses, including
reasonable attorneys' fees and expenses, which Kellstrom or Kellstrom Subsidiary
may suffer through and after the date of the claim for indemnification resulting
from, arising out of, relating to, in the nature of or caused by the breach (or
the alleged breach). In addition, the Company and the Principal, jointly and
severally, shall indemnify Kellstrom and Kellstrom Subsidiary from and against
all damages, costs, liabilities, losses and expenses, including reasonable
attorneys' fees and expenses, which Kellstrom or Kellstrom Subsidiary may suffer
at any time resulting from, arising out of, relating to, in the nature of or
caused by the items described on SCHEDULE 3.19 and such items shall not be
included in the term "Assumed Liabilities"; provided that with respect to Item 6
of SCHEDULE 3.19, the Company and the Principal shall not be required to so
indemnify Kellstrom and Kellstrom Subsidiary solely as a result of the failure
by the Company to deliver to Kellstrom Subsidiary valid title to the aircraft
which are the subject of the dispute referred to in such Item 6. Notwithstanding
anything contained herein to the contrary, (i) Kellstrom and Kellstrom
Subsidiary shall not seek indemnification from the Company or the Principal
relating to a products liability claim to the extent (and only to the extent)
that Kellstrom and Kellstrom Subsidiary are entitled to
-2-
<PAGE> 3
coverage (following any deductible) under a product liability insurance policy,
if any, maintained by either of them, it being understood and agreed that
neither Kellstrom nor Kellstrom Subsidiary shall be under any obligation
whatsoever to maintain any such product liability insurance policy, (ii)
Kellstrom and Kellstrom Subsidiary shall not have the right to be indemnified
against damages, costs, liabilities and expenses that result from, arise out of,
relate to, or are in the nature of or caused by an action or inaction of
Kellstrom or Kellstrom Subsidiary that occurs or continues after the Closing
Date, even if Kellstrom and Kellstrom Subsidiary are entitled hereunder to be
indemnified for damages, costs, liabilities and expenses arising out of similar
or equivalent action or inaction of the Company or the Principal with respect to
a time prior to the Closing date, (iii) the Company and the Principal hereby
covenant to diligently pursue the litigation described in Items 1 through 4 on
SCHEDULE 3.19 and shall pay over, assign and convey to Kellstrom and Kellstrom
Subsidiary all amounts recovered relating to such litigation, less reasonable
legal fees and expenses actually incurred following the Closing Date relating to
such litigation (it being understood that neither Kellstrom nor Kellstrom
Subsidiary assume or shall assume and shall not be deemed to have assumed under
this Agreement or the transactions contemplated hereunder any liabilities,
contingent or otherwise, or obligations arising out of or in connection with
such litigation) and (iv) the Company and the Principal shall diligently pursue
the matter described in Item 6 of SCHEDULE 3.19 to ensure that valid title to
the aircraft described in Item 6 of SCHEDULE 3.19 is delivered to Kellstrom
Subsidiary."
3. The Company and the Principal hereby covenant and agree to
deliver to Kellstrom, within three months of the Closing Date, a pro forma Form
1020S for the Company for the period from January 1, 1998 through the Closing
Date and the related Form K-1 of the Principal to verify that the Interim Period
Tax Distribution shall not exceed the actual tax liability of the Principal (the
"Actual Tax Liability") attributable to the income of the Company for the period
from January 1, 1998 through the Closing Date. Following such delivery, either
(x) the Principal shall promptly return to Kellstrom Subsidiary an amount equal
to the excess of the Interim Period Tax Distribution over the Actual Tax
Liability or (y) Kellstrom or Kellstrom Subsidiary shall promptly pay Principal
an amount equal to the excess of the Actual Tax Liability over the Interim
Period Tax Distribution. In the event that the actual Form 1020S filed by the
Company and the related K-1 differ from the pro forma Form 1020S and K-1
delivered hereunder, appropriate adjustment shall be made between the parties so
that the Interim Period Tax Distribution equals the Actual Tax Liability.
4. This Amendment may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
5. This Amendment shall be governed by and construed and
enforced in accordance with the laws of the State of New York.
-3-
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have duly executed this
Amendment as of the date set forth above.
KELLSTROM INDUSTRIES,INC.
By: /s/ Zivi R. Nedivi
---------------------------
Zivi R. Nedivi
President and
Chief Executive Officer
INTEGRATED TECHNOLOGY
HOLDINGS CORP.
By: /s/ Zivi R. Nedivi
---------------------------
Zivi R. Nedivi
President
INTEGRATED TECHNOLOGY CORP.
By: /s/ Gideon Vaisman
---------------------------
Title: President
------------------------
/s/ Gideon Vaisman
------------------------------
GIDEON VAISMAN
-4-
<PAGE> 1
EXHIBIT 10.3
AMENDMENT (NO. 2)
TO THE ASSET PURCHASE AGREEMENT
-------------------------------
Amendment (No. 2), dated as of March 13, 1998, to the ASSET PURCHASE
AGREEMENT, dated as of February 27, 1998, as amended by Amendment (No. 1) dated
March 13, 1998 (the "Agreement"), by and among (i) Kellstrom Industries, Inc., a
Delaware corporation ("Kellstrom"), (ii) Integrated Technology Holdings Corp., a
Delaware corporation and a wholly-owned subsidiary of Kellstrom ("Kellstrom
Subsidiary"), (iii) Integrated Technology Corp., a New Jersey corporation (the
"Company"), and (iv) Gideon Vaisman, an individual residing at 22 Woodland
Drive, Tenafly, New Jersey 07670 (the "Principal").
WHEREAS, Kellstrom, Kellstrom Subsidiary, the Company and the Principal
have determined that it is in the best interest of the parties, and in
furtherance of their purposes, to amend the Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements
hereinafter contained, the parties hereto agree as follows:
1. The Agreement shall be amended by:
(a) deleting SCHEDULE 2.03(A) (including Appendix X thereto)
in its entirety and replacing it with SCHEDULE 2.03(a)
attached hereto.
(b) deleting Section 2.03(c) in its entirety and replacing it
with the following:
"(c) CALCULATION OF ADDITIONAL PAYMENTS. The
calculation of the Additional Payment, if any, for
each Payment Year (as defined in Schedule 2.03(a))
shall be determined by Kellstrom and delivered to the
Company and the Principal within [_______] days of
the conclusion of each Payment Year."
(c) deleting in its entirety the paragraph immediately
following clause (z) of Section 7.09 and replacing it with the
following:
"Termination of the Employment Agreement, or the
non-competition provisions contained therein, shall
in no way affect or diminish the obligations of the
Principal pursuant to this Section 7.09.
Notwithstanding the foregoing or anything else in
this Agreement to the contrary, (a) in the event that
it is determined as set forth in Section 2.03, or
otherwise
<PAGE> 2
agreed to by Kellstrom that Kellstrom is required to
pay the Company Additional Payments and Kellstrom is
in default of such payments or (b) the Principal
leaves the employ of Kellstrom for good reason (as
defined in Section 5(d) of the Employment Agreement),
the non-competition provisions contained herein shall
terminate."
(d) Section 7.12 of the Agreement is deleted in its entirety.
2. The letter agreement, dated June 23, 1998, by and among Kellstrom,
Kellstrom Subsidiary, the Company and the Principal, is null and void and of no
force or effect.
3. Except as amended herein, the Agreement shall remain in full force
and effect.
1. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
4. This Amendment shall be governed by and construed and enforced in
accordance with the laws of the State of New York.
-2-
<PAGE> 3
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as of the date set forth above.
KELLSTROM INDUSTRIES, INC.
By: /s/ Zivi R. Nedivi
---------------------------------------
Zivi R. Nedivi
President and Chief Executive Officer
INTEGRATED TECHNOLOGY HOLDINGS CORP.
By: /s/ Zivi R. Nedivi
---------------------------------------
Zivi R. Nedivi
President
INTEGRATED TECHNOLOGY CORP.
By: /s/ Gideon Vaisman
---------------------------------------
Title: President
------------------------------------
/s/ Gideon Vaisman
------------------------------------------
GIDEON VAISMAN
-3-
<PAGE> 4
SCHEDULE 2.03(A)
.
5. The Company shall be entitled to certain additional payments (the
"ADDITIONAL PAYMENTS"), if any, calculated in accordance with this Schedule
2.03(a). The term "PAYMENT YEARS" shall mean each of the three twelve-month
periods ending December 31, 1998, 1999 and 2000.
(a) If Kellstrom has Net Income (as hereinafter defined) for any
Payment Year in an amount equal to or greater than Kellstrom's target net income
as determined in the sole discretion of the Board of Directors of Kellstrom (or
its Executive Committee of the Board of Directors) relating to Kellstrom's
senior executive officers for such Payment Year (the "Target"), the Additional
Payment shall be $3,333,333, it being understood that such Additional Payment
shall not be increased in the event that Kellstrom's Net Income exceeds the
Target in such Payment Year.
(b) If Kellstrom has Net Income for such Payment Year of less than 50%
of the Target, the Company shall not be entitled to an Additional Payment for
such Payment Year.
(c) If Kellstrom has Net Income for such Payment Year of at least 50%
of the Target but less than the Target, the Company shall be entitled to an
Additional Payment as calculated below:
AP = $3,333,333 -[ $3,333,333 x (T-NI) ]
--------
T
where:
AP = the Additional Payment for such year.
T = the Target for such Payment Year.
NI = the actual Net Income of Kellstrom for such Payment Year.
"Net Income" means the net income of Kellstrom as determined by the
independent auditors of Kellstrom, in conformity with generally
accepted accounting principles and practices in the United States
applied on a consistent basis with prior periods of Kellstrom, [as
reported by Kellstrom in its annual report on Form 10-K, filed with the
Securities and Exchange Commission, relating to the applicable Payment
Year].
(d) Kellstrom shall inform the Company and the Principal of the Target
for each Payment Year immediately following the determination of the Target by
the Board of Directors of Kellstrom (or its Executive Committee of the Board of
Directors) [which determination shall be made no later than [______] in any
Payment Year].
-4-
<PAGE> 5
6. The Company may assign the right to receive Additional Payments
under this Schedule 2.03(a) to Gideon Vaisman.
7. Notwithstanding anything to the contrary contained in this Agreement
or in the Employment Agreement, dated the Closing Date, between Gideon Vaisman
and Kellstrom Subsidiary (the "Employment Agreement"), in the event that (i)
Gideon Vaisman's employment under the Employment Agreement is terminated under
Section 5(c)(i), (ii) or (iii) of the Employment Agreement, all rights to
receive Additional Payments not yet received relating to Payment Years ending
after the date of any such termination shall be null and void and of no further
force or effect.
-5-
<PAGE> 1
EXHIBIT 10.4
AMENDMENT (NO.1)
TO THE EMPLOYMENT AGREEMENT
---------------------------
Amendment (No. 1), dated as of September 15, 1998, to the EMPLOYMENT
AGREEMENT, dated as of February 27, 1998 (the "Agreement"), by and among
Integrated Technology Holdings Corp., a Delaware corporation (the "Company"),
and Gideon Vaisman, an individual residing at 22 Woodland Drive, Tenafly, New
Jersey 07670 (the "Employee").
WHEREAS, the Company and the Employee have determined that it is in the
best interest of the parties, and in furtherance of their purposes, to amend the
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements
hereinafter contained, the parties hereto agree as follows:
1. Section 5(c)(iv) of the Agreement is deleted in its entirety.
2. The Agreement is amended by deleting the second paragraph of Section
7 in its entirety and replacing it with the following paragraph:
"Notwithstanding anything in this Agreement to the contrary, (a) in the
event that it is determined as set forth in Section 2.03 of the
Purchase Agreement, or otherwise agreed to by Kellstrom that Kellstrom
is required to pay to the Company the Additional Payments (as defined
in Schedule 2.03(a) to the Purchase Agreement), and Kellstrom is in
default of such payments, or (b) if Employee leaves the employ of the
Company for good reason (as defined in Section 5(d) of this Agreement),
the non-competition provisions set forth herein shall terminate."
1. Except as amended herein, the Agreement shall remain in full force
and effect.
3. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
4. This Amendment shall be governed by and construed in accordance with
the laws of the State of Florida.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned have duly executed this Amendment
as of the date set forth above.
INTEGRATED TECHNOLOGY HOLDINGS
CORP.
By: /s/ Zivi R. Nedivi
----------------------------
Zivi R. Nedivi
President
/s/ Gideon Vaisman
-------------------------------
GIDEON VAISMAN
-2-
<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 SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 895
<SECURITIES> 0
<RECEIVABLES> 20,368
<ALLOWANCES> 2,141
<INVENTORY> 93,923
<CURRENT-ASSETS> 119,124
<PP&E> 12,494
<DEPRECIATION> 1,702
<TOTAL-ASSETS> 322,507
<CURRENT-LIABILITIES> 24,047
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 141,840
<TOTAL-LIABILITY-AND-EQUITY> 322,507
<SALES> 98,264
<TOTAL-REVENUES> 119,960
<CGS> 65,602
<TOTAL-COSTS> 92,406
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,422
<INCOME-PRETAX> 20,455
<INCOME-TAX> 7,629
<INCOME-CONTINUING> 12,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,826
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTRED FROM THE
KELLSTROM INDUSTRIES, INC. BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE
PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 703
<SECURITIES> 907
<RECEIVABLES> 7,071
<ALLOWANCES> 187
<INVENTORY> 52,275
<CURRENT-ASSETS> 64,261
<PP&E> 4,281
<DEPRECIATION> 1,056
<TOTAL-ASSETS> 101,644
<CURRENT-LIABILITIES> 41,842
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 47,569
<TOTAL-LIABILITY-AND-EQUITY> 101,644
<SALES> 50,236
<TOTAL-REVENUES> 54,768
<CGS> 32,710
<TOTAL-COSTS> 42,637
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,918
<INCOME-PRETAX> 9,469
<INCOME-TAX> 3,542
<INCOME-CONTINUING> 5,927
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,927
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.67
</TABLE>
