<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-52917
$75,000,000
(Kellstrom Industries Logo)
Kellstrom Industries, Inc.
5 1/2% Convertible Subordinated Notes Due 2003
------------------
The 5 1/2% Convertible Subordinated Notes Due 2003 (the "Notes") to be
issued by Kellstrom Industries, Inc. (the "Company" or "Kellstrom") will be
convertible into shares of common stock, par value $0.001 per share, of the
Company (the "Common Stock") at any time after 60 days following the latest date
of the original issuance thereof and prior to maturity, unless previously
redeemed or repurchased, at a conversion price of $32 1/2 per share, subject to
certain adjustments. See "Description of Notes -- Conversion of Notes." The
Common Stock is traded on the Nasdaq National Market under the symbol "KELL." On
June 11, 1998, the last reported sale price of the Common Stock was $26 1/16 per
share.
Interest on the Notes is payable on June 15 and December 15 of each year,
commencing on December 15, 1998. The Notes will be redeemable, at any time, on
at least 15 days' notice at the option of the Company, in whole or in part, at
the redemption prices set forth in this Prospectus, in each case, together with
accrued interest. Subject to certain restrictions and conditions, in the event
of a Change in Control (as defined), each holder of the Notes may require the
Company to repurchase all or a portion of such holder's Notes at 100% of the
principal amount thereof, together with accrued interest to the date of
repurchase. See "Description of Notes -- Optional Redemption by the Company" and
"-- Repurchase at Option of Holders Upon Change in Control." The Notes are not
entitled to any sinking fund. The Notes will mature on June 15, 2003.
The Notes are general unsecured obligations of the Company and will be
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined) of the Company. As of June 11, 1998, the Company had approximately
$102.1 million of Senior Indebtedness outstanding. After giving effect to the
offering of the Notes and the Common Stock offered concurrently herewith and the
application of net proceeds therefrom, the Company, as of June 11, 1998, would
have had approximately $11.3 million of Senior Indebtedness outstanding. The
Indenture will not restrict the Company or its subsidiaries from incurring
Senior Indebtedness or other indebtedness.
Concurrently with the Notes Offering, the Company is offering 2,750,000
shares of its Common Stock by a separate prospectus. The consummation of the
Notes Offering and the Common Stock Offering are not conditioned upon each
other.
------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY INVESTORS
IN EVALUATING AN INVESTMENT IN THE NOTES OFFERED HEREBY, SEE "RISK FACTORS"
BEGINNING ON PAGE 12.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
========================================================================================================================
INITIAL PUBLIC UNDERWRITING PROCEEDS TO
OFFERING PRICE(1) DISCOUNT(2)(3) COMPANY(1)(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.................................. 100% 3% 97%
- ------------------------------------------------------------------------------------------------------------------------
Total(4).................................. $75,000,000 $2,250,000 $72,750,000
========================================================================================================================
</TABLE>
(1) Plus accrued interest, if any, from June 17, 1998.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of $475,000 payable by the Company.
(4) The Company has granted the Underwriters an option for 30 days to purchase
up to an additional $11,250,000 aggregate principal amount of Notes at the
offering price shown above, less the underwriting discount, solely to cover
over-allotments, if any. If such option is exercised in full, the total
public offering price, underwriting discount and proceeds to Company will be
$86,250,000, $2,587,500 and $82,662,500, respectively. See "Underwriting."
------------------
The Notes offered hereby are offered severally by the Underwriters, as
specified herein, subject to receipt and acceptance by them and subject to their
right to reject any order in whole or in part. It is expected that the Notes
will be ready for delivery in book-entry form only through the facilities of DTC
in New York, New York on or about June 17, 1998, against payment therefor in
immediately available funds.
BT Alex. Brown Brean Murray & Co., Inc.
THE DATE OF THIS PROSPECTUS IS JUNE 11, 1998.
<PAGE> 2
KELLSTROM INDUSTRIES, INC.
(Photos containing airplane, engine, engine parts and Company personnel)
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES OR THE COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE
OFFERING. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY)
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES
EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus and in the
documents incorporated herein by reference. Unless otherwise indicated, (i) all
references to the "Company" or "Kellstrom" refer to Kellstrom Industries, Inc.
and its wholly-owned subsidiaries, unless the context otherwise requires, and
(ii) all information contained in this Prospectus assumes that the Underwriters'
over-allotment option is not exercised. See "Underwriting." This Prospectus
contains forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
such forward-looking statements. Factors that might cause differences include,
but are not limited to, those discussed in "Risk Factors."
THE COMPANY
GENERAL
Kellstrom is a leader in the airborne equipment segments of the
international aviation services after-market. The Company's principal business
is the purchasing, overhauling (through subcontractors), reselling and leasing
of aircraft, engines and engine parts. The Company specializes in providing
engines and after-market engine parts for large turbo-fan engines manufactured
by CFM International, General Electric, Pratt & Whitney and Rolls Royce. The
Company believes that the engine types which it sells and leases and for which
it supplies parts comprise in excess of 85% of the total world jet engine
supply. The Company is a supplier to a broad base of approximately 1,000
domestic and international customers representing nearly all segments of the
worldwide aviation industry, including commercial airlines such as American,
Delta, Lufthansa, SwissAir and Singapore Airlines, and original equipment
manufacturers ("OEMs") and engine overhaul facilities such as Daimler-Benz, GE
Aircraft Engine Services and Pratt & Whitney. The Company enables customers to
reduce their inventory, inventory carrying costs and airborne equipment
maintenance costs by offering a broad inventory of engines and engine parts on a
timely basis and at competitive prices. For the fiscal year ended December 31,
1997, the Company generated revenues of $79.4 million, EBITDA of approximately
$23.8 million and net earnings of $8.5 million (or $0.95 per diluted share). On
a pro forma basis, giving effect to the acquisitions completed by the Company
since January 1997 and the Company's proposed Aerocar Acquisition (as defined
below), the Company generated revenues of approximately $143.8 million, EBITDA
of approximately $45.0 million and net earnings of approximately $15.0 million
(or $1.64 per diluted share) for the fiscal year ended December 31, 1997.
The Company's business strategy is focused on strong and controlled
internal growth, supplemented by strategic inventory purchases and acquisitions
of competing and complementary businesses meeting pre-defined criteria. The
Company pursues acquisitions to strengthen current product lines, increase
access to customers in its existing markets and expand into new product lines
and markets. In evaluating acquisition opportunities, the Company's management
considers the following criteria in addition to customary business and
operational due diligence: the effects on earnings per share, the expected
stability and inherent strength of gross margins and a comparative analysis of
returns on invested capital and assets.
The Company's operating approach enables it to pursue its growth plans
while maintaining and improving operating efficiencies and results. As the
Company's operations team strives to enhance internal procedures and controls,
streamline distribution channels and maintain and expand customer relationships
and account management, the Company's acquisition team works continuously with
external advisors to identify, structure and consummate acquisitions. This
operating approach enables the Company to manage the internal growth of its
business and integrate acquired businesses while continuing to evaluate
acquisition opportunities.
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THE INDUSTRY
The airline industry has experienced rapid growth in the level of air
travel and the volume of air cargo in recent years and is expected by industry
analysts to continue to face such growth in the future. According to the Boeing
1997 Current Market Outlook (the "Boeing Report"), air travel is expected to
rise over current levels by approximately 75% by 2006 and by approximately 250%
by 2016. While this growth to date has been accommodated largely by increasing
load factors, airlines are responding by expanding fleet size. The Boeing Report
projects that the worldwide fleet of commercial aircraft is expected to double
from approximately 11,500 at the end of 1996 to approximately 23,000 by 2016,
and the worldwide fleet of cargo jet aircraft is expected to increase from
approximately 1,230 in 1996 to approximately 2,350 by 2016.
This increase in worldwide air travel has resulted in a corresponding
increase in demand for aircraft, engines and after-market engine parts. In light
of FAA requirements that aircraft engines and engine parts be serviced at
scheduled intervals of flying hours, the increase in worldwide air travel has
resulted in the need for more frequent servicing cycles and a corresponding
increase in demand for engines and engine parts. As a result of cost
considerations, the Company believes that many airlines and repair and
maintenance facilities that historically purchased parts from new parts
manufacturers are increasingly utilizing after-market parts sold by resellers
such as the Company.
The aircraft engine and engine parts market is estimated by the United
States Department of Commerce to exceed $18 billion. The resale segment of this
market is highly fragmented, characterized by a limited number of large
suppliers with broad product offerings and numerous smaller competitors serving
niche markets. Several notable trends in the industry have recently emerged to
improve safety, reduce costs and increase efficiency, including increasing
emphasis on documentation and traceability of parts, outsourcing of inventory
management functions, implementing "just-in-time" inventory management systems
and reducing the number of approved suppliers. The Company believes that only
those companies with superior quality assurance programs, sophisticated
information systems and adequate capital will succeed in this changing
environment. The Company is an active participant in the consolidation of the
industry, having completed four acquisitions in the past 16 months with combined
annual revenues in the year preceding the acquisition of approximately $75
million, and having entered into a definitive agreement to acquire Aerocar (as
defined below), which had 1997 annual revenues of approximately $42 million.
BUSINESS STRATEGY
The elements of the Company's business strategy are the following:
- STRONG AND CONTROLLED INTERNAL GROWTH. The Company has achieved strong
and controlled internal growth by increasing business with its existing
customers, expanding its customer base and constantly improving the efficiency
of its operations. From 1996 to 1997, the total revenue of the Company (without
taking into account any increases in revenue resulting from acquisitions)
increased by 43%. During the same time period, the Company quadrupled the size
of its marketing department to support its customer base, which grew from
approximately 175 to approximately 1,000. The Company believes that the focus of
its core business on purchasing, overhauling (through subcontractors), reselling
and leasing airborne equipment results in cost-efficient operations which
maximize its profit margins and minimize its dependence on expensive machinery,
equipment and labor. The Company believes that its efficiency is exemplified by
its increased sales per employee. Between its first quarter of fiscal 1996 and
its first quarter of fiscal 1998, the Company's annualized sales per employee
increased from approximately $1.1 million to approximately $2.5 million. The
Company intends to further improve efficiency by continuing to centralize its
management and consolidate its operations in a new state-of-the-art, 195,000
square foot headquarters facility, which is expected to be completed in late
1998.
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<PAGE> 5
- STRATEGIC INVENTORY PURCHASES. The Company believes that its potential
to increase revenues from its existing business is largely dependent on its
ability to deliver aircraft, engines and engine parts on a "just-in-time" basis.
The lead time between purchasing aircraft, engines and engine parts and having a
ready-for-sale product is generally 60-90 days. The Company focuses on
developing new sources of supply, such as OEMs and overhaul facilities, as well
as airlines which are replacing portions of their fleets or disposing of excess
inventory. By broadening its sources of supply, the Company is better able to
maintain a strategic stock of inventory in order to remain responsive to
customer demands and delivery requirements. The Company relies on its market
expertise and industry network to analyze both short and long-term trends in
supply and demand in the aviation industry.
- AIRBORNE EQUIPMENT LEASING. The Company is focusing its leasing efforts
on aircraft and engines. The Company's lease program offers customers increased
financial flexibility by offering short to medium-term leases (approximately 3
to 36 months), which require relatively small initial capital investments. The
Company's lease program also provides the Company access to a regular supply of
aircraft, engines and engine parts. As leases expire, the Company can elect to
overhaul, sell or disassemble the leased equipment depending upon then existing
market supply and demand.
- ACQUISITIONS IN EXISTING COMMERCIAL AVIATION MARKETS. As a result of its
concentration in certain niche markets, the Company's management develops
in-depth knowledge of other resellers serving similar product lines that may be
potential acquisition candidates. The recent acquisition of ITC (as defined
below) has, and the proposed Aerocar Acquisition will, upon completion, expand
the Company's customer base within its existing commercial aviation product
lines, enhance its product offering and strengthen its distribution network. See
"Business -- Recent Developments."
- ACQUISITIONS IN ADJACENT MARKETS. As a result of its position in the
industry, the Company's management also becomes familiar with companies serving
complementary markets that may be attractive acquisition candidates. The Company
continually works with outside advisors to evaluate and pursue companies that
will enable it to expand into product lines and markets in which the Company
does not have a significant presence. As a result of the acquisition of Aero
Support (as defined below) in September 1997, the Company is able to offer
engines and engine parts to customers in the large cargo transport aircraft and
commercial helicopter markets, which were not previously served by the Company.
The Company believes that similar expansion may be achieved through the
acquisitions of companies offering different product lines than those of the
Company, such as resellers of avionics equipment and airframes.
COMPETITIVE STRENGTHS
The Company believes that it will be able to achieve its business strategy
through the following competitive strengths:
- QUALITY ASSURANCE. The Company believes that it was the first reseller
of commercial jet engines and engine parts to receive ISO 9002 certification
from the International Standards Organization ("ISO"), providing it with a
distinctive competitive strength. The ISO's comprehensive evaluation system
seeks to ensure satisfaction of customer requirements, documentation of quality
management systems and verification that a product or service is designed,
delivered and maintained in accordance with specific requirements. To refine its
document storage and retrieval capabilities, the Company relies on a
sophisticated optical imaging system, which further ensures quality assurance by
maximizing the Company's ability to respond to customers as well as to provide
accurate documentation of its inventory.
- BROAD ARRAY OF PRODUCTS AND SERVICES. The Company buys, overhauls
(through subcontractors), sells and leases a broad array of aircraft, engines
and engine parts. In addition, the Company provides inventory management
services. Through its recent acquisitions, the Company
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has expanded its supply of aircraft, engines and engine parts in the markets it
serves, and has expanded its products and services into new markets. The Company
believes that this breadth of products and services gives it a competitive
advantage in obtaining business from new customers and affords an opportunity to
expand its business with existing customers. It also positions the Company to
respond to its customers' desire to focus on a select group of suppliers to
control costs, increase quality and enhance timeliness of delivery.
- LARGE AND DIVERSE CUSTOMER BASE. The Company serves a broad base of
approximately 1,000 domestic and international customers representing nearly all
segments of the worldwide aviation industry, including commercial airlines such
as American, Delta, Lufthansa, SwissAir and Singapore Airlines, and OEMs and
overhaul facilities such as Daimler-Benz, GE Aircraft Engine Services and Pratt
& Whitney.
- MARKET FOCUS. The Company focuses its operations on the technical,
logistical and financial aspects of inventory management. Unlike many of its
competitors which have diversified into the manufacturing, refurbishing and
overhauling markets, the Company has remained focused on its core business of
buying, overhauling (through subcontractors), selling and leasing aircraft,
engines and engine parts. In focusing its business on inventory management, the
Company is able to keep its capital investments to a minimum and dedicate most
of its liquid resources to inventory purchases. As a result, the Company does
not risk committing the large capital investments required to compete in the
manufacturing and overhaul segments of the industry. The Company believes that
this enables it to maximize the cost-efficiency and profitability of its
operations.
- STRONG MANAGEMENT TEAM. The members of the Company's senior operations
team has an average of over 18 years of experience in the aviation industry,
having worked for such industry participants as The AGES Group, Aviation Sales
Company, Chromalloy Research and Technology Corporation, Israel Aircraft
Industry Ltd. and United Airlines. The Company believes that its management team
has a depth of industry knowledge and experience across technical, marketing and
financial functions that permits it consistently to manage and meet expectations
of its customers. Through its acquisitions, the Company continues to add to its
senior management team individuals with experience in the aviation industry who
share the objective of increasing stockholder value. In this connection, all
members of the Company's senior management are paid a performance bonus based on
the profitability of the Company and are encouraged to become stockholders of
the Company through the open market purchases of shares of Common Stock and
through participation in the Company's stock option plans.
- CAPITAL AND OTHER RESOURCES. As a result of the Company's available
capital, the Company regularly seeks to develop and pursue opportunities to
expand its product, customer and service bases, to make selected acquisitions
and to evaluate bulk purchases of inventory. The Company's market presence,
industry experience, sophisticated MIS systems and available capital enable the
Company to analyze and complete acquisitions and inventory purchases quickly,
which the Company believes gives it an effective competitive advantage.
RECENT DEVELOPMENTS
- ITC ACQUISITION. The Company acquired all of the assets, and assumed
certain of the liabilities, of Integrated Technology Corp. ("ITC") on April 1,
1998 (the "ITC Acquisition"). ITC is a leading after-market supplier of jet
engines and jet engine parts for the airline industry and also provides related
services such as engine leasing. For the fiscal year ended December 31, 1997,
ITC's revenue was approximately $29 million and its EBITDA was approximately
$6.3 million. See "Business -- Recent Developments -- ITC Acquisition."
- AEROCAR ACQUISITION. The Company entered into an agreement on May 6,
1998 to acquire all of the outstanding capital stock of Aerocar Aviation Corp.
("Aerocar Aviation") and Aerocar Parts, Inc. ("Aerocar Parts," and together with
Aerocar Aviation, "Aerocar"), and expects to consummate this acquisition (the
"Aerocar Acquisition") upon the fulfillment of certain conditions following the
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consummation of the Common Stock Offering and Notes Offering. Aerocar is engaged
in the sale and lease of aircraft, engines and engine parts to major airlines
and regional carriers. For the fiscal year ended December 31, 1997, Aerocar's
revenue was approximately $42 million and its EBITDA was approximately $13.3
million (excluding the impact of certain extraordinary transactions and payments
to shareholders). See "Business -- Recent Developments -- Aerocar Acquisition."
- BENEFITS OF ACQUISITIONS. As a result of the Company's recent
acquisitions, the Company has expanded its senior management team, broadened its
product base to include additional lines of engines such as the Rolls Royce
RB-211 and the Pratt & Whitney JT8D and broadened its customer base to bring its
total number of customers to approximately 1,000.
The Company's principal executive office is located at the Sawgrass
International Corporate Park, 14000 N.W. 4th Street, Sunrise, Florida 33325. Its
telephone number is (954) 845-0427.
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<PAGE> 8
THE OFFERING
Securities Offered............ $75,000,000 aggregate principal amount of
5 1/2% Convertible Subordinated Notes Due 2003
(the "Notes," and the offering of such Notes,
the "Notes Offering"). The Company has granted
the Underwriters an option for 30 days to
purchase up to $11,250,000 additional aggregate
principal amount of Notes, solely to cover
over-allotments.
Interest Payment Dates........ Interest on the Notes is payable at the rate
set forth on the cover page hereof,
semi-annually on each June 15 and December 15,
commencing December 15, 1998.
Maturity Date................. June 15, 2003
Conversion.................... The Notes are convertible at any time after 60
days following the latest date of the original
issuance thereof and prior to maturity, unless
previously redeemed or repurchased, into shares
of Common Stock at a conversion price of
$32 1/2 per share, subject to adjustment in
certain circumstances as described herein. See
"Description of Notes -- Conversion of Notes."
Subordination................. The Notes are unsecured and subordinated in
right of payment to all existing and future
Senior Indebtedness (as defined herein) of the
Company. As defined, Senior Indebtedness will
include the Company's long-term debt and
capital leases and any outstanding balance on
its Credit Facility (as defined). As of June
11, 1998, the Company had approximately $102.1
million aggregate principal amount of Senior
Indebtedness outstanding, approximately $90.8
million of which will be repaid with the net
proceeds from this Offering and the concurrent
Common Stock Offering. The Indenture will not
restrict the Company or its subsidiaries from
incurring additional Senior Indebtedness or
other indebtedness. The Notes are pari passu to
the 5 3/4% Notes (as defined herein). See
"Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of
Operations" and "Description of
Notes -- Subordination of Notes."
Redemption at the Option of
the Company................. The Notes will be redeemable at the Company's
option, in whole or in part, at any time on at
least 15 days' notice on or after June 15, 2001
at the redemption prices set forth herein plus
accrued interest to the date of redemption. See
"Description of Notes -- Optional Redemption by
the Company."
Repurchase at Option of
Holders upon a Change of
Control..................... In the event of a Change of Control (as
hereinafter defined), each holder of Notes may
require the Company to repurchase its Notes, in
whole or in part at a repurchase price of 100%
of the principal amount of Notes to be
repurchased, plus accrued interest to the
repurchase date. If a Change of Control were to
occur, there could be no assurance that the
Company would have sufficient funds to pay the
repurchase price for the Notes tendered by the
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holders thereof or that the Company would be
permitted to repurchase the Notes under its
then-existing credit arrangements. See
"Description of Notes -- Repurchase at Option
of Holders Upon Change in Control."
Use of Proceeds............... The Company intends to use the net proceeds
from the Notes Offering and the concurrent
Common Stock Offering to repay outstanding
borrowings under its revolving credit facility,
to finance the Aerocar Acquisition and for
general corporate purposes. See "Use of
Proceeds."
Listing....................... The Notes are a new issue of securities with no
established trading market. The Underwriters
have advised the Company that they intend to
make a market in the Notes. The Underwriters
are not obligated, however, to make a market in
the Notes, and any such market making may be
discontinued at any time at the sole discretion
of the Underwriters without notice. See
"Underwriting."
Common Stock.................. The Common Stock is quoted on the Nasdaq
National Market under the symbol "KELL."
Risk Factors.................. See "Risk Factors" for certain considerations
relevant to an investment in the Notes offered
hereby.
Concurrent Common
Stock Offering.............. Concurrently with the Notes Offering, the
Company is offering 2,750,000 shares of Common
Stock (the "Common Stock Offering") by a
separate prospectus. The consummation of the
Common Stock Offering and the Notes Offering
are not conditioned upon each other.
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
Set forth below is a summary of consolidated financial and operating data
of the Company for the periods and as of the dates indicated. This information
should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes thereto included elsewhere in this Prospectus,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and other information contained elsewhere in this Prospectus and
incorporated herein by reference.
(IN THOUSANDS, EXCEPT SHARE DATA AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- -------------------------------------
1995 1996 1997 1997 1998
--------- --------- --------------------- --------- -------------------------
PRO PRO
ACTUAL FORMA(1) ACTUAL FORMA(2)
--------- --------- ---------- ----------
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INCOME STATEMENT DATA:
Total revenues..................... $ 8,579 $ 24,922 $ 79,439 $143,793 $ 16,466 $ 29,091 $ 42,060
Gross Profit....................... 3,201 8,686 28,044 57,376 5,739 10,379 16,977
EBITDA(3).......................... 1,719 5,781 23,761 44,977 4,623 8,988 14,963
Operating income................... 1,517 4,753 17,611 35,101 3,680 6,352 11,526
Interest expense, net.............. (225) 645 3,991 11,085 1,036 1,638 3,121
Earnings before income taxes....... 632 4,109 13,620 24,016 2,644 4,714 8,405
Net earnings....................... 374 2,646 8,543 15,010 1,659 2,942 5,253
Net earnings per share:
Basic............................. .14 .90 1.18 2.07 .29 .36 .65
Diluted........................... .10 .56 .95 1.64 .21 .29 .49
Weighted average number of common
shares outstanding:
Basic............................. 2,745,265 2,943,902 7,266,534 7,266,534 5,725,255 8,118,711 8,118,711
Diluted........................... 3,609,956 4,759,890 9,394,439 9,394,439 7,922,924 11,739,791 11,739,791
OTHER OPERATING DATA:
EBITDA margin...................... 20.0% 23.2% 29.9% 31.3% 28.1% 30.9% 35.6%
Current ratio...................... 2.6x 2.3x 2.8x 2.3x 2.6x 4.6x 4.3x(5)
Return on average equity........... 3.3% 16.9% 25.1% 44.1% 21.8% 22.7% 40.6%
Debt to equity..................... 38.9% 45.1% 146.4% 289.6% 85.1% 209.2% 114.7%(5)
Sales per employee................. $ 746 $ 1,424 $ 1,869 $ 2,130 * * *
Ratio of earnings to fixed
charges(4)........................ 2.8x 7.2x 4.0x 3.2x 3.3x 3.7x 3.6x
</TABLE>
* Not available
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(5)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 701 $ 25,293
Working capital............................................. 51,742 92,730
Total assets................................................ 180,212 293,793
Long-term debt.............................................. 111,961 140,250
Stockholders' equity........................................ 53,530 122,290
</TABLE>
- ---------------
(1) Gives pro forma effect to the acquisition of substantially all of the assets
and certain of the liabilities of Aero Support USA, Inc. ("Aero Support") in
September 1997 (the "Aero Support Acquisition"), the ITC Acquisition and the
proposed Aerocar Acquisition as if such acquisitions had been consummated as
of January 1, 1997. See "Business -- Recent Developments" and Note 17 to the
Company's Consolidated Financial Statements appearing elsewhere in this
Prospectus.
(2) Gives pro forma effect to the ITC Acquisition and the proposed Aerocar
Acquisition as if such acquisitions had been consummated as of January 1,
1998.
(3) EBITDA represents earnings before net interest expense, income taxes,
depreciation and amortization, non-recurring charges and extraordinary
items. EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring a company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations, as defined by generally accepted accounting principles, and
should not be
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considered as a substitute for net earnings, as an indicator of the
Company's operating performance or cash flow, or as a measure of its
liquidity.
(4) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes, interest income and fixed
charges. Fixed charges consist of interest expense, which includes the
amortization of deferred financing costs related to the Company's
outstanding indebtedness.
(5) Gives pro forma effect to the ITC Acquisition and the proposed Aerocar
Acquisition as if such acquisitions had been consummated as of January 1,
1998, and as adjusted for the Common Stock Offering and the Notes Offering
and the application of the net proceeds therefrom as described in "Use of
Proceeds."
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RISK FACTORS
In evaluating the Company's business, prospective investors should
carefully consider the following factors in addition to the information
contained elsewhere in this Prospectus and incorporated by reference herein.
LIMITED OPERATING HISTORY; POTENTIAL FLUCTUATIONS IN OPERATING
RESULTS. 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, the Company may experience
significant fluctuations in its net sales, 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 aviation industry, the availability and price of surplus aviation equipment,
the size and timing of customer orders and the cost of capital to the Company.
In a strategic response to a changing, competitive environment, the Company may
elect from time to time to make certain pricing, product or marketing decisions,
and any such decisions could have a material adverse effect on the Company's
periodic results of operations, including net sales and net income from quarter
to quarter. A large portion of the Company's operating expenses is relatively
fixed. Since the Company typically does not obtain long-term purchase orders or
commitments from its customers with respect to the sale of aircraft, engines and
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, financial condition and results of operations.
Therefore, 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.
MANAGEMENT OF GROWTH. The Company has recently experienced significant
expansion that has placed substantial demands upon its management, systems and
resources. The Company's ability to manage its future growth, if any, will
require the Company continually to improve its financial controls, management
controls, reporting systems and procedures on a timely basis, implement new
systems as necessary and expand, train and manage its workforce. There can be no
assurance that the Company's controls, systems or procedures will continue to be
adequate to support the Company's operations. The failure of the Company's
management to respond effectively to changing business conditions would have a
material adverse effect upon the Company's business, financial condition and
results of operations.
GROWTH STRATEGY AND RISKS RELATING TO ACQUISITIONS. A key element of the
Company's strategy involves growth through the acquisition of additional
inventories of aircraft, engines and engine parts and the acquisition of other
companies, assets or product lines that would complement or expand the Company's
existing business. The Company's ability to grow by acquisition is dependent
upon, and may be limited by, the availability of suitable aircraft, engines and
engine parts inventories, acquisition candidates and capital, and by
restrictions contained in the Company's credit agreements. The Company completed
the IASI Acquisition in January 1997, the Aero Support Acquisition in September
1997 and the ITC Acquisition in April 1998. The Company has entered into an
agreement providing for the proposed purchase by it of Aerocar which is expected
to close upon the fulfillment of certain conditions following the completion of
the Common Stock Offering and the Notes Offering. The process of seeking to
integrate an acquired company's business into the Company's operations may
result in ongoing and extraordinary operating difficulties and expenditures, may
absorb significant management attention that would otherwise be available for
the ongoing development of the Company's business and may result in charges
against income. In addition, future acquisitions by the Company could result in
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and amortization expenses related to goodwill and other
intangible assets, any of which could materially adversely affect the Company's
12
<PAGE> 13
operating results and financial condition. There can be no assurance that the
Company will be able to consummate the Aerocar Acquisition or any future
acquisitions on satisfactory terms or that it will be able to integrate
successfully newly acquired businesses into its existing operations. See
"Business -- Recent Developments."
UNCERTAIN SUPPLY OF INVENTORY. The Company obtains its inventories of
aircraft, engines and engine parts by purchasing surplus inventory from
airlines, overhaul facilities and other suppliers. There is no organized market
for surplus aircraft, engines and engine parts, and the Company must rely on
field representatives and personnel, advertisements and its reputation as a
buyer of surplus inventory in order to generate opportunities to purchase such
equipment. The market for bulk sales of surplus aircraft, engines and engine
parts is highly competitive, in some instances involving a bidding process.
While the Company has been able to purchase surplus inventory in this manner
successfully in the past, there can be no assurance that surplus aircraft,
engines and engine parts of the type required by the Company's customers will be
available on acceptable terms when needed in the future or that the Company will
continue to compete effectively in the purchase of such surplus equipment.
DEPENDENCE ON THIRD-PARTY AIRCRAFT ENGINE REPAIR FACILITIES. The Company
is dependent on third-party Federal Aviation Administration ("FAA")-approved
repair facilities to perform repair services to bring surplus aircraft, engines
and engine parts into a condition of airworthiness so that the Company can then
sell or lease such equipment to its customers. Third-party repair facilities may
experience heavy workloads or may allocate their resources to customers with
which they have entered into long-term, regularly scheduled aircraft engine and
airframe maintenance agreements and thereby delay the services to be provided to
the Company. The repair facilities utilized by the Company are responsible for
inspecting and certifying engines and engine parts to be of serviceable quality.
The Company does not have direct control over the quality of repairs performed
by such repair facilities or the accuracy of the airworthiness condition
designated by such facility. It is possible that engines and engine parts could
pass inspection by the Company, be sold by the Company and be incorporated into
an aircraft, and subsequently be determined to be unsafe or in need of further
repair. In such event, the FAA has the authority to take actions which may
include the grounding of an aircraft which contains such parts. Additionally,
the customer who purchased such engines or engine parts could demand a
replacement from the Company. While the Company has insurance coverage to cover
related losses, the effect of such a development on passenger confidence and
customer relations could have a material adverse effect upon the Company.
CUSTOMER CONCENTRATION. The Company's pro forma net sales to its five
largest customers accounted for approximately 22% of total pro forma net sales
for the year ended December 31, 1997 and 36% of total pro forma net sales for
the three months ended March 31, 1998. Specifically, for the year ended December
31, 1997, Willis Lease Finance Corporation, SwissAir, Lufthansa, AAR Corp. and
U.S. Turbine Engine Corp. accounted for 11%, 9%, 9%, 6% and 5% of the Company's
sales, respectively. While the relative significance of customers varies from
period to period as a result of the large unit prices associated with whole
aircraft engine sales, the loss of, or significant curtailments of purchases by,
one or more of the Company's significant customers at any time could have a
material adverse effect on the Company's business, financial condition and
results of operations.
CUSTOMER CREDIT RISKS. The Company's inability to collect receivables from
a substantial sale could adversely affect the Company's financial position and
results of operations for a particular period, although Company policy is
generally to sell whole engines for cash at closing. Kellstrom's bad debt
expense was less than 0.2% of sales for the years ended December 31, 1995, 1996
and 1997. The Company anticipates that it may incur greater bad debt losses in
the future as its customer base grows and the Company experiences greater
exposure to its customers as a result, in part, of the implementation of a
program for the leasing of aircraft engines and airframes. There can be no
assurance that the Company will not incur significant bad debt losses in the
future which
13
<PAGE> 14
individually, or in the aggregate, could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL. The Company depends upon the efforts of its
officers and directors. The loss of the services of such key personnel could
have a material adverse effect on the Company's ability to successfully achieve
its business objectives. Although each of the key employees has executed an
employment agreement that prohibits the employee from competing against the
Company for a specified period of time, there can be no assurance that such
remedy will be available to the Company or that such protection will mitigate
any losses incurred as a result of termination of employment.
PRODUCT LIABILITY. The Company's business exposes it to possible claims
for personal injury or death that may result from the failure of an aircraft or
engine owned and leased by it or an engine part sold by it. The Company
currently maintains product liability insurance coverage in the amount of $500
million on an aggregate and per claim basis. There can be no assurance that
claims will not arise in the future, that such insurance coverage can be
maintained in the future at an acceptable cost or that such coverage will be
adequate to cover any future liability of the Company. Any such liability not
covered by insurance could have a material adverse effect on the financial
condition of the Company.
YEAR 2000. The Year 2000 problem is the result of computer programs being
written using two digits rather than four to define the applicable year. The
Company has engaged a software consulting firm to replace its accounting and
inventory management software programs with programs that are Year 2000
compliant. There can be no assurance, however, that replacing such software
programs will result in Year 2000 compliant software systems. The Company
expects the conversion efforts to be completed by the end of 1999. Management
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. Even if the
Company becomes Year 2000 compliant, there can be no assurance that all of the
Company's customers and suppliers will be Year 2000 compliant by the end of
1999. The failure of the Company or any of its customers or suppliers to become
Year 2000 compliant by the end of 1999 could have a material adverse effect on
the Company's business, financial condition and results of operations.
DEPENDENCE ON THE CONDITION OF THE AIRLINE INDUSTRY. Aircraft engine and
engine parts pricing is affected to a degree by the overall economic condition
of the airline industry, which has historically been volatile. The demand for
after-market engines and engine parts is driven primarily by flying hours or
cycles. Regardless of the profitability of the airline industry, parts must be
serviced or replaced at scheduled intervals. As such, the demand for
after-market parts is a function of the level of worldwide air traffic.
Additionally, factors such as the price of fuel affect the aircraft parts
market, since older aircraft (into which aircraft parts are most often placed)
become less economically viable as the price of fuel increases. During a
downturn in the aviation industry, there may be reduced overall demand for
aircraft, engines and engine parts, lower selling prices for the Company's
products and increased credit risk associated with doing business with industry
participants. There can be no assurance that economic and other factors that
might affect the airline industry will not have an adverse impact on the
Company's business, financial condition and results of operations.
COMPETITION. The aviation parts after-market is highly competitive.
Competition is based on product quality, price and the ability to provide needed
parts quickly. The largest segment of the after-market is served by OEMs.
However, the relatively high overhead and slow response times often associated
with such large organizations can present a handicap in a fast-moving, price-
sensitive marketplace. OEMs generally concentrate on selling new parts, leaving
the market in serviceable and overhauled parts to other suppliers.
OEM-manufactured new parts generally do not compete with overhauled parts. The
largest resellers include companies such as AAR Corp. and The AGES Group. There
are approximately 10 to 15 midsize resellers, including the Company. A large
14
<PAGE> 15
portion of the market revenue is generated by over 50 small after-market
suppliers and brokers. As a result of industry consolidation, management expects
that a number of these smaller operators will either be acquired or will have
difficulty competing in this changing market. In addition, the engine parts
supply business has been reshaped by the widespread adoption of ILS -- the
Inventory Locator Service. The ILS lists the availability of thousands of types
of parts from brokers, distributors, repair facilities and airlines. The listing
includes the quantity of parts available, the condition of the parts, when the
parts are available and a contact for more information. The ILS has created a
much freer flow of information concerning the supply and demand for particular
parts. Dealers now must compete not only on the basis of their relationships
with customers and knowledge regarding a potential source for products, but also
on the quality of the parts available, the documentation tracing the history of
the parts and the price. There can be no assurance that the Company will
continue to compete effectively against present and future competitors or that
competitive pressures will not have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATION. The aviation industry is highly regulated by the
FAA in the United States and the equivalent regulatory agencies in other
countries. While the Company's reselling business is not regulated, the
aircraft, engines and engine parts that the Company sells to its customers must
be accompanied by documentation that enables the customer to comply with
applicable regulatory requirements. There can be no assurance that new and more
stringent government regulations will not be adopted in the future or that any
such new regulations, if enacted, would not have an adverse impact on the
Company. Before engine parts may be installed in an aircraft engine, they must
meet certain standards of airworthiness established by the FAA or the equivalent
regulatory agencies in other countries. Specific regulations vary from country
to country, although regulatory requirements in other countries are generally
satisfied by compliance with FAA requirements. Engine components must also be
traceable to sources deemed acceptable by such agencies. Although the Company
believes it complies with the highest level of such regulatory standards,
standards may change in the future, requiring engine components already
contained in the Company's inventory to be scrapped or modified. Aircraft engine
manufacturers may also develop new engine components to be used in lieu of
engine components already contained in the Company's inventory. In all such
cases, to the extent that the Company has such engine components in its
inventory, their value may be reduced and the Company's business, financial
condition and results of operations could be adversely affected.
NO DIVIDENDS. The Company intends to retain all earnings for the
foreseeable future for use in the operation and expansion of its business.
Consequently, the Company does not anticipate paying any cash dividends on its
Common Stock to its stockholders for the foreseeable future. In addition, it is
probable that debt financing agreements to be entered into by the Company will
contain restrictions on the Company's ability to declare dividends. See
"Dividend Policy."
SUBORDINATION. The Notes will be unsecured and subordinated in right of
payment in full to all existing and future Senior Indebtedness (as defined
herein) of the Company. Under the Indenture (as defined herein), the Notes will
be subordinated to the Company's long-term debt and capital leases, any amounts
outstanding under its line of credit and any other indebtedness incurred by the
Company that is senior to the Notes. As a result of such subordination, in the
event of any insolvency, liquidation or reorganization of the Company or upon
acceleration of the Notes due to an Event of Default (as defined in the
Indenture), the assets of the Company will be available to pay obligations on
the Notes and any other subordinated indebtedness of the Company only after all
Senior Indebtedness has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Notes and any other
subordinated indebtedness of the Company then outstanding. The Indenture does
not prohibit or limit the incurrence of Senior Indebtedness or the incurrence of
other indebtedness and other liabilities by the Company. The incurrence of such
indebtedness could adversely affect the Company's ability to pay its obligations
under the Notes. As of June 11, 1998, the Company had $102.1 million of
indebtedness outstanding that would have constituted Senior Indebtedness.
15
<PAGE> 16
ABSENCE OF PUBLIC MARKET FOR THE NOTES. The Notes are new securities for
which there currently is no market. Although the Underwriters have informed the
Company that they currently intend to make a market in the Notes, they are not
obligated to do so and any such market making may be discontinued at any time
without notice. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Notes. The liquidity of, and trading market for,
the Notes also may be adversely affected by general declines in the market for
the Common Stock or other similar securities. Such a decline may adversely
affect such liquidity and trading markets independent of the financial
performance of, and prospects for, the Company.
LIMITATION ON REPURCHASE OF NOTES UPON CHANGE IN CONTROL. Upon the
occurrence of a Change in Control (as defined in the Indenture) each holder of
Notes may require the Company to repurchase all or a portion of such holder's
Notes. If a Change in Control were to occur, there could be no assurance that
the Company would have sufficient financial resources or would be able to
arrange financing to pay the repurchase price for all Notes tendered by holders
thereof. The Company's ability to repurchase the Notes in such event may be
limited by law, the Indenture and the terms of other agreements relating to
borrowings that constitute Senior Indebtedness, as such indebtedness or
agreements may be entered into, replaced, supplemented or amended from time to
time. The Company may be required to refinance Senior Indebtedness in order to
make any such payment. If the Company is prohibited from repurchasing the Notes,
such failure would constitute an Event of Default under the Indenture, which
may, in turn, constitute a further default under certain of the Company's
existing agreements relating to borrowings and the terms of other indebtedness
that the Company may enter into from time to time. In such circumstances, the
subordination provisions in the Indenture would prohibit payments to the holders
of the Notes. Furthermore, the Company may not have the financial ability to
repurchase the Notes in the event that maturity of Senior Indebtedness is
accelerated as a result of a default under the applicable loan or similar
agreement. See "Description of Notes -- Repurchase at Option of Holders upon
Change in Control."
16
<PAGE> 17
USE OF PROCEEDS
The proceeds of the Notes Offering, before giving effect to the Company's
estimated Notes Offering expenses and the underwriting discount, are expected to
be approximately $75,000,000 (approximately $86,250,000 if the Underwriters'
over-allotment option is exercised in full). The proceeds of the Notes Offering
and the Common Stock Offering, if consummated, will be used as follows: (i)
approximately $90.8 million will be used to repay principal and interest under
the Company's revolving credit facility with Barnett Bank, N.A. (the "Credit
Facility") (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources"), (ii) approximately
$44 million will be used to pay the portion of the purchase price required to be
paid at closing in connection with the Aerocar Acquisition (see
"Business -- Recent Developments -- Aerocar Acquisition"), and (iii) the
remainder will be used for general corporate purposes. As of June 11, 1998,
approximately $90.8 million principal amount of indebtedness was outstanding
under the Credit Facility at a weighted average annual interest rate of 8.25%.
The maturity of such debt is March 10, 2001. To the extent the Underwriters'
over-allotment option is exercised, net proceeds from such exercise will also be
used for general corporate purposes, including future acquisitions.
CONCURRENT COMMON STOCK OFFERING
Concurrently with the Notes Offering, the Company is offering 2,750,000
shares of Common Stock by a separate prospectus. The consummation of the Notes
Offering and the Common Stock Offering are not conditioned upon each other.
17
<PAGE> 18
PRICE RANGE OF COMMON STOCK
Since June 25, 1997, the Company's Common Stock has been quoted on the
Nasdaq National Market under the trading symbol "KELL". From April 11, 1994
through June 24, 1997, the Company's Common Stock was quoted on the Nasdaq
SmallCap Market. The following table sets forth for the periods indicated the
high and low sale prices of the Company's Common Stock from January 1, 1996
through June 11, 1998.
<TABLE>
<CAPTION>
HIGH LOW
FISCAL 1996 ---- ---
<S> <C> <C> <C> <C>
First Quarter............................................... $ 7 1/4 $ 4 3/4
Second Quarter.............................................. 8 7/8 6 1/2
Third Quarter............................................... 8 3/8 7
Fourth Quarter.............................................. 8 9/16 7 3/8
FISCAL 1997
First Quarter............................................... $14 7/8 $ 8 1/4
Second Quarter.............................................. 17 1/8 11 7/8
Third Quarter............................................... 21 7/8 15
Fourth Quarter.............................................. 27 1/2 17 1/8
FISCAL 1998
First Quarter............................................... $27 3/4 $20
Second Quarter (through June 11, 1998)...................... 29 3/4 23
</TABLE>
The last reported sale price of the Common Stock as reported on the Nasdaq
National Market on June 11, 1998 was $26 1/16 per share.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying cash dividends in the foreseeable future, but intends instead
to retain any future earnings for reinvestment in its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors deems relevant. Furthermore, the Company's ability to declare or pay
dividends may be limited in the future by the terms of any then-existing credit
facilities which may contain covenants which restrict the payment of cash
dividends.
18
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 and (i) as adjusted to give effect to the sale of $75,000,000
principal amount of Notes offered hereby and the application of the estimated
net proceeds therefrom; (ii) as further adjusted to give effect to the sale of
the Notes offered hereby and the sale of the 2,750,000 shares of the Common
Stock offered pursuant to the Common Stock Offering at the public offering price
of $26.00 per share and the application of the estimated net proceeds therefrom
and (iii) pro forma to give effect to the ITC Acquisition and the Aerocar
Acquisition (see "Business -- Recent Developments") and as adjusted to give
effect to the sale of the Notes offered hereby and the sale of the Common Stock
offered pursuant to the Common Stock Offering, and the application of the net
proceeds therefrom. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the Notes thereto contained
elsewhere in this Prospectus and incorporated herein by reference.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------------------------------------------
(IN THOUSANDS)
----------------------------------------------------------
AS FURTHER PRO FORMA
ACTUAL AS ADJUSTED(3) ADJUSTED(4) AS ADJUSTED(5)
---------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Notes payable and current maturities of
long-term debt................................ $ 0 $ 0 $ 0 $ 0
Long-term debt:
Credit Facility............................... $ 46,711 0 0 0
5 3/4 Convertible Subordinated Notes Due
2002........................................ $ 54,000 $ 54,000 $ 54,000 $ 54,000
11 3/4 Senior Subordinated Notes Due 2004..... $ 11,250 $ 11,250 $ 11,250 $ 11,250
Notes offered hereby.......................... $ 0 $ 75,000 $ 75,000 $ 75,000
Total Debt.............................. $ 111,961 $ 140,250 $ 140,250 $ 140,250
Stockholders' Equity:
Preferred Stock, $.001 par value, 1,000,000
shares authorized; no shares outstanding
Common Stock, $.001 par value, 50,000,000
shares authorized; 8,368,561 shares
outstanding; 11,118,561 shares outstanding,
as adjusted(2).............................. 8 8 11 11
Additional paid-in capital.................... 39,376 39,376 106,634 108,134
Other......................................... (351) (351) (351) (351)
Retained earnings............................. 14,497 14,497 14,497 14,497
Total stockholders' equity.................... $ 53,530 $ 53,530 $ 127,090 $ 122,290
---------- ---------- ---------- ----------
Total capitalization.................... $ 165,491 $ 193,780 $ 261,040 $ 262,540
========== ========== ========== ==========
</TABLE>
- ---------------
(1) The number of authorized shares of Common Stock gives effect to the proposal
to amend the Company's Restated Certificate of Incorporation to increase the
number of authorized shares of Common Stock to 50,000,000 shares, which was
approved by the Company's stockholders at the Company's annual meeting on
May 29, 1998.
(2) Represents the number of shares outstanding as of May 22, 1998, and excludes
(i) 2,284,337 shares reserved for issuance under the Company's stock option
plans (as of May 22, 1998, giving effect to the proposal to increase the
authorized number of shares subject to the options to be issued under the
Company's 1997 Stock Option Plan from 600,000 to 1,000,000, which proposal
was approved by the Company's stockholders at the Company's annual meeting
on May 29, 1998), of which 1,884,337 shares were subject to outstanding
options as of such date, (ii) 300,000 shares subject to options which were
outstanding as of May 22, 1998 and granted other than under the Company's
stock option plans and (iii) 875,655 shares reserved for issuance upon
exercise of warrants to purchase shares of the Company's Common Stock which
were outstanding as of May 22, 1998.
19
<PAGE> 20
(3) Adjusted to give effect to the sale of the $75,000,000 aggregate principal
amount of the Notes offered hereby and the application of the net proceeds
therefrom.
(4) Adjusted to give effect to the sale of the $75,000,000 aggregate principal
amount of the Notes offered hereby and the sale of 2,750,000 shares of
Common Stock offered pursuant to the Common Stock Offering at the public
offering price of $26.00 per share, and the application of the net proceeds
therefrom.
(5) On a pro forma basis to give effect to the ITC Acquisition and the Aerocar
Acquisition as if such acquisitions had occurred on January 1, 1997, and
adjusted to give effect to the sale of the Notes offered hereby and the
Common Stock offered pursuant to the Common Stock Offering, and the
application of the net proceeds therefrom.
20
<PAGE> 21
SELECTED FINANCIAL DATA
The following table presents selected consolidated financial and operating
data of the Company for the periods and as of the dates indicated. The selected
financial data at or for each of the full fiscal years presented below were
derived from the Company's Consolidated Financial Statements, which have been
audited by KPMG Peat Marwick LLP, Independent Certified Public Accountants. The
selected financial data relating to the three months ended March 31, 1997 and
1998, which have been derived from the Company's unaudited financial statements,
include normal recurring adjustments and reflect all other adjustments which
are, in the opinion of management, necessary for a fair presentation of the
information contained therein. Financial and operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the entire fiscal year ending December 31, 1998. Unaudited
pro forma selected financial data are derived from the historical financial
statements of the Company, Aero Support, ITC and Aerocar for the periods
indicated. The pro forma selected financial data include the recurring items
which are directly attributable to the Aero Support Acquisition, the ITC
Acquisition and the Aerocar Acquisition and are expected to have a continuing
impact. The unaudited pro forma information does not purport to represent what
the Company's results of operations would actually have been if the Aero Support
Acquisition, the ITC Acquisition and the Aerocar Acquisition had in fact
occurred on the dates indicated or project the Company's results of operations
for any future date or period. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the unaudited financial statements included elsewhere in this
Prospectus and incorporated herein by reference.
(IN THOUSANDS, EXCEPT SHARE DATA AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------------------- -----------------------------------
1995 1996 1997 1997 1998
--------- --------- --------------------- --------- -----------------------
PRO PRO
ACTUAL FORMA(1) ACTUAL FORMA(2)
--------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues........................ $ 8,579 $ 24,922 $ 79,439 $143,793 $ 16,466 $ 29,091 $ 42,060
Gross Profit.......................... 3,201 8,686 28,044 57,376 5,739 10,379 16,977
EBITDA(3)............................. 1,719 5,781 23,761 44,977 4,623 8,988 14,963
Operating income...................... 1,517 4,753 17,611 35,101 3,680 6,352 11,526
Interest expense, net................. (225) 645 3,991 11,085 1,036 1,638 3,121
Earnings before income taxes.......... 632 4,109 13,620 24,016 2,644 4,714 8,405
Net earnings.......................... 374 2,646 8,543 15,010 1,659 2,942 5,253
Net earnings per share:
Basic................................ .14 .90 1.18 2.07 .29 .36 .65
Diluted.............................. .10 .56 .95 1.64 .21 .29 .49
Weighted average number of common
shares outstanding:
Basic................................ 2,745,265 2,943,902 7,266,534 7,266,534 5,725,255 8,118,711 8,118,711
Diluted.............................. 3,609,956 4,759,890 9,394,439 9,394,439 7,922,924 11,739,791 11,739,791
OTHER OPERATING DATA:
EBITDA margin......................... 20.0% 23.2% 29.9% 31.3% 28.1% 30.9% 35.6%
Current ratio......................... 2.6x 2.3x 2.8x 2.3x 2.6x 4.6x 4.5x(5)
Return on average equity.............. 3.3% 16.9% 25.1% 44.1% 21.8% 22.7% 40.6%
Debt to equity........................ 38.9% 45.1% 146.4% 289.6% 85.1% 209.2% 112.2%(5)
Sales per employee.................... $ 746 $ 1,424 $ 1,869 $ 2,130 * * *
Ratio of earnings to fixed
charges(4)........................... 2.8x 7.2x 4.0x 3.2x 3.3x 3.7x 3.6x
</TABLE>
* not applicable
21
<PAGE> 22
<TABLE>
<CAPTION>
AT MARCH 31, 1998
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED(5)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 701 $ 25,293
Working capital............................................. 51,742 42,730
Total assets................................................ 180,212 293,793
Long-term debt.............................................. 111,961 140,250
Stockholders' equity........................................ 53,530 122,290
</TABLE>
- ---------------
(1) Gives pro forma effect to the Aero Support Acquisition, the ITC Acquisition
and to the proposed Aerocar Acquisition as if such acquisitions had been
consummated as of January 1, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business-- Recent Developments" and Note 17 to the Company's
Consolidated Financial Statements appearing elsewhere in this Prospectus.
(2) Gives pro forma effect to the ITC Acquisition and the proposed Aerocar
Acquisition as if such acquisitions had been consummated as of January 1,
1998.
(3) EBITDA represents earnings before net interest expense, income taxes,
depreciation and amortization, nonrecurring charges and extraordinary items.
EBITDA is included herein because management believes that certain investors
find it to be a useful tool for measuring a company's ability to service its
debt; however, EBITDA does not represent cash flow from operations, as
defined by generally accepted accounting principles, and should not be
considered as a substitute for net earnings, as an indicator of the
Company's operating performance or cash flow, or as a measure of its
liquidity.
(4) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before income taxes, interest income and fixed
charges. Fixed charges consist of interest expense, which includes the
amortization of deferred financing costs related to the Company's debt
issuances.
(5) Gives pro forma effect to the ITC Acquisition and the proposed Aerocar
Acquisition as if such acquisitions had been consummated as of January 1,
1998, and as adjusted for the Common Stock Offering and the Notes Offering
and the application of the net proceeds therefrom as described in "Use of
Proceeds."
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<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with (i) the Company's audited
Consolidated Financial Statements and the related Notes thereto included
elsewhere herein and in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and (ii) the Company's unaudited Condensed Consolidated
Financial Statements and the related Notes thereto included elsewhere herein and
in the Company's Form 10-Q for the three months ended March 31, 1998.
GENERAL
Kellstrom is a leader in the airborne equipment segments of the
international aviation services after-market. The Company's net sales have
increased from $24,921,587 for the year ended December 31, 1996 to $79,439,149
for the year ended December 31, 1997. During the same time period, the Company's
net income increased from $2,646,343 to $8,542,519. The increase in sales and
net income is the result of 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.
RESULTS OF OPERATIONS
For the periods indicated, the following table sets forth the percentage of
certain income statement items to total revenues derived from the Company's
consolidated statements of earnings.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
---------------------------------------------
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenues:
Sales of aircraft and engine parts, net................... 100.0% 96.4% 90.1% 93.9% 87.1%
Rental Revenues........................................... -- 3.6 9.9 6.1 12.9
----- ----- ----- ----- -----
Total Revenues...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Operating Expenses:
Cost of Goods Sold........................................ 62.6 62.8 58.9 61.1 57.3
Depreciation of Equipment Under Operating Leases.......... -- 2.3 5.7 4.0 7.0
Selling, General and Administrative Expenses.............. 17.3 14.0 11.2 10.8 11.8
Depreciation and Amortization Expense..................... 2.4 1.8 2.0 1.8 2.0
----- ----- ----- ----- -----
Total Operating Expenses............................ 82.3% 80.9% 77.8% 77.7% 78.1%
Interest Expense (net of Interest Income)................... (2.6) 2.6 5.0 6.3 5.6
----- ----- ----- ----- -----
Net Income.................................................. 4.4% 10.6% 10.8% 10.1% 10.2%
===== ===== ===== ===== =====
Sales of aircraft and engine parts, net..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold.......................................... 62.7 65.1 65.4 65.2 65.8
</TABLE>
Three Months Ended March 31, 1998 and 1997
Net sales of aircraft and engine parts increased by 64% to $25,335,696 for
the three months ended March 31, 1998 as compared with $15,458,916 for the three
months ended March 31, 1997. The increase in net sales of aircraft and engine
parts was primarily due to (i) internal growth of sales of approximately
$4,320,000 primarily due to additional inventory availability as a result of the
Company's increased capital resources and (ii) incremental sales of
approximately $5,557,000 related to the Aero Support Acquisition.
Rental revenues increased by 273% to $3,754,875 for the three months ended
March 31, 1998 as compared with $1,007,157 for the three months ended March 31,
1997. The increase in rental
23
<PAGE> 24
revenues was primarily due to the Company's continued expansion into the
short-term leasing business through purchases of individual leased assets
resulting in increased rental revenues.
Cost of goods sold increased by 65% to $16,668,164 for the three months
ended March 31, 1998 as compared to $10,072,332 for the three months ended March
31, 1997; the gross profit margin decreased to 34.2% in the first quarter of
1998 from 34.8% in 1997. The increase in cost of goods sold was primarily due to
increased sales volume across all product lines.
Depreciation of equipment under operating leases increased by 212% to
$2,043,156 for the three months ended March 31, 1998 as compared with $654,653
for the three months ended March 31, 1997. The increase in depreciation of
equipment under operating leases was primarily due to the Company's continued
expansion into the short-term leasing business through purchases of individual
leased assets resulting in increased depreciation expense.
Selling, general and administrative expenses increased by 94% to $3,433,955
for the three months ended March 31, 1998 as compared to $1,770,329 for the
three months ended March 31, 1997, which resulted in an increase as a percentage
of total revenues to 11.8% in 1998 from 10.8% in 1997. The increase in selling,
general and administrative expenses was primarily the result of (i) expenses of
approximately $675,000 related to the continuing operations of Aero Support and
(ii) expenses of approximately $989,000 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. 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 105% to $593,223 for the
three months ended March 31, 1998 as compared with $288,879 for the three months
ended March 31, 1997, which resulted in an increase as a percentage of total
revenues to 2.0% in 1998 from 1.8% in 1997. The increase in depreciation and
amortization expense is primarily the result of amortization of goodwill related
to the Aero Support Acquisition.
Interest expense (net of interest income) increased by 58% to $1,637,954
for the three months ended March 31, 1998 as compared to $1,035,858 for the
three months ended March 31, 1997. The increase in interest expense was
primarily due to interest expense and related costs of approximately $350,000
from the $17,300,000 of debt related to the acquisition of Aero Support, as well
as increased borrowings by the Company during 1998 necessary to expand the
Company's inventory levels. 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.
Net income increased by 77% to $2,941,610 for the three months ended March
31, 1998 as compared to $1,659,368 for the three months ended March 31, 1997.
Basic earnings per common share increased by 24% to $0.36 for the three months
ended March 31, 1998 as compared to $0.29 for the three months ended March 31,
1997. Diluted earnings per common share increased by 38% to $0.29 for the three
months ended March 31, 1998 as compared to $0.21 for the three months ended
March 31, 1997.
Years Ended December 31, 1997 and 1996
Net sales of aircraft and engine parts increased by 198% to $71,534,539 for
the year ended December 31, 1997 as compared to $24,019,999 for the year ended
December 31, 1996. The increase in net sales of aircraft and engine parts was
primarily due to (i) incremental sales of
24
<PAGE> 25
approximately $23,800,000 related to the IASI Acquisition, (ii) internal growth
of sales of approximately $16,900,000 primarily due to additional inventory
availability as a result of the Company's increased capital resources, and (iii)
incremental sales of approximately $6,800,000 related to the acquisition of the
Aero Support operations.
Rental revenues increased by 777% to $7,904,610 for the year ended December
31, 1997 as compared to $901,588 for the year ended December 31, 1996. 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
assets and leasing substantial portions of such assets to customers resulting in
incremental rental revenues of approximately $5,500,000 and (ii) the purchase of
a portfolio of commercial aircraft and jet engines during the fourth quarter of
1997 and the leasing of such assets resulting in additional rental revenues of
approximately $1,500,000.
Cost of goods sold increased by 199% to $46,800,589 for the year ended
December 31, 1997 as compared to $15,649,127 for the year ended December 31,
1996; the gross profit margin decreased to 34.6% in 1997 from 34.9% in 1996. The
increase in cost of goods sold was primarily due to the increased sales volume
associated with the IASI and Aero Support operations as well as continued
internal sales growth within the Company.
Depreciation of equipment under operating leases increased by 684% to
$4,594,399 for the year ended December 31, 1997 as compared to $586,032 for the
year ended December 31, 1996. The increase in depreciation of equipment under
operating leases was primarily due to (i) the Company's expansion into the
short-term leasing business through purchases of individual assets resulting in
incremental depreciation expense of approximately $3,300,000 and (ii) the
purchase of a portfolio of commercial aircraft and jet engines during the fourth
quarter of 1997, resulting in additional depreciation expense of approximately
$700,000.
Selling, general and administrative expenses increased by 154% to
$8,877,598 for the year ended December 31, 1997 as compared to $3,491,457 for
the year ended December 31, 1996; however, as a percentage of total revenues,
selling, general and administrative expenses decreased to 11.2% in 1997 from
14.0% in 1996. The increase in selling, general and administrative expenses was
primarily due to expenses of approximately $2,900,000 related to the continuing
operations of IASI and Aero Support. In addition, approximately $2,500,000
related to 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. Selling, general and
administrative expenses as a percentage of total revenues decreased primarily
due to economies of scale and operating efficiencies. 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 252% to $1,555,673 for
the year ended December 31, 1997 as compared to $441,854 for the year ended
December 31, 1996; however, as a percentage of total revenues, depreciation and
amortization expense increased to 2.0% in 1997 from 1.8% in 1996. The increase
in depreciation and amortization expense was primarily due to amortization of
goodwill related to the IASI and Aero Support acquisitions.
Interest expense (net of interest income) increased by 519% to $3,991,212
for the year ended December 31, 1997 as compared to $644,527 for the year ended
December 31, 1996. The increase in interest expense was primarily due to
interest expense and related costs of approximately $3,000,000 for the
$35,600,000 and $17,300,000 of debt assumed and incurred related to the
acquisitions of IASI and Aero Support, respectively, as well as interest expense
of approximately $400,000 related to the overall increases in the Company's debt
levels due to the investment in equipment under operating leases. 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
25
<PAGE> 26
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.
Net income increased by 223% to $8,542,519 for the year ended December 31,
1997 as compared to $2,646,343 for the year ended December 31, 1996. Basic
earnings per common share increased by 31% to $1.18 for the year ended December
31, 1997 as compared to $0.90 for the year ended December 31, 1996. Diluted
earnings per common share increased by 70% to $0.95 for the year ended December
31, 1997 as compared to $0.56 for the year ended December 31, 1996.
Years Ended December 31, 1996 and 1995
Net sales of aircraft and engine parts increased by 180% to $24,019,999 for
the year ended December 31, 1996 as compared to $8,579,017 for the year ended
December 31, 1995. The increase in net sales of aircraft and engine parts was
primarily due to the increased availability of cash resources to acquire
inventory for resale. The Company believes that the availability of inventory is
a critical factor in achieving sales growth in its industry.
Rental revenues were $901,588 for the year ended December 31, 1996 as
compared to no rental revenue for the year ended December 31, 1995. The increase
in rental revenues was primarily due to the Company entering into two new
operating leases during the year ended December 31, 1996.
Cost of goods sold increased by 191% to $15,649,127 for the year ended
December 31, 1996 as compared to $5,378,053 for the year ended December 31,
1995; however, gross profit margins decreased to 34.9% in 1996 from 37.3% in
1995. The increase in cost of goods sold was primarily due to increased sales
volume and a shift in the sales mix during 1996. During the year ended December
31, 1995, the gross profit margin was unusually high as a result of several
large, very profitable engine sales. The Company does not anticipate that the
unusually high gross profit margins experienced in the fourth quarter of 1995
will continue on a regular basis.
Depreciation of equipment under operating leases was $586,032 for the year
ended December 31, 1996 as compared to no depreciation of equipment under
operating leases for the year ended December 31, 1995. The increase in
depreciation of equipment under operating leases was primarily due to the
depreciation associated with the two new operating leases entered into during
the year ended December 31, 1996.
Selling, general and administrative expenses increased by 136% to
$3,491,457 for the year ended December 31, 1996 as compared to $1,482,048 for
the year ended December 31, 1995; however, as a percentage of total revenues,
selling, general and administrative expenses decreased to 14.0% in 1996 from
17.3% in 1995. The increase in selling, general and administrative expenses was
primarily due to expanding the Company's office and warehouse facilities along
with its sales, administrative and warehouse personnel levels to address the
Company's increased inventories and the resultant increased revenues.
Depreciation and amortization expense increased by 118% to $441,854 for the
year ended December 31, 1996 as compared to $202,331 for the year ended December
31, 1995; however, as a percentage of total revenues, depreciation and
amortization decreased to 1.8% in 1996 from 2.4% in 1995. The increase in
depreciation and amortization expense was primarily due to increased
depreciation expense resulting from the expansion of the Company's office and
warehouse facilities during the year ended December 31, 1996.
Interest expense (net of interest income) increased by 186% to $644,527 for
the year ended December 31, 1996 as compared to net interest income of $225,452
for the year ended December 31, 1995. The increase in interest expense was
primarily due to the increase in the borrowing levels necessary to expand the
Company's inventory levels, as well as financing of the expansion of the
Company's office and warehouse facilities.
26
<PAGE> 27
Net income increased by 607% to $2,646,343 for the year ended December 31,
1996 as compared to $374,439 for the year ended December 31, 1995. Basic
earnings per common share increased by 543% to $0.90 for the year ended December
31, 1996 as compared to $0.14 for the year ended December 31, 1995. Diluted
earnings per common share increased by 460% to $0.56 for the year ended December
31, 1996 as compared to $0.10 for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
Three Months Ended March 31, 1998 and 1997
As of March 31, 1998, the Company's liquidity and capital resources
included cash and cash equivalents of $700,548 and working capital of
$51,742,170. As of March 31, 1998, total outstanding debt was $111,960,732 as
compared to $73,088,800 as of December 31, 1997. As of March 31, 1998, the
outstanding principal balance on the Company's 5 3/4% Convertible Subordinated
Notes Due 2002 (the "5 3/4% Notes") was $54,000,000 and the Company had
contractual lines of credit totaling $100,000,000 of which $47,449,031 was
available.
Cash flows used in operating activities for the three months ended March
31, 1998 was $38,008,661 as compared to $904,402 for the three months ended
March 31, 1997. The primary uses of cash for operating activities during the
three months ended March 31, 1998 was for purchases of equipment under operating
leases of $39,635,531 and an increase in inventory and trade receivables with a
corresponding decrease in accrued expenses which amounted to $13,725,931. The
primary sources of cash for operating activities for the three months ended
March 31, 1998 was an increase in prepaid expenses and other current assets and
an increase in accounts payable and income taxes payable, which amounted to
$8,979,882, coupled with net income of $2,941,610 and total depreciation and
amortization of $2,921,079.
Cash flows used in investing activities for the three months ended March
31, 1998 was $589,363 compared to $25,164,410 for the three months ended March
31, 1997. The primary uses of cash for investing activities for the three months
ended March 31, 1998 related to purchases of property, plant and equipment of
$1,234,519. The primary sources of cash for investing activities for the three
months ended March 31, 1998 related to proceeds from the sales of investment
securities of $692,856.
Cash flows provided by financing activities for the three months ended
March 31, 1998 was $38,835,896 compared to $33,554,091 for the three months
ended March 31, 1997. The primary uses of cash for financing activities for the
three months ended March 31, 1998 related to debt repayments of $2,688,410 and
payments of deferred financing costs of $416,753. The primary sources of cash
for financing activities for the three months ended March 31, 1998 related to
borrowings under the line of credit of $41,560,342 and proceeds from the
issuance of Common Stock of $357,613.
On March 11, 1998, the Company expanded the Credit Facility to $100,000,000
and extended the term through March 10, 2001. The Loan bears interest at .25%
below the bank's prime rate (which was 8.25% at May 6, 1998), or at the
Company's option, LIBOR plus 175 - 275 basis points. Indebtedness issued under
the expanded Credit Facility is secured by substantially all of the Company's
assets, including all of the capital stock of the Company's subsidiaries.
During the three months ended March 31, 1998, the Company's highest
utilization of its Credit Facility was $46,710,732. The outstanding balance at
March 31, 1998 under the Credit Facility was $46,710,732.
The Company plans to take advantage of growth opportunities that are
consistent with the Company's expansion and profit objectives. These growth
opportunities will require the investment of cash into inventories of engines
and engine parts. Greater availability of such inventories will better enable
the Company to continue to increase its revenues as well as to encourage the
development of strategic relationships with new customers. The Company intends
to finance its
27
<PAGE> 28
inventory expansion program through its expanded Credit Facility 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's management 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 the Credit Facility to fund increased working capital needs.
However, the Company may elect to seek equity capital in the future depending
upon market conditions and the capital needs of the Company.
Years Ended December 31, 1997 and 1996
As of December 31, 1997, the Company's liquidity and capital resources
included cash and cash equivalents of $462,676 and working capital of
$34,313,730. As of December 31, 1997, total outstanding debt was $73,088,800 as
compared to $8,187,595 as of December 31, 1996. As of December 31, 1997, the
outstanding principal balance on the 5 3/4% Notes was $54,000,000, and the
Company had contractual lines of credit totaling $55,000,000, of which
$27,048,011 was available.
Cash flows used in operating activities for the year ended December 31,
1997 was $22,356,482 compared with $2,622,996 for the year ended December 31,
1996. The primary uses of cash for operating activities during the year ended
December 31, 1997 was due to purchases of equipment under operating leases of
$51,891,994 and an increase in accounts receivable and prepaid expenses with a
corresponding decrease in accounts payable which amounted to $8,183,434. The
primary sources of cash for operating activities for the year ended December 31,
1997 was due to a decrease in inventory and increase in accrued expenses which
amounted to $22,504,327, coupled with net income of $8,542,519 and total
depreciation and amortization of $6,910,091.
Cash flows used in investing activities for the year ended December 31,
1997 was $28,952,749 compared with $2,540,491 for the year ended December 31,
1996. The primary uses of cash for investing activities for the year ended
December 31, 1997 was related to the acquisitions of IASI and Aero Support for
$27,709,430 and purchases of property, plant and equipment for $2,418,677,
offset by proceeds from the sale of investment securities of $428,499.
On January 15, 1997, the acquisition of IASI was completed and primarily
financed through the issuance of $15,000,000 in senior subordinated debt (the
"Senior Debt") and warrants, as well as the proceeds of a $6,000,000
subordinated bridge loan ("Bridge Loan") and warrants with the balance from the
Company's working capital. The Company also assumed IASI's existing debt,
including various credit facilities with Union Bank of California ("Union Bank")
secured by IASI's assets, which facilities provided for credit of up to a
maximum of approximately $20,000,000 as of the date of the acquisition. The
amount of credit outstanding as of the date of acquisition was $14,555,826.
Interest on the credit facilities accrued daily and ranged from .50% to 1.00%
above Union Bank's prime rate, and was payable monthly. In March 1997, the
remaining balance outstanding on these credit facilities was fully repaid.
The Company entered into certain short-term equipment leases during the
years ended December 31, 1997 and 1996, and acquired certain other equipment
under lease as part of the IASI acquisition. The Company continues to believe
this activity should allow it to liquidate the remaining maintenance value of
jet engines on a profitable basis by realizing both rental revenue as well as
maintenance reserve fees charged to the Company's engine lease customers for
their utilization of such engines. Upon the full consumption of the remaining
maintenance value of the equipment, the Company will evaluate the equipment's
condition in order to determine if such equipment should be overhauled or should
be disassembled into piece parts for use in support of the Company's parts
supply business. These leases are accounted for as operating leases.
The Company's acquisition of Aero Support was financed primarily through
the issuance of short-term notes payable, which were due from September 1997 to
January 1998, the Company's
28
<PAGE> 29
working capital and warrants. The Company also assumed Aero Support's existing
debt of $3,498,537, which was immediately paid by the Company upon consummation
of the acquisition. The amount of short-term notes payable as of the date of
acquisition and December 31, 1997 was $11,687,867 and $2,688,410, respectively.
Interest on the remaining short-term notes payable accrued at an annual rate
equal to the prime rate and was fully repaid during January 1998.
Cash flows provided by financing activities for the year ended December 31,
1997 was $51,617,653 compared with $5,106,870 for the year ended December 31,
1996. The primary sources of cash for financing activities for the year ended
December 31, 1997 were the proceeds from the issuance of $54,000,000 principal
amount of 5 3/4% Notes and issuance of Common Stock of $20,776,420, offset by
repayments of debt incurred and assumed of $18,363,997 and payment of deferred
financing costs of $4,432,355.
On December 23, 1996, the Company entered into a Revolving Loan Agreement
with Barnett Bank, N.A. This Revolving Loan Agreement replaced the working
capital line and the guidance line with BankAtlantic, and increased the
Company's bank credit lines from $8.0 million to $15.0 million. This arrangement
reduced the interest rate paid by the Company from 1% above BankAtlantic's prime
rate to 1/8% below Barnett's prime rate or, at the Company's option, to LIBOR
plus 275 basis points. Indebtedness under the Revolving Loan Agreement was
secured by substantially all the Company's assets. The advance rate formulas
under this bank facility were liberalized to provide for advances against
foreign receivables. This modification was important to the Company as its
foreign business has recently represented a greater percentage of its total
revenues.
On April 24, 1997, in order to modify and consolidate its current credit
facilities, the Company entered into a $55,000,000 revolving loan agreement with
Barnett Bank, N.A. The loan bears interest at .25% below the bank's prime rate
(which was 8.25% at February 27, 1998) and was due on April 24, 1998. On April
28, 1997, utilizing funds from the new facility, the Company paid $13,640,774 to
fully satisfy the existing credit lines outstanding with Union Bank. The new
loan agreement is secured by substantially all of the Company's assets.
Effective March 11, 1998, the Company's Credit Facility has been expanded to a
three-year $100,000,000 lending agreement. The interest rate under the new
expanded Credit Facility is .25% below the bank's prime, or at the Company's
option, LIBOR plus 175-275 basis points.
During the year ended December 31, 1997, the Company's highest utilization
of its Credit Facility was $26,868,581. The outstanding balance at December 31,
1997 on the Barnett Bank revolving credit facility was $4,070,603.
As of December 31, 1997, the Company had a first mortgage of $1,079,787
(including a $750,000 construction/mortgage loan) held by BankAtlantic and
secured by the Company's office and warehouse facilities. The interest on the
mortgage is 10.49% per annum. Principal and interest are payable in monthly
installments of $20,238. Principal is amortized over a ten-year period with a
final payment of $20,238 due May 2005. During January 1998, the Company fully
repaid the first mortgage held by BankAtlantic.
The Senior Debt is held by The Equitable Life Assurance Society of the
United States ("Equitable"). The interest rate on the Senior Debt is 11 3/4% per
annum, payable quarterly. Additionally, warrants to purchase 305,660 shares of
Common Stock were issued to Equitable. The warrants are exercisable at $10 per
share and expire on January 15, 2004. Principal on this debt is payable in two
equal annual installments beginning January 15, 2002 and a final payment in the
amount of $1,250,000 payable on January 15, 2004. The outstanding balance at
December 31, 1997 on the Senior Debt was $11,250,000. An advance principal
payment of $3,750,000, along with a prepayment penalty of 1%, was made by the
Company on October 10, 1997 with the proceeds received from the 5 3/4% Notes
offering. Moreover, the Company may at its option, redeem up to an additional
$750,000 (along with a prepayment penalty of 1%) of principal amount of Senior
Debt
29
<PAGE> 30
concurrently or within five days after the occurrence of any public offering of
the Company's Common Stock as long as the principal balance of the debt is not
reduced below $10,500,000.
In connection with the Bridge Loan, the Company issued warrants to purchase
75,000 shares of Common Stock at an exercise price of $10 per share, exercisable
until three years from the repayment of the Bridge Loan. A portion of the Bridge
Loan, in the amount of $1,000,000, was repaid on February 12, 1997 with the
remaining amount of $5,000,000 being repaid on April 15, 1997.
On February 4, 1997, the Company called its publicly traded warrants
pursuant to their terms. There were 4,166,510 publicly traded warrants
outstanding at December 31, 1996. Each warrant entitled the holder to purchase
one share of the Company's Common Stock at an exercise price of $5.00 per share.
The Company received total proceeds of $22,961,950 from the exercise of warrants
during the period from October 1, 1996 to March 21, 1997.
On September 24, 1997, the Company signed a definitive agreement with
Aerocar to purchase commercial aircraft and jet engines, all of which were under
operating leases, for $20,300,000 in cash. The portfolio consists of aircraft
and engines on leases expiring from early 1998 through 2002. The purchase is
intended to enable the Company to enter the short-term aircraft leasing business
and to increase its whole engine leasing business. The agreement with Aerocar
closed on October 14, 1997, and was financed with the net proceeds from the sale
of the 5 3/4% Notes.
On October 10, 1997, the Company issued $54,000,000 aggregate principal
amount of the 5 3/4% Notes. Proceeds of the offering were used for repayment of
indebtedness, the purchase of inventory, acquisitions of complementary
businesses and general corporate purposes.
The Company plans to take advantage of growth opportunities that are
consistent with the Company's expansion and profit objectives. These growth
opportunities will require the investment of cash into inventories of jet
engines and jet engine parts. Greater availability of such inventories will
better enable the Company to continue to increase its revenues as well as to
encourage the development of strategic relationships with new customers. The
Company intends to finance its inventory expansion program through its credit
facilities, which were expanded in March 1998, 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's Board of Directors has approved the construction of a new
facility in the Sawgrass International Corporate Park area near Fort Lauderdale,
Florida in anticipation of the expiration of the IASI Lease and the
consolidation of operations in a single location. The new facility will consist
of approximately 195,000 square feet of office and warehouse space. The final
cost of the new facility is estimated to be approximately $9,500,000.
The Company's management 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 and to increase inventory purchases. However,
the Company may elect to seek equity capital in the future depending upon market
conditions and the capital needs of the Company.
YEAR 2000 ISSUE
The Company has developed plans to address the possible exposures related
to the impact on its computer systems of the Year 2000 issue. The plan provides
for the conversion efforts to be completed by the end of 1999. The Year 2000
issue is the result of computer programs being written using two digits rather
than four to define the applicable year. Management 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 Company is expensing
all costs associated with these systems changes as the costs are incurred.
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RECENT DEVELOPMENTS
In April 1998, the Company completed the ITC Acquisition. See
"Business -- Recent Developments -- ITC Acquisition." On May 6, 1998, the
Company agreed to acquire all of the outstanding capital stock of Aerocar. See
"Business -- Recent Developments -- Aerocar Acquisition."
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus contains certain statements that are "Forward Looking
Statements," which include, among other things, the discussions of the Company's
business strategy and expectations concerning market position, future
operations, margins, revenue, profitability, liquidity and capital resources, as
well as statements concerning the integration of the operations of acquired
businesses and achievement of financial benefits and operational efficiencies in
connection therewith. Forward Looking Statements are included in "Prospectus
Summary," "Selected Financial Data," "Summary Consolidated Financial and
Operating Data," "Business," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Prospectus. Although
the Company believes that the expectations reflected in Forward Looking
Statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Generally, these statements relate to business plans
or strategies, projected or anticipated benefits or other consequences of such
plans or strategies, number of acquisitions and projected or anticipated
benefits from acquisitions made by or to be made by the Company, or projections
involving anticipated revenues, expenses, earnings, levels of capital
expenditures, liquidity or indebtedness or operations of the Company and are
subject to a number of uncertainties, risks and other influences, many of which
are outside the control of the Company and any one of which, or a combination of
which, could materially affect the results of the Company's operations and
whether the Forward Looking Statements made by the Company ultimately prove to
be accurate. Important factors that could cause actual results to differ
materially from the Company's expectations include, but are not limited to,
those that are disclosed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and under "Risk Factors" in this
Prospectus. The Company assumes no duty to update the Forward Looking
Statements.
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BUSINESS
GENERAL
Kellstrom is a leader in the airborne equipment segments of the
international aviation services after-market. The Company's principal business
is the purchasing, overhauling (through subcontractors), reselling and leasing
of aircraft, engines and engine parts. The Company specializes in providing
engines and after-market engine parts for large turbo-fan engines manufactured
by CFM International, General Electric, Pratt & Whitney and Rolls Royce. The
Company believes that the engine types which it sells and leases and for which
it supplies parts comprise in excess of 85% of the total world jet engine
supply. The Company is a supplier to a broad base of approximately 1,000
domestic and international customers representing nearly all segments of the
worldwide aviation industry, including commercial airlines such as American,
Delta, Lufthansa, SwissAir and Singapore Airlines, and OEMs and engine overhaul
facilities such as Daimler-Benz, GE Aircraft Engine Services and Pratt &
Whitney. The Company enables customers to reduce their inventory, inventory
carrying costs and airborne equipment maintenance costs by offering a broad
inventory of engines and engine parts on a timely basis and at competitive
prices. For the fiscal year ended December 31, 1997, the Company generated
revenues of $79.4 million, EBITDA of approximately $23.8 million and net
earnings of $8.5 million (or $0.95 per diluted share). On a pro forma basis,
giving effect to the acquisitions completed by the Company since January 1997
and the Company's proposed Aerocar Acquisition, the Company generated revenues
of approximately $143.8 million, EBITDA of approximately $45.0 million and net
earnings of approximately $15.0 million (or $1.64 per diluted share) for the
fiscal year ended December 31, 1997.
The Company's business strategy is focused on strong and controlled
internal growth, supplemented by strategic inventory purchases and acquisitions
of competing and complementary businesses meeting pre-defined criteria. The
Company pursues acquisitions to strengthen current product lines, increase
access to customers in its existing markets and expand into new product lines
and markets. In evaluating acquisition opportunities, the Company's management
considers the following criteria in addition to customary business and
operational due diligence: the effects on earnings per share, the expected
stability and inherent strength of gross margins and a comparative analysis of
returns on invested capital and assets.
The Company's operating approach enables it to pursue its growth plans
while maintaining and improving operating efficiencies and results. As the
Company's operations team strives to enhance internal procedures and controls,
streamline distribution channels and maintain and expand customer relationships
and account management, the Company's acquisition team works continuously with
external advisors to identify, structure and consummate acquisitions. This
operating approach enables the Company to manage the internal growth of its
business and to integrate acquired businesses while continuing to evaluate
acquisition opportunities.
BUSINESS STRATEGY
The elements of the Company's business strategy are the following:
- STRONG AND CONTROLLED INTERNAL GROWTH. The Company has achieved strong
and controlled internal growth by increasing business with its existing
customers, expanding its customer base and constantly improving the efficiency
of its operations. From 1996 to 1997, the total revenue of the Company (without
taking into account any increases in revenue resulting from acquisitions)
increased by 43%. During the same time period, the Company quadrupled the size
of its marketing department to support its customer base, which grew from
approximately 175 to approximately 1,000. The Company believes that the focus of
its core business on purchasing, overhauling (through subcontractors), reselling
and leasing airborne equipment results in cost-efficient operations which
maximize its profit margins and minimize its dependence on expensive
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machinery, equipment and labor. The Company believes that its efficiency is
exemplified by its increased sales per employee. Between its first quarter of
fiscal 1996 and its first quarter of fiscal 1998, the Company's annualized sales
per employee increased from approximately $1.1 million to approximately $2.5
million. The Company intends to further improve efficiency by continuing to
centralize its management and consolidate its operations in a new
state-of-the-art, 195,000 square foot headquarters facility, which is expected
to be completed in late 1998.
- STRATEGIC INVENTORY PURCHASES. The Company believes that its potential
to increase revenues from its existing business is largely dependent on its
ability to deliver aircraft, engines and engine parts on a "just-in-time" basis.
The lead time between purchasing aircraft, engines and engine parts and having a
ready-for-sale product is generally 60-90 days. The Company focuses on
developing new sources of supply, such as OEMs and overhaul facilities, as well
as airlines which are replacing portions of their fleets or disposing of excess
inventory. By broadening its sources of supply, the Company is better able to
maintain a strategic stock of inventory in order to remain responsive to
customer demands and delivery requirements. The Company relies on its market
expertise and industry network to analyze both short and long-term trends in
supply and demand in the aviation industry.
- AIRBORNE EQUIPMENT LEASING. The Company is focusing its leasing efforts
on aircraft and engines. The Company's lease program offers customers increased
financial flexibility by offering short to medium-term leases (approximately 3
to 36 months), which require relatively small initial capital investments. The
Company's lease program also provides the Company access to a regular supply of
aircraft, engines and engine parts. As leases expire, the Company can elect to
overhaul, sell or disassemble the leased equipment depending upon then existing
market supply and demand.
- ACQUISITIONS IN EXISTING COMMERCIAL AVIATION MARKETS. As a result of its
concentration in certain niche markets, the Company's management develops
in-depth knowledge of other resellers serving similar product lines that may be
potential acquisition candidates. The recent acquisition of ITC has, and the
proposed Aerocar Acquisition will, upon completion, expand the Company's
customer base within its existing commercial aviation product lines, enhance its
product offering and strengthen its distribution network. See
"Business -- Recent Developments."
- ACQUISITIONS IN ADJACENT MARKETS. As a result of its position in the
industry, the Company's management also becomes familiar with companies serving
complementary markets that may be attractive acquisition candidates. The Company
continually works with outside advisors to evaluate and pursue companies that
will enable it to expand into product lines and markets in which the Company
does not have a significant presence. As a result of the acquisition of Aero
Support in September 1997, the Company is able to offer engines and engine parts
to customers in the large cargo transport aircraft and commercial helicopter
markets, which were not previously served by the Company. The Company believes
that similar expansion may be achieved through the acquisitions of companies
offering different product lines than those of the Company, such as resellers of
avionics equipment and airframes.
COMPETITIVE STRENGTHS
The Company believes that it will be able to achieve its business strategy
through the following competitive strengths:
- QUALITY ASSURANCE. The Company believes that it was the first reseller
of commercial jet engines and engine parts to receive ISO 9002 certification
from the ISO, providing it with a distinctive competitive strength. The ISO's
comprehensive evaluation system seeks to ensure satisfaction of customer
requirements, documentation of quality management systems and verification that
a product or service is designed, delivered and maintained in accordance with
specific requirements. To refine its document storage and retrieval
capabilities, the Company relies on a sophisticated optical imaging system,
which further ensures quality assurance by maximizing
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the Company's ability to respond to customers as well as to provide accurate
documentation of its inventory.
- BROAD ARRAY OF PRODUCTS AND SERVICES. The Company buys, overhauls
(through subcontractors), sells and leases a broad array of aircraft, engines
and engine parts. In addition, the Company provides inventory management
services. Through its recent acquisitions, the Company has expanded its supply
of aircraft, engines and engine parts in the markets it serves, and has expanded
its products and services into new markets. The Company believes that this
breadth of products and services gives it a competitive advantage in obtaining
business from new customers and affords an opportunity to expand its business
with existing customers. It also positions the Company to respond to its
customers' desire to focus on a select group of suppliers to control costs,
increase quality and enhance timeliness of delivery.
- LARGE AND DIVERSE CUSTOMER BASE. The Company serves a broad base of
approximately 1,000 domestic and international customers representing nearly all
segments of the worldwide aviation industry, including commercial airlines such
as American, Delta, Lufthansa, SwissAir and Singapore Airlines, and OEMs and
overhaul facilities such as Daimler-Benz, GE Aircraft Engine Services and Pratt
& Whitney.
- MARKET FOCUS. The Company focuses its operations on the technical,
logistical and financial aspects of inventory management. Unlike many of its
competitors which have diversified into the manufacturing, refurbishing and
overhauling markets, the Company has remained focused on its core business of
buying, overhauling (through subcontractors), selling and leasing aircraft,
engines and engine parts. In focusing its business on inventory management, the
Company is able to keep its capital investments to a minimum and dedicate most
of its liquid resources to inventory purchases. As a result, the Company does
not risk committing the large capital investments required to compete in the
manufacturing and overhaul segments of the industry. The Company believes that
this enables it to maximize the cost-efficiency and profitability of its
operations.
- STRONG MANAGEMENT TEAM. The members of the Company's senior operations
team has an average of over 18 years of experience in the aviation industry,
having worked for such industry participants as The AGES Group, Aviation Sales
Company, Chromalloy Research and Technology Corporation, Israel Aircraft
Industry Ltd. and United Airlines. The Company believes that its management team
has a depth of industry knowledge and experience across technical, marketing and
financial functions that permits it consistently to manage and meet expectations
of its customers. Through its acquisitions, the Company continues to add to its
senior management team individuals with experience in the aviation industry who
share the objective of increasing shareholder value. In this connection, all
members of the Company's senior management are paid a performance bonus based on
the profitability of the Company and are encouraged to become shareholders of
the Company through the open market purchases of shares of Common Stock and
through participation in the Company's stock option plans.
- CAPITAL AND OTHER RESOURCES. As a result of the Company's available
capital, the Company regularly seeks to develop and pursue opportunities to
expand its product, customer and service bases, to make selected acquisitions
and to evaluate bulk purchases of inventory. The Company's market presence,
industry experience, sophisticated MIS systems and available capital enable the
Company to analyze and complete acquisitions and inventory purchases quickly,
which the Company believes gives it an effective competitive advantage.
RECENT DEVELOPMENTS
- ITC ACQUISITION. On April 1, 1998, the Company acquired all of the
assets, and assumed certain of the liabilities, of ITC for a purchase price of
approximately $20.2 million paid at closing plus the payment of certain
additional consideration if ITC meets certain specified criteria in the three
years following closing. For the fiscal year ended December 31, 1997, ITC's
revenue was approximately $29 million and its EBITDA was approximately $6.3
million. ITC is a leading after-market supplier of jet engines and jet engine
parts for the airline industry. It also provides related services such as engine
leasing. In connection with the ITC Acquisition, the Company paid a merger
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and acquisition fee to Helix Capital Services, Inc., a merchant bank in which
Yoav Stern, Chairman, and Zivi R. Nedivi, President and CEO of the Company, are
principals, in an amount equal to three percent of the consideration paid and
indebtedness assumed by the Company in connection with such transaction.
- AEROCAR ACQUISITION. On May 6, 1998, the Company agreed to acquire all
of the outstanding capital stock of Aerocar for an aggregate purchase price
payable at closing of approximately $44 million and the issuance at closing of a
warrant to purchase 250,000 shares of Common Stock at the fair market value of
the Common Stock at closing, plus an additional $5 million payable over a two
year period following the 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
issuance. The $44 million closing date payment will be paid by the Company out
of the net proceeds of the Notes Offering and the Common Stock Offering. For the
fiscal year ended December 31, 1997 Aerocar's revenue was approximately $42
million and its EBITDA was approximately $13.3 million (excluding the impact of
certain extraordinary transactions and payments to stockholders). Aerocar is
engaged in the sale and lease of aircraft, engines and engine parts to major
airlines and regional carriers. The Company is obligated to pay Helix Capital
Services, Inc. a merger and acquisition fee in connection with the Aerocar
Acquisition, in an amount equal to two percent of the consideration paid and
indebtedness assumed by the Company in connection with such transaction.
THE INDUSTRY
The airline industry has experienced rapid growth in the level of air
travel and the volume of air cargo in recent years and is expected by industry
analysts to continue to face such growth in the future. According to the Boeing
Report, air travel is expected to rise over current levels by approximately 75%
by 2006 and by approximately 250% by 2016. While this growth to date has been
accommodated largely by increasing load factors, airlines are responding by
expanding fleet size. The Boeing Report projects that the worldwide fleet of
commercial aircraft is expected to double from approximately 11,500 at the end
of 1996 to approximately 23,000 by 2016, and the worldwide fleet of cargo jet
aircraft is expected to increase from approximately 1,230 in 1996 to
approximately 2,350 by 2016.
This increase in worldwide air travel has resulted in a corresponding
increase in demand for aircraft, engines and after-market engine parts. In light
of FAA requirements that aircraft engines and engine parts be serviced at
scheduled intervals of flying hours, the increase in worldwide air travel has
resulted in the need for more frequent servicing cycles and a corresponding
increase in demand for engines and engine parts. As a result of cost
considerations, the Company believes that many airlines and repair and
maintenance facilities that historically purchased parts from new parts
manufacturers are increasingly utilizing after-market parts sold by resellers
such as the Company.
The aircraft engine and engine parts market is estimated by the United
States Department of Commerce to exceed $18 billion. The resale segment of this
market is highly fragmented, characterized by a limited number of large
suppliers with broad product offerings and numerous smaller competitors serving
niche markets. Several notable trends in the industry have recently emerged to
improve safety, reduce costs and increase efficiency, including increasing
emphasis on documentation and traceability of parts, outsourcing of inventory
management functions, implementing "just-in-time" inventory management systems
and reducing the number of approved suppliers. The Company believes that only
those companies with superior quality assurance programs, sophisticated
information systems and adequate capital will succeed in this changing
environment. The Company is an active participant in the consolidation of the
industry, having completed four acquisitions in the past 16 months with combined
annual revenues in the year preceding the acquisition of approximately $75
million, and having entered into a definitive agreement to acquire Aerocar,
which had 1997 annual revenues of approximately $42 million.
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The engine and engine parts industry is being affected by the following
trends:
- INCREASING EMPHASIS ON DOCUMENTATION AND TRACEABILITY. As safety
requirements have become more stringent, regulatory authorities have increased
the level of documentation required of aircraft operators. Operators have, in
turn, extended this requirement to the independent dealers from which they
purchase after-market parts. The expense and sophistication required to track
the history of inventory consisting of thousands of components is considerable
and provides a barrier to entry into the engine parts after-market. In addition
to the barriers created by documentation requirements, management believes that
tighter regulations regarding the operating procedures of resellers may
eliminate smaller participants and create additional barriers to entry.
- OUTSOURCING OF INVENTORY MANAGEMENT FUNCTION. Some airlines have
streamlined their operations by outsourcing the entire inventory management
function to independent third parties. This improves the airline's
profitability, as measured by return on assets, by removing parts inventory from
the balance sheet. Outsourcing allows airlines to secure parts on an "as-needed"
basis without incurring the costs associated with carrying its own expensive
inventory. This enables a company such as Kellstrom to acquire directly or
through consignment arrangements a large inventory and to make such inventory
attractive to a broad customer base. Under consignment agreements, the supplier
is granted the right to sell spare parts from the airlines' inventory, with the
proceeds divided between the supplier and the airline itself.
- LEASING. Similar to outsourcing, leasing engines or engine parts enables
airlines to meet short-term operating needs while lowering their overhead and/or
working capital requirements. Short-term leases, often 30-90 days in duration,
are used by some carriers that do not wish to maintain a pool of spare engines
or engine parts. Intermediate and long-term leases (up to 10 years) are used by
many larger carriers as they upgrade their fleets. Almost all of the new
aircraft flown by the major carriers are leased and such carriers prefer to
lease rather than purchase spare engines for their fleet. In addition, many of
the new entrant jet carriers are capital-constrained and thereby prefer to lease
rather than own engines.
- REDUCTION IN NUMBER OF SUPPLIERS AND CONSOLIDATION OF THE ENGINE PARTS
AFTER-MARKET. In order to ensure better control of their safety standards and
to reduce their administrative costs, airlines are limiting the number of
suppliers with which they do business. To remain a supplier to the airlines,
dealers must maintain high standards of quality control, enabling customers to
trace the complete history of any part. This move to limit the number of
suppliers is causing a realignment among independent dealers. A small number of
dealers continues to do business directly with airlines, and a new tier of
dealers sells to these approved suppliers. The Company believes that this
reduction in supplier base will continue to lead to consolidation in the market
for aircraft spare parts.
- INCREASED IMPORTANCE OF CAPITAL. Suppliers need ready access to capital
in order to take advantage of various profitable opportunities, including
purchasing large portfolios of assets to be made available for outsourcing and
leasing. Larger inventories, sophisticated information technology systems and
more expensive jet engines require increased access to capital.
THE ENGINE AND ENGINE PARTS AFTER-MARKET
Airlines maintain inventories of engines and engine parts, with inventory
levels determined by the expected usage for the particular part. These
inventories are stored primarily at the airline's maintenance centers, although
limited quantities of certain parts are also kept at each airport serviced by
the operator in order to avoid revenue-damaging AOG (aircraft on ground)
situations.
For the first few years after a new engine is introduced, most parts are
supplied by the engine manufacturer. After about five years, engine parts tend
to become available on the surplus market. This availability is the result of
three primary factors:
(1) when aircraft and engines are sold, supporting inventories may be
sold to third parties;
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(2) the development of repair planning scenarios provides a supply of
overhauled and serviceable parts; and
(3) with experience, operators become better able to forecast their
need for a particular engine part, enabling them to sell excess new part
inventories.
Three types of engine parts are available in the after-market: new parts;
serviceable parts (i.e., used parts that were removed from aircraft and were
inspected and designated airworthy by the airline or by an FAA-approved repair
station or that were overhauled by an FAA-approved entity); and unserviceable
parts (i.e., used parts that were removed from aircraft that may or may not be
repairable). The decision as to which type of part to purchase is made based
upon the relative price and availability of parts, the condition of the specific
part, the repair facilities that have been used during the life of the part, the
previous owners of the part, the life remaining on the part (if applicable), the
maintenance policy of the airline which will use the part and other
considerations.
Commercial aircraft engine parts are available from a variety of sources,
including OEMs, third-party dealers, brokers (who maintain no inventory),
overhaul and repair facilities, lessors and airline operators. Relationships in
the engine parts market are complex; at different times participants may act as
both buyers and sellers, suppliers and clients. The Company, for example, both
buys from and sells to airlines, OEMs, lessors, operators of refurbishment
facilities and other independent dealers. Sources for surplus aircraft engines
do not exist as an organized market, and the Company must rely on field
representatives and personnel, advertisements and its reputation as a buyer of
surplus aircraft engines and components in order to generate opportunities to
purchase these materials. The market for bulk sales of surplus aircraft engines
and components is highly competitive, in some instances involving a bidding
process. While the Company has been able to purchase surplus aircraft engines in
this manner successfully in the past, there can be no assurance that such parts
will be available on acceptable terms when needed in the future.
The engine after-market consists of several business segments including
engine sales, leasing, maintenance management, parts distribution, parts repair
and overhauls. The Company is active in most of these segments, either directly
through in-house activity or indirectly, by contracting refurbishment work to
third-party suppliers.
OPERATING APPROACH
The principal elements of the Company's operating approach are as follows:
- CONTINUE STRONG QUALITY ORIENTATION. The Company's management believes
that its comprehensive quality program is among the best in the industry. The
Company is a member of the Coordinating Agency for Supplier Evaluation, a
self-governing organization formed by the airlines that evaluates and audits
parts suppliers and repair stations. The Company believes it was the first
reseller of commercial jet engines and engine parts in the world to receive ISO
9002 certification which the Company believes provides it with a distinctive
competitive advantage. ISO's comprehensive evaluation system seeks to ensure
satisfaction of customer requirements, documentation of quality management
systems and verification that a product or service is designed, delivered and
maintained in accordance with specific requirements. The ISO 9002 designation
indicates a quality assurance standard recognized by leading businesses
throughout the world. In response to recent airline tragedies and resultant
increased scrutiny of airline safety, airlines and maintenance repair facilities
are demanding internationally recognized quality assurance certification as a
condition of doing business.
The Company is one of the few vendors in the industry to have invested in a
sophisticated optical imaging system for documentation storage and retrieval.
This system, which includes a WORM (write once, read many) drive, provides a
high degree of traceability by serial number for engine parts sold by the
Company. The FAA and customers accept this form of electronic documentation as
the equivalent of original documents. In addition, the Company is working to
make such documentation available on-line to customers worldwide.
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- ADDITIONAL KNOWLEDGEABLE PERSONNEL. The market for engine parts is
highly specialized and technically complex. The Company believes that its
success depends heavily on the high level of technical and engineering knowledge
and experience possessed by its personnel. The Company continues to add to its
technically proficient personnel as its business expands both internally and
through the acquisition of competing and complementary businesses.
- OPTIMIZE INVENTORY. The Company manages its inventory carefully by
purchasing both whole engines and individual engine parts through
well-structured transactions, disassembling engines for parts when market
conditions are favorable, closely monitoring the overhauling of selected parts
by high quality subcontractors, maintaining a high level of documentation at all
stages of the process, and storing the engine parts in a carefully controlled
environment. In addition, the Company's management has developed a systematic
approach and management procedures to assess demand for engines and engine
parts. In such assessments, the Company compiles a periodic analysis of the
industry's supply and demand on a product-by-product basis, reevaluates its
available supply of inventory and interfaces with customers and suppliers to
forecast supply and demand. The Company believes that its ability to structure
and to finance inventory purchase transactions is critical to its success.
- EXPAND MARKETING RELATIONSHIPS. The Company maintains close
relationships with a variety of key customers, including OEMs, repair
facilities, domestic and international airlines and other distributors.
- INCREASE CAPITAL RESOURCES. It is critical for the Company to have the
capital to act quickly when purchasing opportunities present themselves. In
addition, increasing the Company's access to capital markets to finance working
capital requirements should allow the Company to take advantage of opportunities
such as leasing, inventory outsourcing and long-term inventory management
contracts.
PRODUCTS
Spare engine parts are purchased by customers in both the commercial and
military sectors. The Company is active in the commercial aircraft sector, which
is divided into large jet transports, smaller commercial aircraft (known as
general aviation aircraft) and helicopters. General aviation includes both jet
and propeller-driven planes for business and personal use. The Company has
traditionally specialized in the large jet segment of the business. With the
Aero Support Acquisition, the Company added certain military customers for
turbojet engines and engine parts for large transport aircraft and commercial
customers for helicopters. The Company has not entered the turboprop market,
which is typically low margin in terms of cost per unit.
The Company specializes in providing overhauled, new and as-removed parts
for large fan engines, particularly the Pratt & Whitney JT9D engine and to a
lesser extent the PWA 4000 engine, as well as narrow-body engines such as the
Pratt & Whitney JT8D and PWA 2000 engines. The JT9D and PWA 4000 power the
Boeing 747, 767 and 777 aircraft, McDonnell Douglas DC-10 and MD-11 and the
Airbus A300/310/330; the JT8D and PWA 2000 engines power the Boeing 727, 737 and
757 aircraft as well as the McDonnell Douglas MD-80 and DC-9 series aircraft.
Moreover, the Company recently entered the markets for the CFM-56 engine which
powers the Boeing 737-300, -400 and - 500 aircraft as well as the Airbus A320,
A321 and A340 aircraft and the McDonnell Douglas DC-8. The Company also provides
Allison (Rolls Royce) T56/501 turbojet engines and engine parts, which power the
military's Hercules C-130 aircraft and similar large transport aircraft and
Allison 250 turbojet engines and engine parts, which power a range of commercial
helicopters.
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Several manufacturers dominate the market for large commercial airplanes,
including Boeing, McDonnell Douglas and Airbus Industries. A small number of
suppliers provide the bulk of engines used to power large jet aircraft. The
suppliers include the Pratt & Whitney division of United Technologies, General
Electric, Rolls Royce and CFM International. The following is a brief
description of the engines models for which the Company supplies engine parts:
- JT9D. JT9D engines, introduced by Pratt & Whitney in the late 1960's,
are used in Boeing 747 and 767 aircraft, the McDonnell Douglas DC-10 and Airbus
A300/310s. The JT9D was the first commercial turbo fan with a high bypass ratio,
enabling the engine to provide unprecedented thrust with outstanding fuel
efficiency and relatively low noise. The JT9D engine has flown more than 135
million hours. Approximately 3,000 of these engines were built until production
ceased in 1990; approximately 2,800 are still flying on wide body aircraft
operated by over 50 airlines. The Company estimates that JT9D engines will be
widely used for the next 10-15 years. Pratt & Whitney continues to upgrade and
improve in-service engines to meet current noise and emissions requirements,
thus increasing the life span of these engines.
- JT8D. JT8D engines, a derivative military J-52 Turbojet, were originally
developed by Pratt & Whitney for the Boeing 727 airliner in 1963. The engine is
the most widely used engine in commercial aviation history. More than 13,000 of
the JT8D family of engines have been produced and the engine is still in
production today. A variant of the basic JT8D, called the 200 Series, was
introduced in 1977. The older, less fuel efficient JT8D engines are used in the
Boeing 727 and 737, the McDonnell Douglas DC-9, the Aerospatiale Carvelle,
Dassualt Mercure and the C-9 and C-22, U.S. military versions of the DC-9 and
727 aircraft. The newer 200 Series JT8D engines are used throughout the
McDonnell Douglas MD-80 range of aircraft models. The Company estimates that the
older JT8D engines will be in service for at least ten more years, and the 200
Series JT8D engines will be in service for at least 20 more years.
- PWA 2000. Pratt & Whitney began development in 1974 of a series of
advanced technology aircraft engines to power the commercial transports of the
mid-1980s and beyond. The PWA 2037 engine model, the first in the series of such
model, was awarded FAA certification in December 1983. These highly fuel
efficient engines feature high thrust, low noise and reduced emissions. The PWA
2000 series engines are used to power the Boeing 757 and are considered to be
current technology engines that are likely to continue in service for at least
25 more years.
- PWA 4000. In 1982, Pratt & Whitney launched development of the PWA 4000
Series turbofan -- an all new commercial jet engine series with improved fuel
efficiency and higher takeoff thrust rating. The PWA 4000 entered commercial
service in mid 1987. The PWA 4000 is designed for use on current and advanced
versions of such wide-body aircraft as the Airbus A300, A310, A330, the Boeing
747, 767, 777 and the McDonnell Douglas MD-11. These engines are considered to
be current technology engines and are likely to continue in service for at least
25 more years.
- ROLLS ROYCE RB-211. The RB-211 was built by Rolls Royce beginning in
1970 for the Lockhead L-1011, the majority of which were purchased by Delta and
Eastern. Approximately 230 aircraft are still in use which use the RB-211.
- CFM-56. The CFM-56 is manufactured by CFM International, a joint venture
between General Electric and SNECMA, and is the second most popular engine as
measured by number of aircraft in the worldwide fleet powered by this engine
type. The CFM-56 is used to power the Boeing 737 and the Airbus A320, A321, A340
and the McDonnell Douglas DC-8. These engines are considered to be current
technology engines and are likely to continue in service for at least 25 more
years.
- T56/501. The T56/501 engine is used to power the widely used military
transport aircraft, the Hercules C-130, manufactured by Lockheed. Over 17,000
engines have been produced.
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- A250. The A250 engine is used to power a wide range of helicopters
manufactured by Bell, McDonnell Douglas and Eurocopter. There are approximately
16,000 engines currently in use by approximately 2,700 helicopter operators.
The development of a new engine for a commercial aircraft can take five to
fifteen years. Often, an engine becomes the basis for numerous series, tailored
to the needs of particular aircraft. For example, the JT9D and JT8D engine
families for Pratt & Whitney include more than 15 models each.
QUALITY CONTROL
Engine parts are generally more expensive, flight critical, technically
complex and utilize more specialized heat tolerant metals than other aircraft
parts. A high standard for quality control and documentation is an absolute
necessity. The history of a given part from the date of original manufacture
must be documented and available to regulators and maintenance personnel. The
Company is dependent on third-party FAA certified repair facilities to perform
repair services to bring surplus aircraft engines held for resale and certain
engine components into a condition of airworthiness so that the Company can sell
such equipment.
The Company's management believes that its ability to continue to act as an
approved supplier for the major airlines, OEMs and overhaul facilities is
heavily dependent on quality assurance, and that the Company's comprehensive
quality assurance program is among the best in its industry. The Company is (i)
a member of the Coodinating Agency for Supplier Evaluation, a self-governing
organization formed by the airlines that evaluates and audits parts suppliers
and repair stations, (ii) a member of the Airline Suppliers Association for
which the Company is an accredited reseller under the provisions of FAA AC 00-56
and (iii) is listed in the European Aerospace Suppliers Register. In addition,
in September 1996, the Company received certification under ISO 9002. The ISO
9002 designation indicates a quality assurance standard recognized by leading
companies throughout the world. The Company believes it was the first
after-market supplier of commercial jet engines and engine parts in the world to
receive such a certification. In addition, the Company is one of the few vendors
in the industry to have invested in a sophisticated optical imaging system for
document storage and retrieval. This system provides a high degree of
traceability by serial number for engine parts sold by the Company.
CUSTOMERS
The Company's customers include airlines, OEMs, lessors, operators of
refurbishment facilities and other independent dealers. These customers include
American, Daimler-Benz, Delta, Lufthansa, GE Aircraft Engine Services, Pratt &
Whitney, SwissAir and Singapore Airlines. For the years ended December 31, 1997,
1996 and 1995, the five largest customers collectively accounted for
approximately 38%, 55% and 96% of the Company's consolidated revenues. Certain
significant customers vary from period to period as a result of the large unit
prices associated with whole aircraft engine sales. The loss of, or significant
curtailments of purchases by, the Company's significant customers could have a
material adverse effect on the Company's business, consolidated financial
condition, results of operations or cash flows.
COMPETITION
The aviation after-market is highly competitive. Competition is based on
product quality, price and the ability to provide needed parts quickly. The
largest segment of the after-market is served by OEMs. However, the relatively
high overhead and slow response times which characterize these large
organizations can present a handicap in a fast-moving, price-sensitive
marketplace. OEMs generally concentrate on selling new parts, leaving the market
in serviceable and overhauled parts to other suppliers. OEM-manufactured new
parts generally do not compete with overhauled parts.
The largest resellers include companies such as AAR Corp. and The AGES
Group. There are approximately 10 to 15 midsize competitors, including the
Company. Over 50 small after-market
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suppliers and brokers generate a large portion of the market revenue. As a
result of industry consolidation, management expects that a number of these
smaller operators will either be acquired or will have difficulty competing in
this changing market. The Company competes based on its ability to deliver parts
on a "just-in-time" basis, the breadth of its product offering, quality
assurance and part traceability, proven technical capabilities and price. There
can be no assurance that the Company will continue to compete effectively
against present and future competitors or that competitive pressures will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition, the engine parts supply business has been reshaped by the
widespread adoption of ILS -- the Inventory Locator Service. The ILS lists the
availability of thousands of types of engine parts from brokers, resellers,
repair facilities and airlines. The listing includes the quantity of parts
available, the condition of the parts, when the parts are available and a
contact for more information. The ILS has created a much freer flow of
information concerning the supply and demand for particular parts. Dealers now
must compete not only on the basis of their relationships with customers and
knowledge regarding a potential source for products, but also on the quality of
the parts available, the documentation tracing the history of the parts and the
price.
GOVERNMENT REGULATION
The aviation industry is highly regulated by the FAA in the United States
and the equivalent regulatory agencies in other countries. While the business of
selling after-market engines and engine parts is not regulated by the FAA, the
aircraft engines, engine components and airframe materials must be accompanied
by documentation that enable the customers to comply with applicable regulatory
requirements. Aircraft operators must maintain logs concerning the utilization
and condition of aircraft engines, life-limited engine components and airframes.
Before engine parts may be installed in an aircraft engine, they must meet
certain standards of airworthiness established by the FAA or the equivalent
regulatory agencies in other countries. Specific regulations vary from country
to country, although regulatory requirements in other countries are generally
satisfied by compliance with FAA requirements. Engine components must also be
traceable to sources deemed acceptable by such agencies. Although the Company
believes it complies with the highest level of such regulatory standards,
standards may change in the future, requiring engine components already
contained in the Company's inventory to be scrapped or modified. Aircraft engine
manufacturers may also develop new engine components to be used in lieu of
engine components already contained in the Company's inventory. In all such
cases, to the extent that the Company has such engine components in its
inventory, their value may be reduced.
Management believes that the industry will be subject to continued
regulatory activity. Increased oversight has and will continue to originate with
quality assurance departments at airline operators. The Company has been able to
meet all such requirements to date, and believes that it will meet any
additional requirements that may be imposed. There can be no assurance, however,
that new, more stringent government regulations will not be adopted in the
future or that any such new regulations, if enacted, would not have a material
adverse impact on the Company.
EMPLOYEES
As of April 1, 1998, the Company had 81 full-time employees. None of the
Company's employees is a member of a labor union. The Company believes that its
relations with its employees are good.
FACILITIES
The Company's principal place of business is located in a 33,000 square
foot facility situated on 2.5 acres in the Sawgrass International Corporate Park
located in Sunrise, Florida. In connection with IASI, the Company leases an
approximately 30,000 square foot facility in San Carlos, California.
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In connection with Aero Support, the Company leases facilities in New York, New
York, and Lafayette, Louisiana for offices and warehouses constituting
approximately 8,500 and 4,000 square feet, respectively. In connection with ITC,
the Company leases an approximately 9,300 square foot facility in Ridgefield,
New Jersey. In connection with Aerocar, the Company will lease an approximately
15,000 square foot facility in Weston, Florida, a 15,700 square foot facility in
Miami, Florida and a 5,000 square foot facility in Medley, Florida. In
anticipation of the expiration of the leases for certain of these facilities,
the Company is constructing a new facility in the Sawgrass International
Corporate Park located in Sunrise, Florida and intends to consolidate its
operations in this new location. The new facility will consist of approximately
195,000 square feet of office and warehouse space and is expected to be
completed in late 1998. The final cost of the new facility is estimated to be
approximately $9,500,000 and is expected to be financed through a mortgage loan.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Yoav Stern............................. 44 Chairman of the Board
Zivi R. Nedivi......................... 39 Chief Executive Officer, President and
Director
John S. Gleason........................ 48 Executive Vice President and Director
Fred Von Husen......................... 53 Executive Vice President
Anthony Motisi......................... 39 Vice President and Secretary
Donald Reynolds........................ 59 Vice President, Technical Operations
Paul F. Steele......................... 39 Vice President
Gideon Vaisman......................... 57 Senior Vice President
Michael W. Wallace..................... 29 Chief Financial Officer
David J. Mitchell...................... 36 Director
Niv Harizman........................... 33 Director
</TABLE>
YOAV STERN, age 44, is the Chairman of the Board and a director of the
Company. From the Company's inception until June 22, 1995, Mr. Stern was the
Co-Chief Executive Officer and Co-President of the Company. Mr. Stern has been a
director of the Company since its inception. Mr. Stern is a principal of Helix
Management Company II, L.L.C., Helix Capital Services, Inc. and Helix Capital
II, L.L.C. (collectively, "Helix"), which are privately held companies that
provide mergers and acquisition and management advisory services and serve as
diversified holding companies for certain corporate investments. Mr. Stern was a
Co-Chief Executive Officer of European Gateway Acquisition Corporation ("EGAC")
during 1995. EGAC acquired Bogen Communications, Inc. and changed its name to
Bogen Communication International, Inc. ("Bogen") in August 1995. Bogen, a
public company traded on the American Stock Exchange, is engaged in the digital
voice processing business. Since August 1995, Mr. Stern has served as a director
and member of the executive committee of Bogen. Since November 1997, Mr. Stern
has served as Co-Chairman of Bogen. From February 1994 to April 1995, Mr. Stern
served as a director of Random Access, Inc., a public company traded on the
Nasdaq National Market, which is engaged in the information technology business.
From January 1993 to September 1993, Mr. Stern was President of WordStar
International, Inc. ("WordStar"), which is engaged in research and development
and worldwide marketing and distribution of software for business and consumer
applications. From January 1993 until May 1995, Mr. Stern served as a director
of WordStar. Mr. Stern structured the business combination of WordStar with two
other public companies. WordStar changed its name to The Learning Company, which
has annual revenues exceeding $350 million and trades on the New York Stock
Exchange. From March 1990 to December 1992, Mr. Stern was Vice President of
Business Development of Elron Electronic Industries Ltd. ("Elron"), a
multinational high-technology public holding company. Elron's aggregate
revenues, generated through its affiliated companies, exceeded $1.2 billion in
1996. Mr. Stern previously served in the Israeli Air Force for ten years as an
F-15, A-4, Mirage and Kfir fighter pilot, avionic systems officer, commander of
Operational Training Unit and a Deputy Squadron Commander. Mr. Stern earned a
Practical Engineering Diploma (magna cum laude) in advanced mechanics and
automation from ORT Technological College, Israel, graduated from the Israel Air
Force Academy and earned a B.S. degree (magna cum laude) in Mathematics and
Computer Science from Tel Aviv University.
ZIVI R. NEDIVI, age 39, has been the Chief Executive Officer, President and
a director of the Company since June 1995. Mr. Nedivi was the founder, President
and Chief Executive Officer of the predecessor of the Company, an indirectly
wholly-owned subsidiary of Rada Electronic Industries Ltd. ("Rada"), from its
establishment in 1990 until June 1995. From September 1994 until June 1995, Mr.
Nedivi also served as Corporate Vice President of Rada, a public company traded
on the
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Nasdaq National Market which is engaged in the business of avionics for the
commercial and military aviation industries. From October 1984 to September
1990, Mr. Nedivi was co-founder and General Manager of Maakav Ltd., a private
aviation management company based in Israel. Maakav represented certain American
companies in Israel, including companies active in the distribution of aircraft
parts. From February 1986 until October 1990, Mr. Nedivi was also co-founder and
director of NBC Aviation Inc., a private company based in Texas active in the
sale of commercial jet engines and related components. Mr. Nedivi also serves as
a director of Bogen, a public company traded on the American Stock Exchange
which is engaged in the digital voice processing business. Mr. Nedivi is also a
principal of Helix. A graduate of the Israel Air Force Academy, Mr. Nedivi
served in the Israel Air Force as an F-15 fighter pilot for seven years and held
the rank of Major. He also served as a Human Engineering Consultant to Israel
Aircraft Industries Ltd. on the Lavi fighter aircraft program.
JOHN S. GLEASON, age 48, has served as a director of the Company since July
1997, and has served as Executive Vice President since January 1997, Treasurer
since August 1995 and President of Kellstrom Commercial Aircraft, Inc. since
October 1997. From July 1995 until October 1997, Mr. Gleason served as Chief
Financial Officer of the Company. From January 1986 until July 1995, Mr. Gleason
served as the Vice President of Finance of International Aircraft Support L.P.
("IASI"), a seller of new and used aircraft engine parts. Mr. Gleason was also
responsible for buying, selling and leasing IASI's commercial jet engines on a
worldwide basis, as well as the procurement of jet engine inventory consignment
arrangements. Mr. Gleason is a Certified Public Accountant licensed in Florida
and California and earned a B.S. degree in accounting from Florida Atlantic
University in 1971.
FRED VON HUSEN, age 53, joined the Company in January 1997 as its Executive
Vice President. From 1987 to January 1997, Mr. von Husen was IASI's President
and Chief Executive Officer. Mr. von Husen has 32 years experience in the
aviation industry primarily in engine and aircraft maintenance plus financial
and organizational management. Prior to joining IASI, he served as Vice
President of Operations and earlier as Vice President of Technical Services at
Aircal, a passenger airline based in California. Mr. von Husen also spent 17
years at United Airlines in various positions including engine maintenance,
engineering and corporate planning.
ANTHONY MOTISI, age 39, has been a Vice President and Secretary of the
Company since June 1995. From December 1994 until June 1995, Mr. Motisi was the
Vice President of Operations of the predecessor of the Company, and from July
1993 until December 1994, Mr. Motisi served as Director of Sales and Marketing
of such company. Prior to July 1993, Mr. Motisi held the position of Manager of
Engine Parts Sales at Aviation Sales Company. Mr. Motisi earned a B.S. degree in
finance from the University of Florida in 1980.
DONALD REYNOLDS, age 59, became Vice President of Technical Operations of
the Company in January 1997. Mr. Reynolds served in the same role at IASI since
1985. Mr. Reynolds is responsible for inventory management, quality control,
purchasing, outside vendor business, shipping and receiving, and all technical
services activities. Mr. Reynolds also spent 24 years with United Airlines in
various positions including commercial airline engine maintenance, production
planning, customer service and contract administration.
PAUL F. STEELE, age 39, has been a Vice President of the Company since June
1995. From December 1994 until June 1995, Mr. Steele was the Vice President of
Purchasing for the predecessor of the Company, and from November 1993 until
December 1994, Mr. Steele served as a Director of Operations of such company.
Prior to November 1993, Mr. Steele held the position of Vice President of
Technical Sales at The AGES Group, a subsidiary of Volvo Flygmotor and supplier
of commercial aircraft engines. Mr. Steele graduated from Bolton Street College,
Dublin.
GIDEON VAISMAN, age 57, has served as a Senior Vice President of the
Company and Manager of the Rolls Royce and Pratt & Whitney JT8D product line
divisions of the Company since April 1, 1998, upon the Company's acquisition of
ITC. Mr. Vaisman was the founder of ITC and certain of its
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affiliates in 1985 and served as President and Chief Executive Officer of such
companies from 1985 until April 1998. Prior to founding ITC, Mr. Vaisman worked
for 14 years at Chromalloy Research and Technology Corporation ("Chromalloy"),
where he was involved in the development, marketing and production phases of the
overhaul and repair of jet aircraft engine components. While at Chromalloy, Mr.
Vaisman served as Chief Engineer and General Manager. Mr. Vaisman earned a
degree in mechanical and metallurgical engineering and has received
international on-site training in aeronautical applications.
MICHAEL W. WALLACE, age 29, has served as Chief Financial Officer of the
Company since October 1997. From April 1997 until September 1997, Mr. Wallace
served as Director of Finance of the Company. Prior to joining the Company, Mr.
Wallace was a senior manager at KPMG Peat Marwick at which he held various
positions since August 1990. Mr. Wallace is a Certified Public Accountant
licensed in Georgia and earned a B.B.A. degree from the University of Notre Dame
in 1990.
DAVID J. MITCHELL, age 36, has served as a director of the Company since
December 1993. Mr. Mitchell is Chairman and President of North Atlantic
Acquisition Corporation, a publicly traded acquisitions company. Since March
1995, Mr. Mitchell has served as a director of Bogen, a public company traded on
the American Stock Exchange which is engaged in the digital voice processing
business. Mr. Mitchell serves as a director of several private companies,
including Madah-Com Inc., an Israeli based company involved in sound
transmission, and Direct Furniture, a furniture sales and finance company. Mr.
Mitchell also serves as President of AmeriCash, LLC, a national network of
automated teller machines in non-bank locations.
NIV HARIZMAN, age 33, has served as a director of the Company since
December 1997. From January 1998 until the present, Mr. Harizman has served as a
Principal with BT Alex. Brown Incorporated ("BT Alex. Brown"), the investment
banking subsidiary of Bankers Trust New York Corporation. From June 1996 until
January 1998, Mr. Harizman was a Vice President with BT Alex. Brown. He started
with BT Alex. Brown in 1995. While at BT Alex. Brown, he has advised companies
in a broad range of manufacturing and service industries in their merger and
acquisitions activities and helped clients finance targeted acquisitions. Prior
to working at BT Alex. Brown, from 1994 until 1995, Mr. Harizman was a member of
the mergers and acquisitions group at the investment banking firm of Wasserstein
Perella & Co., where he performed comprehensive strategic advisory assignments
including financial restructuring, leveraged buyouts, recapitalizations,
acquisitions, and divestitures. Prior to working at Wasserstein, Mr. Harizman
was an investment analyst for Henry Crown and Company in Chicago, where he was
involved in transactions in the cellular, media, manufacturing, entertainment
and agricultural industries. Mr. Harizman also worked at the Chicago Board
Options Exchange in equity and index options trading. Mr. Harizman received a
B.B.A. in Finance from the College of Business Administration at the University
of Texas at Austin, and an M.B.A. with a specialization in Finance from the
University of Chicago Graduate School of Business.
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DESCRIPTION OF NOTES
The Notes will be issued under an indenture to be dated as of June 17, 1998
(the "Indenture"), between the Company and First Union National Bank, as Trustee
(the "Trustee"), a copy of which is filed as an exhibit to the Registration
Statement. The following summaries of certain provisions of the Notes and the
Indenture do not purport to be complete and are subject to, and are qualified in
their entirety by reference to, all the provisions of the Notes and the
Indenture, including the definitions therein of certain terms which are not
otherwise defined in this Prospectus. Wherever particular provisions or defined
terms of the Indenture (or of the form of Note which is a part thereof) are
referred to, such provisions or defined terms are incorporated herein by
reference.
GENERAL
The Notes will represent unsecured general obligations of the Company
subordinate in right of payment to certain other obligations of the Company as
described under "-- Subordination of Notes," and convertible into Common Stock
as described under "-- Conversion of Notes." The Notes will be limited to
$75,000,000 in aggregate principal amount ($86,250,000 if the Underwriters'
over-allotment option is exercised in full), will be issued only in
denominations of $1,000 or any multiple thereof and will mature on June 15,
2003, unless earlier redeemed at the option of the Company or repurchased by the
Company at the option of the holder upon a Change in Control.
The Indenture does not contain any financial covenants or any restrictions
on the payment of dividends, the incurrence of Senior Indebtedness or the
issuance or repurchase of securities of the Company. The Indenture contains no
covenants or other provisions to afford protection to holders of Notes in the
event of a highly leveraged transaction or a change in control of the Company
except to the extent described under "-- Repurchase at Option of Holders upon
Change in Control."
The Notes will bear interest at the annual rate set forth on the cover page
hereof on the original date of issuance, payable on June 15 and December 15,
commencing on December 15, 1998, to holders of record at the close of business
on June 1 and December 1, respectively. However, with respect to a Note or
portion thereof called for redemption on a redemption date, or repurchased in
connection with a Change in Control on a Repurchase Date (as defined below)
during the period from the Record Date to (but excluding) the next succeeding
Interest Payment Date, accrued interest shall be payable on the redemption date
or Repurchase Date to the holder of the Note or portion thereof redeemed or
repurchased. Notes converted after the Record Date and before the next
succeeding Interest Payment Date are required to be accompanied by funds equal
to the amount of interest payable on such succeeding Interest Payment Date on
the principal amount so converted, except as set forth under "-- Conversion of
Notes" below. Interest may, at the Company's option, be paid by check mailed to
such holders, provided that a holder of Notes with an aggregate principal amount
in excess of $5,000,000 will be paid by wire transfer in immediately available
funds at the election of such holder. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.
Principal and premium, if any, will be payable, and the Notes may be
presented for conversion, registration of transfer and exchange, without service
charge, at the office of the Company maintained for such purpose in Richmond,
Virginia, which shall initially be the office or agency of the Trustee.
The Indenture will be governed by and construed under the laws of the State
of New York.
BOOK ENTRY, DELIVERY AND FORM
The Notes will be issued in fully registered form, without coupons, in
denominations of $1,000 principal amount and multiples thereof.
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Global Note, Book-Entry Form. The Notes initially will be represented by
one or more Notes in registered, global form without interest coupons
(collectively, the "Global Notes" or "Global Note") which will be deposited upon
issuance with the Trustee as custodian for The Depository Trust Company, New
York, New York, ("DTC") and registered in the name of Cede & Co. ("Cede") as
DTC's nominee. Except as set forth below, record ownership of the Global Note
may be transferred, in whole or in part, only to another nominee of DTC or to a
successor of DTC or its nominee.
A holder may hold its interests in the Global Note directly through DTC if
such holder is a participant in DTC, or indirectly through organizations which
are participants in DTC (the "Participants"). Transfers between Participants
will be effected in the ordinary way in accordance with DTC rules and will be
settled in same-day funds. The laws of some states require that certain persons
take physical delivery of securities in definitive form. Consequently, the
ability to transfer beneficial interest in the Global Note to such persons may
be limited.
Holders who are not Participants may beneficially own interests in the
Global Note held by DTC only through Participants, or certain banks, brokers,
dealers, trust companies and other parties that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
("Indirect Participants"). So long as Cede, as the nominee of DTC, is the
registered owner of the Global Note, Cede for all purposes will be considered
the sole holder of the Global Note. Except as provided below, owners of
beneficial interests in the Global Note will not be entitled to have
certificates registered in their names, will not receive or be entitled to
receive physical delivery of certificates in definitive form and will not be
considered holders thereof.
Payment of interest on and the redemption price of the Global Note will be
made to Cede, the nominee of DTC, as the registered owner of the Global Note, by
wire transfer of immediately available funds on the applicable payment date
therefor. Neither the Company, the Trustee nor any paying agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Company has been informed by DTC that, with respect to any payment of
interest on, or the redemption price of, the Global Note, DTC's practice is to
credit Participants' accounts on the applicable payment date therefor with
payments in amounts proportionate to their respective beneficial interests in
the Notes represented by the Global Note, as shown on the records of DTC
(adjusted as necessary so that such payments are made with respect to whole
Notes only), unless DTC has reason to believe that it will not receive payment
on such payment date. Payments by Participants to owners of beneficial interests
in Notes represented by the Global Note held through such Participants will be
the responsibility of such Participants, as is now the case with securities held
for the accounts of customers registered in "street name."
Holders who desire to convert their Notes into Common Stock pursuant to the
terms of the Notes should contact their brokers or other Participants or
Indirect Participants to obtain information on procedures, including proper
forms and cut-off times, for submitting such requests.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a person
having a beneficial interest in Notes represented by the Global Note to pledge
such interest to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Neither the Company nor the Trustee (or any registrar, paying agent or
conversion agent under the Indenture) will have any responsibility for the
performance by DTC or its Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations. DTC has advised the Company that it will take any action permitted
to be taken by a holder of Notes (including, without limitation, the
presentation of Notes for exchange as described
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below), only at the direction of one or more Participants to whose account DTC
interests in the Global Note are credited and only in respect of the principal
amount of the Notes represented by the Global Note as to which such Participant
or Participants has or have given such direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). DTC holds securities for its Participants. DTC also
facilitates the clearance and settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities through
electronic book-entry changes to accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing corporations
and may include certain other organizations such as the Underwriters. Certain of
such Participants (or their representatives), together with other entities, own
DTC. Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through, or maintain a custodial
relationship with, a Participant, either directly or indirectly. The rules
applicable to DTC and its Participants are on file with the Securities and
Exchange Commission.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among Participants of DTC, they are
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days, the Company will cause Notes to be issued in
definitive form in exchange for the Global Note. None of the Company, the
Trustee nor any of their respective agents will have any responsibility for the
performance by DTC, their Participants or Indirect Participants of their
respective obligations under the rules and procedures governing their
operations, including maintaining, supervising or reviewing the records relating
to, or payments made on account of, beneficial ownership interests in Global
Notes.
Certificated Notes. Certificated Notes may be issued in exchange for Notes
represented by the Global Note if no successor depositary is appointed by the
Company as set forth above under "-- Global Note, Book Entry Form."
CONVERSION OF NOTES
The holders of Notes will be entitled at any time on or after 60 days
following the latest date of original issuance thereof through the close of
business on the final maturity date of the Notes, subject to prior redemption or
repurchase, to convert any Notes or portions thereof (in denominations of $1,000
or multiples thereof) into Common Stock, at the conversion price set forth on
the cover page of this Prospectus, subject to adjustment as described below.
Except as described below, no adjustment will be made on conversion of any Notes
for interest accrued thereon or for dividends on any Common Stock issued upon
conversion of the Notes.
If any Notes not called for redemption are converted after a Record Date
for the payment of interest and prior to the next succeeding Interest Payment
Date, such Notes must be accompanied by funds equal to the interest payable on
such succeeding Interest Payment Date on the principal amount so converted;
provided, however, that no such payment will be required if such Notes being
converted have been called for redemption or are eligible to be called for
repurchase if, as a result, the right to convert such Notes would terminate
during the period between the Record Date and the next succeeding Interest
Payment Date. The Company is not required to issue fractional shares of Common
Stock upon conversion of Notes and, in lieu thereof, will pay a cash adjustment
based upon the market price of the Common Stock on the last Trading Day (as
defined) prior to the date of conversion. In the case of Notes called for
redemption, conversion
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<PAGE> 49
rights will expire at the close of business on the fifth business day preceding
the date fixed for redemption, unless the Company defaults in payment of the
redemption price. A Note in respect of which a holder is exercising its option
to require repurchase upon a Change in Control may be converted only if such
holder withdraws its election to exercise its option in accordance with the
terms of the Indenture.
The initial conversion price of $32 1/2 per share of Common Stock is
subject to adjustment (under formulae set forth in the Indenture) in certain
events, including: (i) the issuance of Common Stock as a dividend or
distribution on Common Stock of the Company; (ii) certain subdivisions and
combinations of the Common Stock; (iii) the issuance to all holders of Common
Stock of certain rights or warrants to purchase Common Stock; (iv) the
distribution to all holders of Common Stock of shares of capital stock of the
Company (other than Common Stock) or evidences of indebtedness of the Company or
assets (including securities, but excluding those rights, warrants, dividends
and distributions referred to above and dividends and distributions in
connection with the liquidation, dissolution or winding up of the Company or
paid in cash); (v) dividends or other distributions consisting exclusively of
cash (excluding any cash portion of distributions referred to in clause (iv)) to
all holders of Common Stock to the extent that such distributions, combined
together with (A) all other such all-cash distributions made within the
preceding 12 months in respect of which no adjustment has been made plus (B) any
cash and the fair market value of the other consideration payable in respect of
any tender offers by the Company for Common Stock concluded within the preceding
12 months in respect of which no adjustment has been made, exceeds 10% of the
Company's market capitalization (being the product of the then current market
price of the Common Stock times the number of shares of Common Stock then
outstanding on the Record Date for such distribution); (vi) the purchase of
Common Stock pursuant to a tender offer made by the Company or any of its
subsidiaries to the extent that the same involves an aggregate consideration
that, together with (X) any cash and the fair market value of any other
consideration payable in any other tender offer by the Company or any of its
subsidiaries for Common Stock expiring within the 12 months preceding such
tender offer in respect of which no adjustment has been made plus (Y) the
aggregate amount of any such all-cash distributions referred to in clause (v)
above to all holders of Common Stock within the 12 months preceding the
expiration of such tender offer in respect of which no adjustments have been
made, exceeds 10% of the Company's market capitalization on the expiration of
such tender offer and (vii) payment in respect of a tender offer or exchange
offer by a person other than the Company or any subsidiary of the Company in
which, as of the closing date of the offer, the Board of Directors is not
recommending rejection of the offer. If an adjustment is required to be made as
set forth in clause (v) above as a result of a distribution that is not a
quarterly dividend, such adjustment would be based upon the full amount of the
distribution. The adjustment referred to in clause (vii) above will only be made
if the tender offer or exchange offer is for an amount which increases that
person's ownership of Common Stock to more than 25% of the total shares of
Common Stock outstanding and, if the cash and value of any other consideration
included in such payment per share of Common Stock, exceeds the Current Market
Price per share of Common Stock on the business day next succeeding that last
date on which tenders or exchanges may be made pursuant to such tender or
exchange offer. The adjustment referred to in clause (vii) above will not be
made, however, if, as of the closing date of the offer, the offering document
with respect to such offer discloses a plan or an intention to cause the Company
to engage in a consolidation or merger of the Company or a sale of the Company's
assets, as an entirety or substantially as an entirety.
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then in
effect; provided that any adjustment that would otherwise be required to be made
shall be carried forward and taken into account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.
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<PAGE> 50
In the case of (i) any reclassification or change of the Common Stock or
(ii) a consolidation, merger or combination involving the Company or a sale or
conveyance to another person of the property and assets of the Company as an
entirety or substantially as an entirety, in each case as a result of which
holders of Common Stock shall be entitled to receive stock, other securities,
other property or assets (including cash) with respect to or in exchange for
such Common Stock, the holders of the Notes then outstanding will be entitled
thereafter to convert such Notes into the kind and amount of shares of stock,
other securities or other property or assets which they would have owned or been
entitled to receive upon such reclassification, change, consolidation, merger,
combination, sale or conveyance had such Notes been converted into Common Stock
immediately prior to such reclassification, change, consolidation, merger,
combination, sale or conveyance assuming that a holder of Notes would not have
exercised any rights of election as to the stock, other securities or other
property or assets receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock (or other
transaction) which results in any adjustment of the conversion price, the
holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain other
circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain Federal Income Tax
Considerations."
The Company from time to time may, to the extent permitted by law, reduce
the conversion price of the Notes by any amount for any period of at least 20
days, in which case the Company shall give at least 15 days' notice of such
decrease, if the Board of Directors has made a determination that such decrease
would be in the best interests of the Company, which determination shall be
conclusive. See "Certain Federal Income Tax Considerations." The Company may, at
its option, make such reductions in the conversion price, in addition to those
set forth above, as the Board of Directors deems advisable to avoid or diminish
any income tax to holders of Common Stock resulting from any dividend or
distribution of stock (or rights to acquire stock) or from any event treated as
such for income tax purposes. See "Certain Federal Income Tax Considerations."
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not entitled to any sinking fund. At any time on or after
June 15, 2001, all or any part of the Notes will be redeemable at the Company's
option on at least 15 but not more than 60 days' notice, as a whole or, from
time to time in part, at the following prices (expressed in percentages of the
principal amount), together with accrued interest to, but excluding, the date
fixed for redemption.
If redeemed during the 12-month period beginning June 15:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2001........................................................ 102.2%
2002........................................................ 101.1%
</TABLE>
and 100% at June 15, 2003; provided that any semi-annual payment of interest
becoming due on the date fixed for redemption shall be payable to the holders of
record on the relevant Record Date of the Notes being redeemed.
If fewer than all the Notes are to be redeemed, the Trustee will select the
Notes to be redeemed in principal amounts of $1,000 or multiples thereof by lot
or, in its discretion, on a pro rata basis. If any Note is to be redeemed in
part only, a new Note or Notes in principal amount equal to the unredeemed
principal portion thereof will be issued. If a portion of a holder's Notes is
selected for partial redemption and such holder converts a portion of such
Notes, such converted portion shall be deemed to be taken from the portion
selected for redemption.
REPURCHASE AT OPTION OF HOLDERS UPON CHANGE IN CONTROL
The Indenture provides that if a Change in Control occurs, each holder of
Notes shall have the right to require the Company to repurchase all of such
holder's Notes, or any portion of the principal
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<PAGE> 51
amount thereof that is an integral multiple of $1,000, on the date (the
"Repurchase Date") that is 30 days after the date of the Company Notice (as
defined below), for cash at a price equal to 100% of the principal amount
thereof (the "Repurchase Price"), together with accrued and unpaid interest to,
but excluding, the Repurchase Date; provided that any semi-annual payment of
interest becoming due on the Repurchase Date shall be payable to the holders of
record on the relevant Record Date of the Notes being repurchased.
Within 15 days after the occurrence of a Change in Control, the Company or,
at the Company's request, the Trustee is obligated to mail to all holders of
record of Notes a notice (the "Company Notice") of the occurrence of such Change
in Control and of the repurchase right arising as a result thereof. The Company
must also deliver a copy of the Company Notice to the Trustee. To exercise the
repurchase right, a holder for such Notes must deliver to the Trustee on or
before the Repurchase Date, written notice of the holder's exercise of such
right, together with the Notes with respect to which the right is being
exercised, duly endorsed for transfer to the Company.
A "Change in Control" will be deemed to have occurred at such time after
the original issuance of the Notes as:
(i) any Person (as defined in the Indenture) (including any syndicate
of group deemed to be a "person" under Section 13(d)(3) of the Exchange
Act), other than the Company, any subsidiary of the Company, or any
employee benefit plan of the Company or any such subsidiary, is or becomes
the beneficial owner, directly or indirectly, through a purchase or other
acquisition transaction or series of transactions (other than a merger or
consolidation involving the Company), of shares of capital stock of the
Company entitling such Person to exercise in excess of 50% of the total
voting power of all shares of capital stock of the Company entitled to vote
generally in the election of directors;
(ii) there occurs any consolidation of the Company with, or merger of
the Company into, any other Person, any merger of another Person into the
Company, or any sale or transfer of the assets of the Company, as an
entirety or substantially as an entirety, to another Person (other than (a)
any such transaction pursuant to which the holders of the Common Stock
immediately prior to such transaction have, directly or indirectly, shares
of capital stock of the continuing or surviving corporation immediately
after such transaction which entitle such holders to exercise in excess of
50% of the total voting power of all shares of capital stock of the
continuing or surviving corporation entitled to vote generally in the
election of directors and (b) any merger (1) which does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock or (2) which is effected solely to change the
jurisdiction of incorporation of the Company and results in a
reclassification, conversion or exchange of outstanding shares of Common
Stock solely into shares of common stock and separate series of common
stock carrying substantially the same relative rights as the Common Stock);
or
(iii) a change in the Board of Directors of the Company in which the
individuals who constituted the Board of Directors of the Company at the
beginning of the one-year period immediately preceding such change
(together with any other director whose election by the Board of Directors
of the Company or whose nomination for election by the stockholders of the
Company was approved by a vote of at least a majority of the directors then
in office either who were directors at the beginning of such period or
whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the directors then in office;
provided, however, that a Change in Control shall not be deemed to have occurred
if either (a) the closing price per share of the Common Stock for any ten
Trading Days within the period of 20 consecutive Trading Days ending immediately
before the Change in Control shall equal or exceed 105% of the conversion price
in effect on each such Trading Day, or (b) (i) at least 90% of the consideration
(excluding cash payments for fractional shares) in the transaction or
transactions constituting the Change in Control consists of shares of common
stock with full voting rights traded on a national securities exchange or quoted
on the Nasdaq National Market (or which will be so
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<PAGE> 52
traded or quoted when issued or exchanged in connection with such Change in
Control) (such securities being referred to as "Publicly Traded Securities") and
as a result of such transaction or transactions such Notes become convertible
solely into such Publicly Traded Securities and (ii) the consideration in the
transaction or transactions constituting the Change in Control consists of cash,
Publicly Traded Securities or a combination of cash and Publicly Traded
Securities with an aggregate fair market value (which, in the case of Publicly
Traded Securities, shall be equal to the average closing price of such Publicly
Traded Securities during the ten consecutive Trading Days commencing with the
sixth Trading Day following consummation of the transaction or transactions
constituting the Change in Control) is at least 105% of the Conversion Price in
effect on the date immediately preceding the date of consummation of such Change
in Control. The term "beneficial owner" shall be determined in accordance with
Rule 13d-3 promulgated by the Commission under the Exchange Act.
To the extent applicable, the Company will comply with the provisions of
Rule 13e-4 or any other tender offer rules, and will file a Schedule 13E-4 or
any other schedule required under such rules, in connection with any offer by
the Company to repurchase Notes upon a Change in Control.
The Change in Control feature of the Notes may in certain circumstances
make more difficult or discourage a takeover of the Company and, thus, the
removal of incumbent management. The repurchase right is not the result of
management's knowledge of any effort to accumulate any Common Stock or to obtain
control of the Company by means of a merger, tender offer, solicitation or
otherwise, or part of a plan by management to adopt a series of anti-takeover
provisions. Instead, this right is the result of negotiations between the
Company and the Underwriters.
The foregoing provisions would not necessarily afford holders of the Notes
protection in the event of a highly leveraged transaction, certain changes in
control of the Company or other transaction involving the Company that may
adversely affect holders.
The Company's ability to repurchase Notes upon the occurrence of a Change
in Control is subject to limitations. If a Change in Control were to occur,
there could be no assurance that the Company would have sufficient financial
resources, or would be able to arrange financing, to pay the repurchase price
for all Notes tendered by holders thereof. In addition, the terms of certain of
the Company's existing debt agreements prohibit the Company from purchasing any
Notes and also identify certain events that would constitute a change in
control, as well as certain other events with respect to the Company or certain
of its subsidiaries, which would constitute an event of default under such debt
agreements. Any future credit agreements or other agreements related to other
Indebtedness (as defined below) (including other Senior Indebtedness) to which
the Company becomes a party may contain similar restrictions and provisions. In
the event a Change in Control occurs at a time when the Company is prohibited
from repurchasing Notes, the Company could seek the consent of its lenders to
repurchase the Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company would remain prohibited from repurchasing Notes. Any
failure by the Company to repurchase the Notes when required following a Change
in Control would result in an Event of Default under the Indenture whether or
not such repurchase is permitted by the subordination provisions of the
Indenture. Any such default may, in turn, cause a default under Senior
Indebtedness of the Company. Moreover, the occurrence of a Change in Control may
cause an event of default under Senior Indebtedness of the Company. As a result,
in each case, any repurchase of the Notes would, absent a waiver, be prohibited
under the subordination provisions of the Indenture until the Senior
Indebtedness is paid in full. See "-- Subordination of Notes" below, "Risk
Factors -- Subordination" and "Risk Factors -- Limitation on Repurchase of Notes
upon Change in Control."
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<PAGE> 53
SUBORDINATION OF NOTES
The Indebtedness evidenced by the Notes is subordinated to the extent
provided in the Indenture to the prior payment in full of all Senior
Indebtedness. The Notes will also be effectively subordinated to all
indebtedness and liabilities of subsidiaries of the Company. Upon any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization, the payment of the principal of, or premium, if
any, and interest on the Notes is to be subordinated to the extent provided in
the Indenture in right of payment to the prior payment in full in cash of all
Senior Indebtedness. In the event of any acceleration of the Notes because of an
Event of Default (as defined in the Indenture), the holders of any Senior
Indebtedness then outstanding would be entitled to payment in full in cash of
all obligations in respect of such Senior Indebtedness before the holders of the
Notes are entitled to receive any payment or distribution in respect thereof.
The Indenture will require that the Company promptly notify holders of Senior
Indebtedness if payment of the Notes is accelerated because of an Event of
Default.
The Company also may not make any payment upon or in respect of the Notes
if (i) a default in the payment of the principal of, premium, if any, interest,
lease payment or other obligations in respect of Senior Indebtedness occurs and
is continuing beyond any applicable period of grace or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness (as
defined below) that permits holders of the Designated Senior Indebtedness as to
which such default relates to accelerate its maturity and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Company or other
person permitted to give such notice under the Indenture. Payments on the Notes
may and shall be resumed (a) in case of payment default, upon the date on which
such default is cured or waived and (b) in case of a nonpayment default, the
earlier of the date on which such nonpayment default is cured or waived or 179
days after the date on which the applicable Payment Blockage Notice is received
if the maturity of such Designated Senior Indebtedness has not been accelerated.
No new period of payment blockage may be commenced pursuant to a Payment
Blockage Notice unless and until (i) 365 days have elapsed since the initial
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the Notes that
have come due have been paid in full in cash. No nonpayment default that existed
or was continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
By reason of the subordination provisions described above, in the event of
the Company's bankruptcy, dissolution or reorganization, holders of Senior
Indebtedness may receive more, ratably, and holders of the Notes may receive
less, ratably, than the other creditors of the Company. Such subordination will
not prevent the occurrence of any Event of Default under the Indenture.
The term "Senior Indebtedness" means the principal of, premium, if any,
interest (including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) and rent payable on or
in connection with, and all fees, costs, expenses and other amounts accrued or
due on or in connection with, Indebtedness (as defined) of the Company, whether
outstanding on the date of the Indenture or thereafter created, incurred,
assumed, guaranteed or in effect guaranteed by the Company (including all
deferrals, renewals, extensions or refundings of, or amendments, modifications
or supplements to, the foregoing), unless in the case of any particular
Indebtedness the instrument creating or evidencing the same or the assumption or
guarantee thereof expressly provides that such Indebtedness shall not be senior
in right of payment to the Notes or expressly provides that such Indebtedness is
"pari passu" or "junior" to the Notes. Notwithstanding the foregoing, the term
Senior Indebtedness shall not include any Indebtedness of the Company to any
Subsidiary (as defined in the Indenture) of the Company. The Notes offered
hereby are pari passu to the 5 3/4% Notes.
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<PAGE> 54
The term "Indebtedness" means, with respect to any Person (as defined in
the Indenture), and without duplication, (a) the principal of and premium, if
any, and interest on, and fees, costs, enforcement expenses, collateral
protection expenses and other reimbursement or indemnity obligations in respect
to all indebtedness or obligations of the Company to any Person, including but
not limited to banks and other lending institutions, for money borrowed that is
evidenced by a note, bond, debenture, loan agreement, or similar instrument or
agreement (including purchase money obligations with original maturities in
excess of one year and noncontingent reimbursement obligations in respect of
amounts paid under letters of credit); (b) all reimbursement obligations and
other liabilities (contingent or otherwise) of such Person with respect to
letters of credit, bank guarantees or bankers' acceptances, (c) all obligations
and liabilities (contingent or otherwise) in respect of leases of such Person
required, in conformity with generally accepted accounting principles, to be
accounted for as capital lease obligations on the balance sheet of such Person,
(d) all obligations of such Person (contingent or otherwise) with respect to an
interest rate or other swap, cap or collar agreement or other similar instrument
or agreement or foreign currency hedge, exchange, purchase, or similar
instrument or agreement, (e) all direct or indirect guaranties or similar
agreements by such Person in respect of, and obligations or liabilities
(contingent or otherwise) of such Person to purchase or otherwise acquire, or
otherwise assure a creditor against loss in respect of indebtedness, obligations
or liabilities of another Person of the kind described in clauses (a) through
(d), (f) any indebtedness or other obligations, excluding any operating leases
the Company is currently (or may become) a party to, described in clauses (a)
through (d) secured by any mortgage, pledge, lien or other encumbrance existing
on property which is owned or held by such Person, regardless of whether the
indebtedness or other obligation secured thereby shall have been assumed by such
Person and (g) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any indebtedness, obligation or
liability of the kind described in clauses (a) through (f).
The term "Designated Senior Indebtedness" means the Company's indebtedness
outstanding from time to time under its Credit Facility and the Senior
Subordinated Indebtedness and any particular Senior Indebtedness in which the
instrument creating or evidencing the same or the assumption or guarantee
thereof (or related agreements or documents to which the Company is a party)
expressly provides that such Senior Indebtedness shall be "Designated Senior
Indebtedness" for purposes of the Indenture (provided that such instrument,
agreement or other document may place limitations and conditions on the right of
such Senior Indebtedness to exercise the rights of Designated Senior
Indebtedness).
Any right of the Company to receive any assets of any of its subsidiaries
upon their liquidation or reorganization (and the consequent right of the
holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company would be
subordinate to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary to that held by the Company.
As of June 11, 1998, the Company had approximately $102.1 million of
indebtedness outstanding that would have constituted Senior Indebtedness. The
Indenture will not limit the amount of additional indebtedness, including Senior
Indebtedness, which the Company can create, incur, assume or guarantee, nor will
the Indenture limit the amount of indebtedness which any subsidiary can create,
incur, assume or guarantee.
In the event that, notwithstanding the foregoing, the Trustee or any holder
of Notes receives any payment or distribution of assets of the Company of any
kind in contravention of any of the subordination provision of the Indenture,
whether in cash, property or securities, including, without limitation, by way
of set-off or otherwise, in respect of the Notes before all Senior Indebtedness
is paid in full, than such payment or distribution will be held by the recipient
in trust for the benefit of holders of Senior Indebtedness or their
representative or representatives to the extent necessary to make payment in
full of all Senior Indebtedness remaining unpaid, after giving effect to any
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<PAGE> 55
concurrent payment or distribution, or provision therefor, to or for the holders
of Senior Indebtedness.
The Company is obligated to pay reasonable compensation to the Trustee and
to indemnify the Trustee against any losses, liabilities or expenses incurred by
it in connection with its duties relating to the Notes. The Trustee's claims for
such payments will be senior to those of holders of the Notes in respect of all
funds collected or held by the Trustee.
EVENTS OF DEFAULT AND REMEDIES
The following will be Events of Default under the Indenture: (i) default in
the payment of any interest upon the Notes, continued for 30 days, (ii) default
in the payment of principal or premium, if any, upon the Notes when due or in
the payment of any redemption obligation, (iii) default by the Company or any
subsidiary with respect to its obligation to pay principal of or interest on
indebtedness for borrowed money, which default shall have resulted in
indebtedness aggregating more than $10 million, (iv) default by the Company with
respect to indebtedness for borrowed money, which default results in the
acceleration of such indebtedness in an amount exceeding $10 million, which
indebtedness has not been discharged or such acceleration has not been rescinded
or annulled for a period of 10 days, (v) failure to perform any other covenant
or warranty of the Company, continued for 60 days after written notice as
provided in the Indenture, (vi) final judgments or orders are rendered against
the Company or any of its subsidiaries which require the payment by the Company
or any of its subsidiaries of an amount (to the extent not covered by insurance)
in excess of $10 million and such judgments or orders remain unstayed or
unsatisfied for more than 60 days and are not being contested in good faith by
appropriate proceedings, and (vii) certain events of bankruptcy, insolvency or
reorganization with respect to the Company.
The Indenture provides that if an Event of Default shall have occurred and
be continuing, the Trustee or the holders of not less than 25% in principal
amount of the Notes then outstanding may declare the principal of and accrued
interest on the Notes to be due and payable immediately, but if the Company
shall cure all defaults (except the nonpayment of principal of, premium, if any,
and interest on any of the Notes which shall have become due by acceleration)
and certain other conditions are met, with certain exceptions, such declaration
may be annulled and past defaults may be waived by the holders of a majority of
the principal amount of the Notes then outstanding. In the case of certain
events of bankruptcy or insolvency, the principal of and accrued interest on the
Notes shall automatically become and be immediately due and payable.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to direct the time, method and place of conducting any
proceedings for any remedy available to the Trustee, subject to certain
limitations specified in the Indenture.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of not less than a majority in principal amount
of the Notes at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the holders of the Notes, except that no
such modification shall (i) extend the fixed maturity of any Note, reduce the
rate or extend the time of payment of interest thereon, reduce the principal
amount thereof or premium, if any, thereon, reduce any amount payable upon
redemption thereof, change the obligation of the Company to repurchase any Note
upon the occurrence of any Change in Control in a manner adverse to holders of
Notes, impair the right of a holder to institute suit for the payment thereof,
change the currency in which the Notes are payable, or impair the right to
convert the Notes into Common Stock in any material respect, or modify the
provisions of the Indenture with respect to the subordination of the Notes in a
manner adverse to the holders of the Notes in any material respect, without the
consent of the holder of each Note so affected, or (ii) reduce the aforesaid
percentage of Notes the
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<PAGE> 56
holders of which are required to consent to any such supplemental indenture,
without the consent of the holders of all of the Notes then outstanding.
CONCERNING THE TRUSTEE
First Union National Bank, the Trustee under the Indenture, has been
appointed by the Company as the initial paying agent, conversion agent,
registrar and custodian with regard to the Notes. The Company may maintain
deposit accounts and conduct other banking transactions with the Trustee or its
affiliates in the ordinary course of business, and the Trustee and its
affiliates may from time to time in the future provide banking and other
services to the Company in the ordinary course of their business.
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<PAGE> 57
CERTAIN FEDERAL TAX CONSIDERATIONS
The following is a summary of certain material United States federal income
tax considerations relating to the purchase, ownership and disposition by
holders of the Notes and of Common Stock into which Notes may be converted, but
does not purport to be a complete analysis of all the potential tax
considerations relating thereto. This summary is based on laws, regulations,
rulings and decisions now in effect, all of which are subject to change,
possibly on a retroactive basis. Except as otherwise noted, this summary deals
only with holders that will hold Notes and Common Stock into which Notes may be
converted as "capital assets" (within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended (the "Code")), and does not address
tax considerations applicable to (i) investors that may be subject to special
tax rules, such as banks, tax-exempt organizations, insurance companies,
broker-dealers, traders in securities that elect to mark to market, (ii) persons
that will hold Notes as a position in a hedging transaction, "straddle" or
"conversion transaction" for tax purposes, (iii) persons other than United
States Holders or (iv) persons who have a "functional currency" other than the
U.S. dollar. As used herein, the term "United States Holder" means a beneficial
holder of Notes or Common Stock received on conversion of the Notes that is for
United States federal income tax purposes (1) a citizen or resident of the
United States, (2) a corporation organized under the laws of the United States
or any State, (3) an estate the income of which is subject to the United States
federal income taxation regardless of its source, (4) a trust if (i) a court
within the United States is able to exercise primary supervision over the
trust's administration and (ii) one or more U.S. persons have the authority to
control all of the trust's substantial decisions or (5) a partnership to the
extent the interest therein is owned by a person described in clause (1), (2),
(3) or (4) of this sentence. This summary discusses the tax considerations
applicable to an initial purchaser of the Notes who purchases the Notes at their
"issue price" as defined in Section 1273 of the Code and does not discuss the
tax considerations applicable to subsequent purchasers of the Notes. Moreover,
the effect of any applicable state, local or foreign tax law is not discussed.
The Company has not sought any ruling from the Internal Revenue Service (the
"Service") with respect to the statements made and the conclusions reached in
the following summary, and there can be no assurance that the Service will agree
with such statements and conclusions.
INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX
LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING
UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY
APPLICABLE TAX TREATY.
PAYMENT OF INTEREST
Interest on a Note generally will be includable in the income of a United
States Holder as ordinary income at the time such interest is received or
accrued, in accordance with such holder's method of accounting for United States
federal income tax purposes.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
Upon the sale, exchange or redemption of a Note (other than the conversion
of a Note into Common Stock), a United States Holder generally will recognize
capital gain or loss equal to the difference between (i) the amount of cash, and
the fair market value of any other property, received on the sale, exchange or
redemption (except to the extent such amount is attributable to accrued interest
income not previously included in income, which is taxable as ordinary income)
and (ii) such holder's adjusted tax basis in the Note. A United States Holder's
adjusted tax basis in a Note generally will equal the cost of the Note to such
holder. Generally, such gain or loss will be capital gain or loss and will be
long-term capital gain or loss if the United States Holder's holding period in
the Note is more than one year at the time of sale, exchange or redemption.
Long-term capital gain of a non-corporate United States Holder is generally
subject to a maximum tax rate of 28% in respect of property with a holding
period of more than one year and to a maximum tax rate of
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<PAGE> 58
20% in respect of property with a holding period of more than 18 months. The
characterization of income as capital gain or loss is also relevant for purposes
of, among other things, limitations with respect to the deductibility of capital
losses.
CONSTRUCTIVE DISTRIBUTIONS
If at any time (i) the Company makes a distribution of cash or property to
its stockholders (including distributions of evidences of indebtedness or
assets, but generally not stock dividends or rights to subscribe for Common
Stock) or purchases Common Stock and such distribution or purchase would be
taxable to such stockholders as a dividend for United States federal income tax
purposes and, pursuant to the antidilution provisions of the Indenture, the
conversion rate of the Notes is increased or (ii) the conversion rate of the
Notes is increased at the discretion of the Company, such increase in conversion
rate may be deemed to be the payment of a taxable dividend to Holders of Notes
(pursuant to Section 305 of the Code). Holders of Notes might therefore be
required to recognize taxable income as a result of an event pursuant to which
they received no cash or property.
CONVERSION OF THE NOTES
A United States Holder generally will not recognize any income, gain or
loss upon conversion of a Note into Common Stock except with respect to cash
received in lieu of a fractional share of Common Stock. A holder's tax basis in
the Common Stock received on conversion of a Note will be the same as such
holder's adjusted tax basis in the Note at the time of conversion (reduced by
any basis allocable to a fractional share interest for which cash is received),
and the holding period for the Common Stock received on conversion will
generally include the holding period of the Note converted.
Cash received in lieu of a fractional share of Common Stock upon conversion
will be treated as a payment in exchange for the fractional share of Common
Stock. Accordingly, the receipt of cash in lieu of a fractional share of Common
Stock generally will result in capital gain or loss (measured by the difference
between the cash received for the fractional share and the United States
Holder's adjusted tax basis in the fractional share).
DISTRIBUTIONS
The gross amount of a distribution with respect to the Common Stock will be
treated as a dividend taxable as ordinary income on the date of receipt, to the
extent of the Company's current and accumulated earnings and profits as
determined for United States federal income tax purposes. Distributions in
excess of such current and accumulated earnings and profits will first
constitute a non-taxable return of capital to the extent thereof, and then as a
capital gain. The portion of any distribution treated as a non-taxable return of
capital will reduce such United States Holder's tax basis in such Common Stock.
Subject to certain limitations, a United States Holder of Common Stock that is a
corporation and that receives dividends on Common Stock generally will be
eligible for a dividends-received deduction equal to 70% of the dividends
received.
Section 1059 of the Code requires a corporate stockholder to reduce its
basis (but not below zero) in the Common Stock by the "nontaxed portion" of any
"extraordinary dividend" if the holder has not held its Common Stock for more
than two years as of the date the amount or payment of such dividend is agreed
to, announced or declared. Generally, the nontaxed portion of an extraordinary
dividend is the amount excluded from income under Section 243 of the Code
(relating to the dividends-received deduction). A corporate stockholder is
required to immediately recognize gain to the extent that its tax basis would
have been reduced below zero.
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<PAGE> 59
SALE OF COMMON STOCK
Upon the sale or exchange of Common Stock, a United States Holder generally
will recognize capital gain or loss equal to the difference between (i) the
amount of cash, and the fair market value of any other property, received upon
the sale or exchange and (ii) such holder's adjusted tax basis in the Common
Stock. Such capital gain or loss will be subject to the rules relating to tax
rates and holding periods discussed above under "Sale, Exchange or Redemption of
the Notes." A United States Holder's basis and holding period in Common Stock
received upon conversion of a Note are determined as discussed above under
"Conversion of the Notes."
NON-UNITED STATES HOLDERS
For purposes of this discussion, a "Non-United States Holder" is any
corporation, individual, partnership, estate or trust that is, as to the United
States, a foreign corporation, a non-resident alien individual, a foreign
partnership, or a non-resident fiduciary of a foreign estate or trust.
Under present United States federal income tax law:
(a) payments by the Company to any holder of a Note who or which is a
Non-United States Holder will not be subject to United States federal
withholding tax; provided, that, (i) the beneficial owner of the Note does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote, (ii) the
beneficial owner of the Note is not a controlled foreign corporation that
is related to the Company through stock ownership, and (iii) either (A) the
beneficial owner of the Note certifies to the Company, under penalties of
perjury, that it is not a United States Holder and provides its name and
address or (B) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its
trade or business (a "Financial Institution"), and holds the Note in such
capacity, certifies to the Company, under penalties of perjury, that such
statement has been received from the beneficial owner by it or by a
Financial Institution holding such security for the beneficial owner and
furnishes the Company or its agent with a copy thereof;
(b) Dividends paid with respect to Common Stock to a Non-United States
Holder generally will be subject to withholding of United States federal
income tax at a 30% rate (or such lower rate as may be specified by an
applicable income tax treaty), unless the dividend (i) is effectively
connected with the conduct of a trade or business of the Non-United States
Holder within the United States or (ii) if an income tax treaty applies, is
attributable to a United States permanent establishment of the Non-United
States Holder.
(c) except to the extent that an applicable treaty otherwise provides,
a Non-United States Holder generally will be taxed in the same manner as a
United States Holder with respect to interest or dividends if the income is
effectively connected with a United States trade or business of the
Non-United States Holder (effectively connected interest or dividends
received by a corporate Non-United States Holder may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30%
rate or such lower rate as may be specified by an applicable income tax
treaty);
(d) a Non-United States Holder of a Note or Common Stock generally
will not be subject to United States federal income or withholding tax on
any gain realized upon the sale or other disposition of such Note or Common
Stock (including the receipt of cash in lieu of fractional shares upon
conversion of Notes into shares of Common Stock), unless (i) (A) the gain
is effectively connected with the conduct of a trade or business of the
Non-United States Holder in the United States and (B) if a tax treaty
applies, the gain is attributable to a United States permanent
establishment of the Non-United States Holder; (ii) in the case of a
Non-United States Holder who is an individual and holds the Notes or Common
Stock as a capital asset, such holder is present in the United States for
183 or more days in the taxable year of the disposition
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<PAGE> 60
and certain other conditions are met; (iii) the Non-United States Holder is
subject to tax pursuant to the provisions of United States federal income
tax laws applicable to certain United States expatriates; or (iv) (A) the
Company is or has been a "U.S. real property holding corporation" for
United States federal income tax purposes at any time during the five-year
period ending on the date of disposition, or, if shorter, the period during
which the Non-United States Holder held the Notes or Common Stock and (B)
assuming that any class of stock of the Company is considered "regularly
traded on an established securities market" at any time during the year of
disposition, the Non-United States Holder meets certain minimum ownership
requirements; and
(e) except to the extent that an applicable treaty otherwise provides,
a Non-United States Holder generally will be taxed in the same manner as a
United States Holder with respect to gain on the sale or disposition of
Notes or Common Stock if the gain is effectively connected with a United
States trade or business of the Non-United States Holder (effectively
connected gain realized by a corporate Non-United States Holder may also,
under certain circumstances, be subject to an additional "branch profits
tax" at a 30% rate or such lower rate as may be specified by an applicable
income tax treaty).
The Company does not believe that it is a U.S. real property holding
corporation as of the date hereof, although it has not determined or established
whether it is now or will be a U.S. real property holding corporation.
Under current United States Treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of that
country (unless the payor has knowledge to the contrary) for purposes of the
withholding discussed above and, under the current interpretation of such
regulations, for purposes of determining the applicability of an income tax
treaty rate. Under recently finalized United States Treasury regulations
effective for payments made after December 31, 1999 (the "Final Regulations"),
however, a Non-United States Holder of Common Stock who wishes to claim the
benefit of a treaty rate will be required to satisfy applicable certification
requirements. Under the Final Regulations, dividend payments will be subject to
information reporting and backup withholding unless these applicable
certification requirements were satisfied. The Final Regulations also will
require, in the case of interest or dividends with respect to Notes or Common
Stock held by a foreign partnership, that (x) the certification requirements
described above be provided by the partners rather than by the foreign
partnership and (y) the partnership provide certain information, including a
United States taxpayer identification number. A look-through rule would apply in
the case of tiered partnerships.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, information reporting requirements will apply to payments to
certain noncorporate United States Holders of (i) principal, premium, if any,
and interest on a Note, (ii) dividends on Common Stock, (iii) proceeds of the
sale of a Note and (iv) proceeds of the sale of Common Stock. In addition, a 31%
backup withholding tax may apply to such payments if the United States Holder
(i) fails to furnish or certify his correct taxpayer identification number to
the payor in the manner required, or (ii) does not otherwise establish his
entitlement to an exemption. Any amounts withheld under the backup withholding
rules from a payment to a United States Holder will be allowed as a credit
against such holder's United States federal income tax and may entitle the
United States Holder to a refund, provided that the required information is
furnished to the Service.
VALIDITY OF THE NOTES
The validity of the Notes offered hereby will be passed upon for the
Company by Akerman, Senterfitt & Eidson, P.A., Miami, Florida and for the
Underwriters by Sullivan & Cromwell, New York, New York.
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<PAGE> 61
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996, and for each of the years in the three-year period ended December
31, 1997, included herein and in this Prospectus and incorporated by reference
from the Annual Report on Form 10-K for the year ended December 31, 1997, have
been included and so incorporated in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, and upon the authority of
said firm as experts in accounting and auditing.
The financial statements of Integrated Technology Corp. as of December 31,
1997 and for the year then ended, are incorporated by reference herein and in
this Prospectus in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
The combined financial statements of Aerocar Aviation and Aerocar Parts as
of December 31, 1997 and for the year then ended are incorporated by reference
herein and in this Prospectus in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and the rules and regulations promulgated thereunder, and, in accordance
therewith, files reports, proxy and information statements and other information
with the Commission. These reports, proxy and information statements and other
information concerning the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549; and at the Commission's regional offices
located at Citicorp Center, Suite 1400, 500 West Madison Street, Chicago,
Illinois 60661 and at Seven World Trade Center, Suite 1300 New York, New York
10048. Copies of such material can also be obtained from the Commission at
prescribed rates through its Public Reference Section at 450 Fifth Street, N.W.,
Washington, D.C. 20549. The Commission also maintains a site on the World Wide
Web at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. In addition, reports, proxy statements and other
information concerning the Company can also be inspected at the offices of the
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the securities offered hereby
(including all amendments and supplements thereto, the "Registration
Statement"). This Prospectus, which forms a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. Statements contained herein concerning the
provisions of certain documents are not necessarily complete and, in each
instance, reference is made to the copy of such document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. The Registration
Statement and the exhibits thereto can be inspected and copied at the public
reference facilities and regional offices of the Commission and at the offices
of the Nasdaq Stock Market referred to above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated by reference in and made a part of this
Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
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<PAGE> 62
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998;
(c) The Company's current report on Form 8-K filed on April 14, 1998, as
amended on May 18, 1998;
(d) The Company's current report on Form 8-K filed on May 18, 1998;
(e) The Company's Definitive Proxy Statement relating to its 1998 Annual
Meeting of Stockholders;
(f) The description of the Common Stock contained in the Company's
Registration Statement on Form 8-A filed on April 1, 1994; and
(g) The Company's description of certain rights relating to the Common
Stock contained in the Company's Form 8-A filed on March 7, 1997.
All other documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the securities offered hereby shall
be deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated herein by reference, or
contained in this Prospectus, shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained herein or
in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus has been delivered, upon written or oral request of such person, a
copy (without exhibits other than exhibits specifically incorporated by
reference) of any or all documents incorporated by reference into this
Prospectus. Requests for such copies should be directed to Michael Wallace,
Chief Financial Officer, Kellstrom Industries, Inc., 14000 N.W. 4th Street,
Sunrise, Florida 33325, phone number (954) 845-0427.
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<PAGE> 63
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated and Brean Murray & Co., Inc., have severally agreed to
purchase from the Company the following respective principal amount of the Notes
at the public offering price set forth on the cover page of the Prospectus less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
UNDERWRITER PRINCIPAL AMOUNT
- ----------- ----------------
<S> <C>
BT Alex. Brown Incorporated................................. 56,250,000
Brean Murray & Co., Inc..................................... 18,750,000
-----------
Total....................................................... $75,000,000
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Notes offered hereby if any of such Notes
are purchased.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the Notes to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of .18% of the principal
amount of the Notes. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of .025% of the principal amount of the Notes to
certain other dealers. After the Notes Offering, the public offering price and
other selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
aggregate of $11,250,000 principal amount of Notes at the public offering price
less the underwriting discounts and commissions set forth on the cover page of
this Prospectus. To the extent that the Underwriters exercise such option, each
of the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the principal amount of the Notes to be purchased
by each of them, as shown in the above table, bears to the $75,000,000 principal
amount of Notes offered, and the Company will be obligated, pursuant to the
option, to sell such Notes to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the Notes offered hereby. If purchased, the Underwriters will offer such
additional Notes on the same terms as those on which the $75,000,000 aggregate
principal amount of Notes are being offered.
The consummation of the Notes Offering and the Common Stock Offering are
not conditioned upon each other.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
The Company has agreed that for a period of 90 days after the date of this
Prospectus, it will not offer, sell, contract to sell or otherwise dispose of
any securities of the Company (other than pursuant to employee stock option
plans existing, or on the conversion or exchange of convertible or exchangeable
securities outstanding, on the date of this Prospectus or issuable in connection
with the Aerocar Acquisition) that are substantially similar to the Notes or the
Common Stock or that are convertible or exchangeable into securities that are
substantially similar to the Notes or the Common Stock without the prior written
consent of the Representatives, except for (i) the shares of Common Stock
offered in connection with the Common Stock Offering, (ii) the Notes and (iii)
the shares of Common Stock issuable upon conversion of the Notes offered hereby.
Certain of the Company's officers and directors have agreed that for a period of
90 days after the date of this Prospectus, they will not offer, sell, contract
to sell, grant any options to purchase or otherwise dispose of or agree to
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<PAGE> 64
dispose of any shares of Common Stock beneficially owned by them (other than by
a bona fide gift to a person or entity who agrees in writing to be bound by the
foregoing restrictions) without the prior written consent of the
Representatives.
In connection with the Notes Offering and the Common Stock Offering,
certain Underwriters may engage in passive market marking transactions in the
Common Stock on the Nasdaq National Market immediately prior to the commencement
of sales in the Common Stock Offering in accordance with Rule 103 of Regulation
M. Passive market making consists of displaying bids on the Nasdaq National
Market limited by the bid prices of independent market makers and making
purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified period and must be discontinued when such limit
is reached. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail and, if commenced, may
be discontinued at any time.
Subject to applicable limitations, the Underwriters, in connection with the
Notes Offering and the Common Stock Offering, may place bids for or make
purchases of the Notes and the Common Stock in the open market or otherwise, for
long or short account, or cover short positions incurred, to stabilize, maintain
or otherwise affect the price of the Notes or the Common Stock, which may be
higher than the price that might otherwise prevail in the open market. There can
be no assurance that the price of the Notes or the Common Stock will be
stabilized, or that stabilizing, if commenced, will not be discontinued at any
time. Subject to applicable limitations, the Underwriters may also place bids or
make purchases on behalf of the underwriting syndicate to reduce a short
position created in connection with this offering. The Underwriters are not
required to engage in these activities and may end these activities at any time.
The Notes are a new issue of securities with no established trading market.
The Company has been advised by the Underwriters that they intend to make a
market in the Notes but are not obligated to do so and may discontinue market
making at any time without notice. No assurance can be given as to the liquidity
of the trading market for the Notes.
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<PAGE> 65
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF KELLSTROM INDUSTRIES, INC.
<TABLE>
<S> <C>
Kellstrom Industries, Inc. Consolidated Financial
Statements:
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets at December 31, 1997 and 1996... F-3
Consolidated Statements of Earnings for the years ended
December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Stockholder's Equity for the
years ended December 31, 1997, 1996 and 1995.............. F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.......................... F-6
Notes to Consolidated Financial Statements.................. F-9
Condensed Consolidated Balance Sheets for the three months
ended March 31, 1998 (unaudited).......................... F-31
Condensed Consolidated Statements of Earnings for the three
months ended March 31, 1998 (unaudited)................... F-32
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 (unaudited)............. F-33
Notes to Condensed Consolidated Financial Statements for the
three months ended March 31, 1998......................... F-35
Integrated Technology Corp. Financial Statements:
Independent Auditors' Report................................ F-38
Balance Sheet as of December 31, 1997....................... F-39
Statement of Earnings for the Year Ended December 31,
1997...................................................... F-40
Statement of Stockholder's Equity for the Year Ended
December 31, 1997......................................... F-41
Statement of Cash Flows for the Year Ended December 31,
1997...................................................... F-42
Notes to Financial Statements............................... F-43
Aerocar Aviation Corp. and Aerocar Parts, Inc. Combined
Financial Statements:
Independent Auditors' Report................................ F-49
Combined Balance Sheet as of December 31, 1997.............. F-50
Combined Statement of Earnings for the Year Ended December
31, 1997.................................................. F-51
Combined Statement of Shareholders' Equity for the Year
Ended December 31, 1997................................... F-52
Combined Statement of Cash Flows for the Year Ended December
31, 1997.................................................. F-53
Notes to Combined Financial Statements...................... F-54
</TABLE>
F-1
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Kellstrom Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Kellstrom
Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the years in the three year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Kellstrom
Industries, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Ft. Lauderdale, Florida
February 27, 1998
F-2
<PAGE> 67
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 462,676 $ 154,254
Trade receivables, net allowances for returns and doubtful
accounts of $335,786 and $150,000 for 1997 and 1996,
respectively............................................ 10,189,082 4,023,298
Notes receivable.......................................... 2,475,856 --
Inventories............................................... 35,965,376 13,059,402
Prepaid expenses.......................................... 2,646,629 588,286
Income tax receivable..................................... 531,762 --
Deferred tax assets (Note 10)............................. 636,115 --
Investment in securities (Note 5)......................... 425,759 1,829,532
------------ -----------
Total current assets.................................... 53,333,255 19,654,772
Equipment under operating leases, net (Note 3).............. 39,932,388 2,663,968
Property, plant and equipment, net (Notes 4, 7)............. 5,027,096 2,943,077
Goodwill, net............................................... 29,775,709 3,618,862
Deferred tax assets (Note 10)............................... -- 287,594
Other assets................................................ 6,293,050 376,791
------------ -----------
Total Assets............................................ $134,361,498 $29,545,064
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term notes payable (Note 7)......................... $ 6,759,013 $ 5,157,302
Current maturities of long-term debt and capital lease
obligations (Note 7).................................... 1,079,787 211,068
Accounts payable.......................................... 6,183,762 1,651,405
Accrued expenses (Note 6)................................. 4,996,963 1,290,393
Income taxes payable...................................... -- 157,212
Deferred tax liabilities (Note 10)........................ -- 97,718
------------ -----------
Total current liabilities............................... 19,019,525 8,565,098
Long-term debt and capital lease obligations, less current
maturities (Note 7)....................................... 11,250,000 2,819,225
Convertible subordinated notes (Note 8)..................... 54,000,000 --
Deferred tax liabilities (Note 10).......................... 180,053 --
------------ -----------
Total Liabilities....................................... 84,449,578 11,384,323
Stockholders' Equity: (Note 11)
Preferred stock, $.001 par value; 1,000,000 shares
authorized; None issued................................. -- --
Common stock, $.001 par value; 20,000,000 shares
authorized; 7,879,356 shares and 3,315,308 shares issued
and outstanding in 1997 and 1996, respectively.......... 7,879 3,315
Additional paid-in capital................................ 39,027,053 14,871,559
Retained earnings......................................... 11,555,161 3,012,642
Loans receivable from directors and officers.............. (362,415) --
Unrealized (loss)/gain on investment securities, net...... (315,758) 273,225
------------ -----------
Total Stockholders' Equity.............................. 49,911,920 18,160,741
------------ -----------
Total Liabilities and Stockholders' Equity.............. $134,361,498 $29,545,064
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 68
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Sales of aircraft and engine parts, net........... $ 71,534,539 $ 24,019,999 $ 8,579,017
Rental revenues................................... 7,904,610 901,588 --
------------ ------------ -----------
Total revenues.................................... 79,439,149 24,921,587 8,579,017
Cost of goods sold................................ (46,800,589) (15,649,127) (5,378,053)
Depreciation of equipment under operating
leases.......................................... (4,594,399) (586,032) --
Selling, general and administrative expenses...... (8,877,598) (3,491,457) (1,482,048)
Depreciation and amortization..................... (1,555,673) (441,854) (202,331)
------------ ------------ -----------
Total operating expenses.......................... (61,828,259) (20,168,470) (7,062,432)
Operating income.................................. 17,610,890 4,753,117 1,516,585
SPAC operating costs and expenses................. -- -- (389,361)
Investment advisory expenses...................... -- -- (720,795)
Interest expense.................................. (4,390,384) (662,528) (145,304)
Interest income................................... 399,172 18,001 370,756
------------ ------------ -----------
Income before income taxes...................... 13,619,678 4,108,590 631,881
Income taxes (Note 10)............................ (5,077,159) (1,462,247) (257,442)
------------ ------------ -----------
Net income...................................... $ 8,542,519 $ 2,646,343 $ 374,439
============ ============ ===========
Earnings per common share -- basic................ $ 1.18 $ 0.90 $ 0.14
------------ ------------ -----------
Earnings per common share -- diluted.............. $ 0.95 $ 0.56 $ 0.10
============ ============ ===========
Weighted average number of common shares
outstanding -- basic............................ 7,266,534 2,943,902 2,745,265
============ ============ ===========
Weighted average number of common shares
outstanding -- diluted.......................... 9,394,439 4,759,890 3,609,956
============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 69
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
LOANS
COMMON STOCK PREFERRED STOCK RETAINED RECEIVABLE
------------------- -------------------- ADDITIONAL EARNINGS/ FROM
NUMBER OF NUMBER OF PAID-IN (ACCUMULATED DIRECTORS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) AND OFFICERS
---------- ------ --------- -------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1994........ 2,220,215 $2,220 -- -- $ 9,232,814 $ (8,140) --
Reclassify common stock whose
redemption rights have expired.... 429,785 430 -- -- 2,155,733 -- --
Issuance of common stock and
warrants to investment banker in
lieu of fees for financial
advisory services provided with
respect to the Acquisition........ 50,000 50 -- -- 381,200 -- --
Purchase of common stock by Company
President (@ $5.50 per share)..... 181,818 182 -- -- 999,818 -- --
Net Income......................... -- -- -- -- -- 374,439 --
--------- ------ -------- -------- ----------- ----------- ---------
Balances, December 31, 1995........ 2,881,818 2,882 -- -- 12,769,565 366,299 --
Exercise of warrants............... 433,490 433 -- -- 2,101,994 -- --
Unrealized gain on investment
securities, net................. -- -- -- -- -- -- --
Net income......................... -- -- -- -- -- 2,646,343 --
--------- ------ -------- -------- ----------- ----------- ---------
Balances, December 31, 1996........ 3,315,308 3,315 -- -- 14,871,559 3,012,642 --
Exercise of warrants............... 4,564,048 4,564 -- -- 20,771,856 -- --
Issuance of warrants related to the
IASI and Aero Support
acquisitions...................... -- -- -- -- 1,853,192 -- --
Issuance of warrants in lieu of
financing fees provided with
respect to IASI acquisition....... -- -- -- -- 1,530,446 -- --
Borrowings on loans receivable..... -- -- -- -- -- -- (362,415)
Unrealized loss on investment
securities, net................... -- -- -- -- -- -- --
Net income......................... -- -- -- -- -- 8,542,519 --
--------- ------ -------- -------- ----------- ----------- ---------
Balances, December 31, 1997........ 7,879,356 $7,879 -- -- $39,027,053 $11,555,161 $(362,415)
========= ====== ======== ======== =========== =========== =========
<CAPTION>
NET UNREALIZED
(LOSS)/GAIN ON TOTAL
INVESTMENT STOCKHOLDERS'
SECURITIES EQUITY
-------------- -------------
<S> <C> <C>
Balances, December 31, 1994........ -- $ 9,226,894
Reclassify common stock whose
redemption rights have expired.... -- 2,156,163
Issuance of common stock and
warrants to investment banker in
lieu of fees for financial
advisory services provided with
respect to the Acquisition........ -- 381,250
Purchase of common stock by Company
President (@ $5.50 per share)..... -- 1,000,000
Net Income......................... -- 374,439
--------- -----------
Balances, December 31, 1995........ -- 13,138,746
Exercise of warrants............... -- 2,102,427
Unrealized gain on investment
securities, net................. 273,225 273,225
Net income......................... -- 2,646,343
--------- -----------
Balances, December 31, 1996........ 273,225 18,160,741
Exercise of warrants............... -- 20,776,420
Issuance of warrants related to the
IASI and Aero Support
acquisitions...................... -- 1,853,192
Issuance of warrants in lieu of
financing fees provided with
respect to IASI acquisition....... -- 1,530,446
Borrowings on loans receivable..... -- (362,415)
Unrealized loss on investment
securities, net................... (588,983) (588,983)
Net income......................... -- 8,542,519
--------- -----------
Balances, December 31, 1997........ $(315,758) $49,911,920
========= ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 70
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 8,542,519 $ 2,646,343 $ 374,439
Adjustments to reconcile net income to net cash
Used in operating activities:
Depreciation and amortization........................... 1,555,673 441,854 202,331
Depreciation of equipment under operating leases........ 4,594,399 586,032 --
Acquisition expenses paid through issuance of common
stock................................................. -- -- 381,250
Amortization of deferred financing costs................ 760,019 30,172 4,132
Purchase of equipment under operating leases............ (51,891,994) (3,250,000) --
Deferred income taxes................................... 80,631 12,285 (358,469)
Loss on sales of investment securities.................. 38,051 -- --
Changes in operating assets and liabilities:
Increase in trade receivables, net...................... (2,392,056) (704,273) (1,062,397)
Decrease (increase) in inventories...................... 18,797,757 (1,207,383) (7,616,960)
Increase in prepaid expenses............................ (3,042,546) (351,704) (121,284)
Decrease (increase) in other assets..................... 330,878 (255,655) (4,763)
Decrease in accounts payable............................ (2,748,832) (515,809) (366,250)
Increase in accrued expenses............................ 3,706,570 431,661 551,457
(Increase) decrease in income taxes payable............. (687,551) (486,519) 540,587
------------ ------------ -----------
Net cash used in operating activities.............. (22,356,482) (2,622,996) (7,475,927)
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of US Government securities.......... -- -- 10,786,209
Proceeds from sale of Treasury bills.................... -- -- 594,518
Purchase of investment securities....................... -- (1,200,000) --
Purchase of KST assets, net of cash acquired............ -- -- (5,790,800)
Purchase of IASI assets, net of cash acquired........... (25,053,141) -- --
Proceeds from sales of investment securities............ 428,499 -- --
Purchase of Aero Support assets, net of cash acquired... (2,656,289) -- --
Purchase of property, plant and equipment............... (2,418,677) (1,372,244) (262,974)
Proceeds from sales of property, plant and equipment.... 744,744 -- --
Other................................................... 2,115 31,753 --
------------ ------------ -----------
Net cash provided by (used in) investing
activities....................................... (28,952,749) (2,540,491) 5,326,953
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement........... 1,086,699 -- --
Proceeds from the issuance of debt...................... 21,000,000 27,577,960 2,250,000
Debt repayment, including capital lease obligation...... (40,450,696) (24,499,503) (943,560)
Proceeds from the issuance of subordinated debentures... 54,000,000 -- --
Proceeds from the issuance of common stock.............. 20,776,420 2,102,427 1,000,000
Borrowings for loans receivable from directors and
officers.............................................. (362,415) -- --
Payment of deferred financing costs..................... (4,432,355) -- --
Other................................................... -- (74,014) (18,951)
------------ ------------ -----------
Net cash provided by financing activities.......... 51,617,653 5,106,870 2,287,489
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS.......... 308,422 (56,617) 138,515
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD................ 154,254 210,871 72,356
------------ ------------ -----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements
F-6
<PAGE> 71
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
CASH & CASH EQUIVALENTS, END OF PERIOD...................... $ 462,676 $ 154,254 $ 210,871
============ ============ ===========
Supplemental disclosures of non-cash investing and financing
activities:
KST assets acquired for notes payable................... $ -- $ -- $ 2,230,000
============ ============ ===========
Issuance of common stock for acquisition expenses....... $ -- $ -- $ 381,250
============ ============ ===========
IASI assets acquired for warrants....................... $ 1,173,134 $ -- $ --
============ ============ ===========
Aero Support assets acquired for warrants............... $ 680,058 $ -- $ --
============ ============ ===========
Net transfer of equipment under operating leases to
inventories........................................... $ 10,029,175 $ -- $ --
============ ============ ===========
Deferred financing costs paid through the issuance of
warrants.............................................. $ 1,530,446 $ -- $ --
============ ============ ===========
Unrealized gain/(loss) on investment securities, net.... $ (588,983) $ 273,225 $ --
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 2,436,209 $ 558,083 $ 155,144
============ ============ ===========
Income taxes............................................ $ 5,685,502 $ 1,936,481 $ 26,680
============ ============ ===========
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 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
============
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
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements
F-7
<PAGE> 72
KELLSTROM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Property, plant and equipment........................... 37,926
Goodwill................................................ 13,198,554
Intangible -- Non compete............................... 1,080,000
Other assets............................................ 4,014
------------
Total assets....................................... $ 22,349,803
============
Accrued expenses........................................ $ 238,803
Accounts payable........................................ 3,161,320
Notes payable -- Bank................................... 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 KST assets net of
liabilities:
Cash.................................................... $ 209,200
Receivables............................................. 2,256,628
Warrants................................................ 200,000
Inventory............................................... 4,235,059
Prepaid expenses........................................ 87,146
Property, plant and equipment........................... 1,522,586
Goodwill................................................ 4,060,477
Other assets............................................ 64,491
-----------
Total assets....................................... $12,635,587
===========
Accrued expenses............................................ $ 310,303
Accounts payable............................................ 2,533,464
Notes payable............................................... 1,561,820
-----------
Total liabilities..................................... 4,405,587
===========
Net acquisition cost.................................. 8,230,000
Less discounted present value of note given to seller....... 2,230,000
-----------
Cash paid to seller at closing.............................. 6,000,000
Less cash required.......................................... 209,200
-----------
Net cash used in acquisition.......................... $ 5,790,800
===========
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE> 73
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Kellstrom Industries, Inc. (the "Company") (formerly known as Israel Tech
Acquisition Corp.) was incorporated in Delaware on December 28, 1993 as a
Specified Purpose Acquisition Company ("SPAC"), the objective of which was to
consummate an initial public offering and enter into a business combination with
an operating business. On June 22, 1995, the Company consummated the acquisition
of all of the assets of Kellstrom Industries, Inc. ("KST") and immediately
changed its name to Kellstrom Industries, Inc. The Company's principal business
is the purchasing, refurbishing (through subcontractors), marketing, reselling,
and leasing of aircraft jet engines, jet engine parts and commercial aircraft.
The Company is also an international after-market reseller of turbojet engines
and turbojet engine parts for helicopters and large transport aircraft. The
Company's customers include major domestic and international airlines, engine
manufacturers, engine part distributors and dealers and overhaul service
suppliers throughout the world. The Company's business enables customers to
reduce their engine maintenance costs by providing Federal Aviation
Administration approved engine parts on a timely basis and at competitive
prices.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.
REVENUE RECOGNITION
Revenue is recognized upon shipment of the product to the customer net of
an estimated allowance for sales returns. Revenue from equipment under operating
leases is recognized as rental revenue on a straight-line basis over the lease
term.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined using the specific identification method for individual part
purchases and on an allocated cost basis for whole engines and aircraft.
Inventories are made up primarily of new, refurbished and as removed engines and
engine parts.
INVESTMENT IN SECURITIES
Investment in securities at December 31, 1997 and 1996 consist of equity
securities. All equity securities are classified as available for sale.
Available for sale securities are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, on available for sale
securities are excluded from earnings and are reported as a separate component
of stockholders' equity until realized. Realized gains and losses from the sale
of available for sale securities are determined on a specific identification
basis.
A decline in the market value of any available for sale security below cost
that is deemed to be other than temporary results in a reduction in carrying
amount to fair value. The impairment is
F-9
<PAGE> 74
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
charged to earnings and a new cost basis for the security is established.
Dividend and interest income are recognized when earned.
EQUIPMENT UNDER OPERATING LEASES
The cost of the asset under lease is the original purchase price plus
overhaul costs. Depreciation of the cost is computed based on a usage-variable
method, which adjusts straight-line depreciation to reflect the usage levels of
the equipment. Maintenance and repair costs are expensed as incurred.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Machinery and equipment
under capital leases are stated at the lesser of fair value or present value of
minimum lease payments. Depreciation on property, plant and equipment is
calculated on the straight-line method over the following estimated useful
lives: building and improvements -- 25 years, machinery and equipment -- 3 to 10
years and furniture and fixtures -- 7 years. Machinery and equipment held under
capital leases are amortized straight-line over the shorter of the lease term or
the estimated useful life indicated above.
GOODWILL
Goodwill represents the excess of purchase price over fair value of net
assets acquired, which is amortized on a straight-line basis over the expected
periods to be benefited, generally 15 to 20 years. Amortization expense of
goodwill was $1,145,663, $271,010 and $138,853 for the years ended December 31,
1997, 1996 and 1995, respectively. The Company assesses the recoverability of
the carrying value of goodwill by determining whether the carrying value can be
recovered through undiscounted future operating cash flows. The amount of
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved. Accumulated amortization of
goodwill was $1,555,526 and $409,863 at December 31, 1997 and 1996,
respectively.
DEFERRED FINANCING COSTS
Deferred financing costs are capitalized and amortized on a straight-line
basis over the life of the related debt, which currently approximates one to
seven years. Amortization expense was $760,019, $30,172, and $4,132 for the
years ended December 31, 1997, 1996 and 1995, respectively.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments, consisting of cash and cash
equivalents, trade accounts receivables, other current assets, equipment under
operating leases, trade accounts payables, accrued expenses, and notes payable
to banks, is based on the short maturity of these instruments
F-10
<PAGE> 75
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which approximates fair value at December 31, 1997 and 1996. The fair value of
the senior subordinated debt and convertible subordinated debt is estimated by
discounting the future cash flows of each instrument at rates currently offered
to the Company for similar debt instruments of comparable maturities by the
Company's bankers which approximate fair value at December 31, 1997. Investment
securities available for sale are recorded at fair value based on quoted market
prices.
COMMITMENTS AND CONTINGENCIES
During 1997, the Company entered into agreements to purchase six aircraft
engines at a total purchase price of $29,478,948. The Company is committed to
purchasing the engines upon successful completion of certain inspections. At
December 31, 1997, the purchases had not yet been consummated.
The Company's Board of Directors has approved the construction of a new
facility in the Sawgrass International Corporate Park area, which is near Fort
Lauderdale, Florida in anticipation of the expiration of the IASI Lease and the
consolidation of operations in a single location. The new facility will consist
of approximately 195,000 square feet of office and warehouse space. The final
cost of the new facility is estimated to be approximately $9,500,000.
The Company records liabilities for loss contingencies, including those
arising from claims, assessments, litigation, fines and penalties, and other
sources when it is probable that a liability has been incurred and the amount of
the liability can be reasonably estimated.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
EARNINGS PER SHARE
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share." SFAS No. 128 establishes
standards for computing and presenting basic and diluted earnings per share and
applies to entities with publicly held common stock or potential common stock.
Basic earnings per share ("EPS") is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Common equivalent shares assume the exercise of
all dilutive stock options and warrants. The weighted average number of common
shares outstanding used to compute basic and diluted EPS was 7,266,534 and
9,394,439 for the year ended December 31, 1997, 2,943,902 and 4,759,890 for the
year ended December 31, 1996, and 2,745,265 and 3,609,956 for the year ended
December 31, 1995. Quarterly and year-to-date computations of per share amounts
are made independently; therefore, the sum of per share amounts for the quarters
may not equal per share amounts for the year.
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" on
January 1, 1995. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
F-11
<PAGE> 76
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. Adoption of this SFAS No. 121 did not have a material impact on
the Company's consolidated financial position, results of operations or cash
flows.
STOCK OPTIONS
Prior to January 1, 1996, the Company accounted for its stock option plan
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
As such, compensation expense would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair value based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 31, 1997. Management does not anticipate a
significant impact of the adoption of SFAS No. 130 on the Company's consolidated
financial position, results of operations or cash flows.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that these enterprises
report selected information about operating segments in interim financial
reports to shareholders. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. Management does not anticipate a
significant impact of the adoption of SFAS No. 131 on the Company's consolidated
financial position, results of operations or cash flows.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements of SFAS No. 87 and SFAS No. 106 to the extent
practicable and recommends a parallel format for presenting information about
pensions and other postretirement benefits. SFAS No. 132 is effective for fiscal
years beginning after December 15, 1997. Management does not anticipate a
significant impact of the adoption of SFAS No. 132 on the Company's consolidated
financial position, results of operations or cash flows.
F-12
<PAGE> 77
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECLASSIFICATIONS
Certain 1996 financial statement amounts have been reclassified to conform
with the 1997 presentation.
2. ACQUISITIONS
On January 15, 1997, the Company through a wholly-owned subsidiary
completed the acquisition of substantially all of the assets and assumed certain
of the liabilities of International Aircraft Support, L.P. ("IASI"), a
California limited partnership, for a cash purchase consideration of
approximately $25,100,000 and issued warrants, with an expiration date of two
years from January 15, 1997, to purchase 500,000 shares of the Company's Common
Stock at $9.25 per share.
The acquisition was financed through the issuance of $15,000,000 in senior
subordinated debt and warrants, along with the proceeds of a $6,000,000
subordinated bridge loan and warrants ("Bridge Loan") with the balance from the
Company's working capital. The Company also assumed IASI's existing debt
including IASI's Union Bank of California various credit facilities that totaled
approximately $20,000,000 as of the date of the acquisition. The Bridge Loan
matured on April 15, 1997 and was fully repaid. The interest rate on the Bridge
Loan was 10% and, additionally, 85,625 warrants that are exercisable at $10 and
expire on April 15, 2000 were issued to the Bridge Loan lenders. The interest
rate on the $15,000,000 senior subordinated debt is 11 3/4%, payable quarterly.
Additionally, 305,660 warrants were issued to this lender, such warrants are
exercisable at $10 and expire on January 15, 2004. Principal on this debt is
payable in three equal annual installments beginning January 15, 2002.
On September 10, 1997, the Company through a wholly-owned subsidiary
completed the acquisition of substantially all of the assets and liabilities of
Aero Support USA, Inc. ("Aero Support") for approximately $13,800,000 in cash
(the "Cash Purchase Price") and three warrants. One warrant is for the purchase
of 75,000 shares of Common Stock at an exercise price of $22.00 per share,
expiring in three years. The other two warrants are for the purchase of an
aggregate 175,000 shares of Common Stock at an exercise price of $19.00 per
share, expiring in five years. Up to an additional $5,000,000 cash consideration
may be paid in the form of an earn-out payable over three years based on certain
specified criteria.
In addition to the $2,100,000 paid at closing, a portion of the Cash
Purchase Price consisted of the issuance of (i) a promissory note in the
aggregate principal amount of $9,000,000, which matured and was fully repaid on
September 17, 1997, bearing interest at the prime rate of interest charged from
time to time by Barnett Bank, N.A. (Kellstrom's senior lender) on short-term
loans and (ii) two promissory notes in the aggregate principal amount of
$2,700,000, which matured and were fully repaid on January 15, 1998, bearing
interest at the same rate. The financing for the payment of the Cash Purchase
Price is being funded through the Company's Revolving Credit Facility.
Borrowings under the Revolving Credit Facility bear interest at .25% below the
prime rate or at LIBOR plus 225 basis points and are secured by substantially
all the assets of the Company.
Both the IASI and Aero Support acquisitions have been accounted for using
the purchase method for accounting in accordance with APB Opinion No. 16,
"Business Combinations," and accordingly, the operating results from both IASI
and Aero Support have been included in the operating results since the dates of
acquisition. A Pro Forma Consolidated Combined Statements of
Earnings -- Unaudited has been provided in Note 18(b) to report the results of
operations for the years ended December 31, 1997 and 1996 as though the
acquisitions had occurred at the beginning of the period being reported.
F-13
<PAGE> 78
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUIPMENT UNDER OPERATING LEASES, NET
Equipment under operating leases consists primarily of aircraft and engines
with typical lease terms of less than 18 months. At December 31, 1997 and 1996,
equipment under operating leases consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Equipment under operating leases.......................... $42,766,620 $3,250,000
Accumulated depreciation.................................. (2,834,232) (586,032)
----------- ----------
$39,932,388 $2,663,968
=========== ==========
</TABLE>
At December 31, 1997, future minimum rental revenue on equipment under
operating leases are as follows:
<TABLE>
<S> <C>
1998.............................. $ 4,166,800
1999.............................. 2,300,000
2000.............................. 1,980,000
2001.............................. 1,980,000
2002.............................. 495,000
-----------
$10,921,800
===========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment at December 31, 1997 and 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land........................................................ $2,133,642 $ 422,600
Building and Improvements................................... 1,824,552 1,807,192
Machinery and Equipment..................................... 1,496,438 715,038
Furniture and Fixtures...................................... 545,486 222,052
---------- ----------
6,000,118 3,166,882
Accumulated Depreciation.................................... (1,157,450) (223,805)
---------- ----------
4,842,668 2,943,077
Construction in Progress.................................... 184,428 --
---------- ----------
$5,027,096 $2,943,077
========== ==========
</TABLE>
5. INVESTMENT IN SECURITIES
Upon consummation of the acquisition of the assets of KST, the Company
received warrants to purchase 400,000 shares of common stock of Rada (the "Rada
Warrants") at $3.00 per share, commencing on July 1, 1995 and expiring on or
before July 1, 2000. The Rada Warrants were originally recorded at their fair
value on the date of the acquisition. The Company classifies these warrants as
"available for sale." In December 1996, the Company exercised the Rada Warrants
upon payment of $1,200,000. As a result of certain antidilution provisions
contained in the Rada Warrant, the Company received 464,643 shares of Rada,
representing 5.6% of the outstanding shares of Rada at the time of exercise. The
Company classifies the shares of Rada as "available for sale." As of December
31, 1997, the Company's ownership of Rada common stock is 309,643 shares,
representing approximately 3.7% of the then current outstanding shares.
F-14
<PAGE> 79
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1997 and 1996, the cost, gross unrealized holding gains,
gross unrealized holding losses and fair value for investment in securities
available for sale are as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
---------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Rada common stock................. $ 932,025 $ 0 $506,266 $ 425,759
========== ======== ======== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------------
GROSS UNREALIZED GROSS UNREALIZED
COST HOLDING GAINS HOLDING LOSSES FAIR VALUE
---------- ---------------- ---------------- ----------
<S> <C> <C> <C> <C>
Rada common stock................. $1,400,000 $429,532 $ 0 $1,829,532
========== ======== ======== ==========
</TABLE>
During the year ended December 31, 1997, the Company sold 155,000 shares of
its investment in Rada. The Company received cash proceeds of $428,499 and
recorded a realized loss of $38,051 related to these sales. Realized gains and
losses on the sales of investments are determined on the specific identification
method.
6. ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued expenses............................................ $ 912,513 $ 198,072
Employee bonuses............................................ 1,033,580 422,000
Acquisition expenses........................................ -- 122,674
Accrued interest............................................ 1,359,508 111,147
Customer deposits........................................... 870,300 436,500
Deferred income............................................. 821,062 --
---------- ----------
$4,996,963 $1,290,393
========== ==========
</TABLE>
F-15
<PAGE> 80
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Long-term debt and capital lease obligations at December 31, 1997 and 1996
consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
11 3/4% Senior subordinated debt due January 15, 2004.... $11,250,000 $ --
First mortgage note bearing interest at 10.49% payable in
monthly installments of $20,238, including interest,
with a final payment of $20,238 due April 2005; secured
by real property with depreciated cost of $2,107,647 in
1997 and $2,175,265 in 1996. During January 1998,
amount was fully repaid................................ 1,079,787 1,194,277
Borrowings under revolving line of credit, interest at
prime -- 1/4% (8.25% at December 31, 1997), and at
prime -- 1/8% (8.125% at December 31, 1996) is payable
monthly; the revolving line of credit expires in April
1998................................................... 4,070,603 5,157,302
Notes payable bearing interest at prime rate (8.25% at
December 31, 1997) related to Aero Support acquisition
with final payment due January 1998. During January
1998, amount was fully repaid.......................... 2,688,410 --
Non-interest bearing note payable in semi-annual
installments of $125,000, including interest, with
final payment of $1,775,000 due June 1999. The note was
discounted using an interest rate of 9%. During March
1997, amount was fully repaid.......................... -- 1,830,150
Capital lease obligations................................ -- 5,866
----------- -----------
Total long-term debt and capital lease obligations....... 19,088,800 8,187,595
Less short-term notes payable............................ (6,759,013) (5,157,302)
Less current installments on long-term debt and capital
lease obligations...................................... (1,079,787) (211,068)
----------- -----------
Long-term debt and capital lease obligations, less
current installments................................... $11,250,000 $ 2,819,225
=========== ===========
</TABLE>
During January 1997, the Company completed the acquisition of IASI, which
was primarily financed through the issuance of $15,000,000 of 11 3/4% senior
subordinated debt (the "Senior Debt") maturing on January 15, 2004. Interest on
the senior debt is payable semi-annually. Principal on this debt is payable in
two equal annual installments beginning January 15, 2002 and a final payment in
the amount of $1,250,000 payable on January 15, 2004. The Company made an
advance principal payment of $3,750,000, along with a prepayment penalty of 1%,
on October 10, 1997. The Company may, at its option, redeem up to an additional
$750,000 (along with a prepayment penalty of 1%) of principal amount of Senior
Debt concurrently or within five days after the occurrence of any public
offering of the Company's Common Stock as long as the principal balance of the
Senior Debt is not reduced below $10,500,000.
Upon the consummation of the acquisition by the Company of the assets of
KST, the Company assumed the mortgage note in the amount of $666,820.
Subsequently, a $750,000 construction loan was added to this mortgage note in
1996. The mortgage note is secured by a first mortgage on the Company's land and
building. During January 1998, the amount outstanding under this facility was
fully repaid.
F-16
<PAGE> 81
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As part of the purchase of the assets of KST, the Company issued an
unsecured non-interest bearing note in the amount of $3,000,000. The note is
payable in eight equal semi-annual payments of $125,000 with the remaining
$2,000,000 to be paid on the fourth anniversary of the acquisition in cash or,
under certain circumstances, in whole or in part by the issuance of additional
shares of Common Stock which for such purpose shall be valued at the higher of
the market price per share at such time or $5.00 per share. The note is
discounted at a rate of 9%. During March 1997, the amount outstanding was fully
repaid.
On December 23, 1996, the Company entered into a Revolving Loan Agreement
with a total commitment of $15,000,000 with Barnett Bank, N.A. This agreement
replaced the lines of credit the Company had established with BankAtlantic. This
agreement, which bore interest at 1/8% below the bank's prime rate (8.125% at
December 31, 1996), was secured by substantially all the Company's assets.
Interest is payable monthly. No compensatory balances were required under the
agreement.
On April 24, 1997, in order to modify and consolidate the $15,000,000
credit facility, the Company entered into a $55,000,000 revolving loan agreement
with Barnett Bank, N.A. The loan bears interest at .25% below the bank's prime
rate (which was 8.25% at March 24, 1998) is due on April 24, 1998. On April 28,
1997, utilizing funds from the new facility, the Company paid $13,640,774 to
fully satisfy the existing credit lines outstanding with Union Bank. The new
loan agreement is secured by substantially all of the Company's assets. At
December 31, 1997, the Company had $27,048,311 available under the agreement. No
compensatory balances are required under the modified revolving loan agreement.
Effective March 11, 1998, the Company's credit facility has been expanded to a
three-year $100,000,000 lending agreement. The interest rate under the new
expanded credit facility is .25% below the bank's prime, or at the Company's
option, LIBOR plus 175-275 basis points.
On September 10, 1997, the Company acquired Aero Support which was financed
primarily through the issuance of short-term notes payable which were due from
September 1997 to January 1998. The Company also assumed Aero Support's existing
debt of $3,498,537 which was immediately paid by the Company upon consummation
of the acquisition. The balance of short-term notes payable outstanding at
December 31, 1997 was $2,688,410. Interest on the short-term notes payable
accrued at an annual rate equal to the prime rate and was fully repaid during
January 1998.
Debt maturities for each of the five years subsequent to December 31, 1997
are as follows: 1998, $7,838,800; 2002, $59,000,000; and thereafter $6,250,000.
8. CONVERTIBLE SUBORDINATED NOTES
During October 1997, the Company completed the offering and sale in a
private placement transaction of $50,000,000 of 5 3/4% Convertible Subordinated
Notes (the "Notes") maturing on October 15, 2002. In November 1997, the
underwriters of the Notes exercised their overallotment option for $4,000,000.
The principal amount is convertible into shares of common stock at the option of
the holders at a conversion price equal to $27.50, subject to adjustment in
certain events. In addition, the Company may at any time on or after October 15,
2000, 2001, and 2002 redeem all or any part of the Notes at prices (expressed in
percentages of the principal amount) of 102.30%, 101.15%, and 100%,
respectively. Interest on the Notes is payable semi-annually.
F-17
<PAGE> 82
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LEASES
The Company has several operating leases, primarily for transportation
equipment and facilities that expire over the next five years. These leases
generally require the Company to pay all executory costs such as maintenance and
insurance and provide for early termination at stipulated values. Future minimum
lease payments under operating lease agreements having an initial or remaining
non-cancelable term in excess of one year as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998.................................................... $454,760
1999.................................................... 92,461
2000.................................................... 43,733
2001.................................................... 22,292
2002.................................................... 20,435
--------
$633,681
========
</TABLE>
Total rent expense for all operating leases for the years ended December
31, 1997, 1996 and 1995 amounted to $346,291, $70,444, and $30,778,
respectively.
10. INCOME TAXES
Income tax expense for the years ended December 31, 1997, 1996 and 1995 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................... $4,393,569 $1,299,550 $ 525,766
State and local........................... 602,959 150,412 90,145
---------- ---------- ----------
4,996,528 1,449,962 615,911
Deferred:...................................... 80,631 12,285 (358,469)
---------- ---------- ----------
Total..................................... $5,077,159 $1,462,247 $ 257,442
========== ========== ==========
</TABLE>
The actual tax expense differs from the "expected" tax expense for the
years ended December 31, 1997, 1996 and 1995 (computed by applying the U.S.
federal corporate tax rate of 34% to income before income taxes), as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Computed "expected" tax expense.................. $4,630,691 $1,396,921 $214,840
State income tax, net of federal benefit......... 573,245 98,411 24,398
Reorganization costs............................. -- -- 14,705
Foreign sales corporation benefit................ (123,771) -- --
Other............................................ (3,006) (33,085) 3,499
---------- ---------- --------
Actual tax expense............................... $5,077,159 $1,462,247 $257,442
========== ========== ========
</TABLE>
Total income tax expense for the years ended December 31, 1997, 1996 and
1995 was allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Income from continuing operations................ $5,077,159 $1,462,247 $257,442
Stockholders' equity, for unrealized gain/(loss)
on investment securities....................... (346,817) 156,308 --
---------- ---------- --------
$4,730,342 $1,618,555 $257,442
========== ========== ========
</TABLE>
F-18
<PAGE> 83
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
-------- ---------
<S> <C> <C>
Deferred tax assets:
Intangible assets......................................... $ 70,194 $ 214,174
Accounts receivable, principally due to allowance for
doubtful accounts...................................... 70,688 54,586
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the Tax Reform
Act of 1986............................................ 278,403 90,491
Unrealized losses on investment securities................ 190,508 --
Accrued liabilities, principally for financial reporting
purposes............................................... 92,335 --
Other..................................................... 4,181 4,004
-------- ---------
Total gross deferred tax assets............................. 706,309 363,255
Less valuation allowance.................................... -- --
-------- ---------
Deferred tax assets......................................... 706,309 363,255
Deferred tax liabilities:
Property, plant and equipment............................. (23,575) (17,071)
Equipment under operating leases.......................... (226,672) --
Unrealized gains on investment securities................. -- (156,308)
-------- ---------
Deferred tax liabilities.................................... (250,247) (173,379)
-------- ---------
Net deferred tax assets..................................... $456,062 $ 189,876
======== =========
</TABLE>
The Company's management believes that it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the deferred tax asset.
11. STOCKHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of preferred stock with
such designations, voting and other rights and preferences as may be determined
from time to time by the Board of Directors.
The Company is authorized to issue 20,000,000 shares of Common Stock, $.001
par value. The Company had 7,879,356 and 3,315,308 shares of Common Stock
outstanding at December 31, 1997 and 1996, respectively.
On January 17, 1997, the Company's Board of Directors declared a dividend
of one preferred share purchase right (a "Right") for each outstanding share of
Common Stock. Each right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Junior Participating Cumulative
Preferred Stock ("Series Preferred Stock") at an exercise price of $80.
The Rights are not exercisable, or transferable apart from the Common
Stock, until the earlier to occur of (i) ten days following a public
announcement that a person or group of affiliated or associated persons have
acquired beneficial ownership of 20% or more of the outstanding Common Stock of
the Company or (ii) ten business days (or such later date, as defined) following
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer, the consummation of which would result in the beneficial
ownership by a person or group of 19% or more of the outstanding Common Stock of
the Company. Furthermore, if the Company enters into a consolidation, merger, or
other business combination, as defined, each Right would entitle the holder upon
exercise to receive, in lieu of shares of Series A Preferred Stock, that number
of shares of common stock of the acquiring company having a value of two times
the exercise price of the
F-19
<PAGE> 84
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Right, as defined. The Rights contain antidilutive provisions, are redeemable at
the Company's option, subject to certain defined restrictions, for $.01 per
Right, and expire on January 14, 2007.
As a result of the Rights dividend, the Board designated 200,000 shares of
preferred stock as Series A Preferred Stock. Series A Preferred Stockholders
will be entitled to a preferential cumulative quarterly dividend of the greater
of $1.00 per share or 100 times the per share dividend declared on the Company's
Common Stock. The Series A Preferred Stock has a liquidation preference, as
defined. In addition, each share will have 100 votes and will vote together with
the shares of Common Stock.
On February 25, 1997, the Board of Directors of the Company approved loans
in the aggregate amount of $530,000 to certain officers and directors of the
Company for the purposes of purchasing shares of common stock. The loans will be
unsecured and payable over four years for employees or five years for directors
at an interest rate based on the applicable federal rate, as defined by the
agreement, at the time of the loan. The interest rate at February 25, 1997 was
6.1% per annum. Interest will be paid annually by officers and will accrue and
be paid at maturity by directors. As of December 31, 1997, the outstanding
balance on the loans receivable was $362,415.
Upon consummation of the acquisition of the assets of IASI and Aero
Support, the Company issued warrants to purchase an additional 750,000 shares of
the Company's Common Stock at stated prices of $9.25-$22.00, expiring two to
five years from the dates of issuance. The amounts recorded by the Company as a
result of the issuance of the shares and warrants was determined based on the
fair value of the shares and warrants on the closing date of the acquisition.
On February 4, 1997 the Company called its publicly traded warrants (the
"Public Warrants") pursuant to their terms. There were 4,166,510 Public Warrants
outstanding at December 31, 1996. The Company received proceeds of $22,961,950
from the exercise of Public Warrants during the period from October 1, 1996 to
March 21, 1997.
The Company had 1,593,155 and 4,576,510 warrants outstanding at December
31, 1997 and 1996, respectively. Each warrant entitles the holder to the
purchase of one share of the Company's Common Stock at an average stated price
of $10.14 and $5.08 respectively. These warrants are exercisable at various
times principally commencing on June 22, 1995 and expiring on or before April
11, 2001. The Company has reserved 5,000,000 common shares for the exercise of
these warrants.
The Company had no unit purchase options outstanding at December 31, 1997
and 200,000 unit purchase options outstanding at December 31, 1996. Each unit
purchase option entitled the holder to the purchase of one unit for $7.62 per
unit. Each unit consisted of one share of the Company's Common Stock and two
redeemable common stock purchase warrants. These unit purchase options were
exercisable commencing on April 11, 1995 and expiring on April 11, 1999. As of
December 31, 1997, all of the issued unit purchase options had been exercised.
12. EMPLOYEE STOCK OPTION PLANS
The 1995 Stock Option Plan provides for the granting of stock options to
purchase up to 250,000 shares of Common Stock to key employees, with no
individual granted options to purchase more than 100,000 shares of Common Stock
during the ten-year period commencing on June 22, 1995, at a price which will
not be less than the fair market value of Common Stock on the date of grant.
These options will be exercisable at such times, in such amounts and during such
intervals as determined on the date of grant. However, no option will be
exercisable during the first six months after the date of grant or more than 10
years after the date of grant. In 1995 the Company granted
F-20
<PAGE> 85
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
235,000 stock options at an exercise price of $5.00; all of which provide that
such options fully vest over a period of three years from the date of grant.
The 1996 Stock Option Plan provides for the granting of incentive stock
options to purchase shares of Common Stock at not less than the fair market
value on the date of the option grant or the granting of nonqualified options
and stock appreciation rights ("SARs") with any exercise price. SARs granted in
tandem with an option have the same exercise price as the related option. The
total number of shares with respect to which options and SARs may be granted
under the Plan is currently 1,100,000. No option or SAR may be granted under the
Plan after July 9, 2006, and no option or SAR may be outstanding for more than
ten years after its grant.
The 1997 Stock Option Plan provides for the granting of incentive stock
options to purchase shares of Common Stock at not less than the fair market
value on the date of the option grant and the granting of nonqualified options.
The total number of shares with respect to which options may be granted under
the Plan is currently 600,000. No option may be granted under the Plan after
October 27, 2007, and no option may be outstanding for more than ten years after
its grant.
The following table summarizes the status of the Company's stock option
plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE OPTION
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C>
Outstanding at January 1, 1996.......................... 235,000 $ 5.00
Granted................................................. 373,000 7.63
Exercised............................................... -- --
Expired or canceled..................................... -- --
---------- ------
Outstanding at December 31, 1996........................ 608,000 6.61
Granted................................................. 1,542,000 12.66
Exercised............................................... 5,499 5.00
Expired or canceled..................................... 81,000 6.94
---------- ------
Outstanding at December 31, 1997........................ 2,063,501 $11.12
========== ======
At December 31, 1997:
Exercisable options..................................... 285,333 $ 6.09
Shares Available for Future Grant....................... -- --
</TABLE>
The following table summarizes the status of stock options outstanding and
exercisable as of December 31, 1997, by range of exercise price:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING TERM PRICE EXERCISABLE PRICE
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 5.00-$ 7.50 195,501 7 Years $ 5.00 166,667 $ 5.00
$ 7.51-$11.25 1,196,000 8 Years $ 8.13 118,666 $ 7.63
$11.26-$16.88 60,000 9 Years $ 13.84 -- --
$16.88-$22.00 612,000 10 Years $ 18.67 -- --
--------- --------
2,063,501 285,333
========= ========
</TABLE>
F-21
<PAGE> 86
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average per share fair values of options granted under the
Company's stock option plans during 1997, 1996 and 1995 were $12.66, $4.02 and
$2.48, respectively. Had the fair value of the grants under these plans been
recognized as compensation expense over the vesting period of the awards, the
Company's net earnings and earnings per share would have reflected the pro forma
amounts shown below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Net earnings (as reported)....................... $8,542,519 $2,646,343 $374,439
-- pro forma................................ 7,193,698 2,260,098 284,456
Earnings per share -- basic (as reported)........ 1.18 0.90 0.14
-- pro forma................................ 0.99 0.77 0.10
Earnings per share -- diluted (as reported)...... 0.95 0.56 0.10
-- pro forma................................ 0.77 0.47 0.08
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for the years ended December 31, 1997, 1996 and 1995: dividend yield
of 0%; expected volatility of 20%; a risk-free interest rate of 6.59%; and an
expected holding period of 5 years. Increased pro forma compensation expense in
1997 is the result of the additional options granted and further vesting of 1995
and 1996 grants during 1997. Pro forma expense for 1998 is expected to increase
over 1997 for the same reasons.
13. EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
Per Share." As such, prior years' earnings per share have been restated. Basic
and diluted earnings per share for the years ended December 31, 1997, 1996 and
1995 were calculated based on the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Basic earnings per common share:
Net income..................................... $8,542,519 $2,646,343 $ 374,439
========== ========== ==========
Weighted average shares outstanding............ 7,266,534 2,943,902 2,745,265
========== ========== ==========
Basic earnings per common share................ $ 1.18 $ 0.90 $ 0.14
========== ========== ==========
Diluted earnings per common share:
Net income..................................... $8,542,519 $2,646,343 $ 374,439
Income adjustment relating to reduction of
debt based on the if converted method..... 405,921 -- --
---------- ---------- ----------
Net income available to common and common
equivalent shares............................ $8,948,440 $2,646,343 $ 374,439
========== ========== ==========
Weighted average shares outstanding............ 7,266,534 2,943,902 2,745,265
Net effect of dilutive stock options and
warrants based on the treasury stock
method.................................... 1,712,196 1,815,988 864,691
Net effect of dilutive convertible
subordinated notes based on the if
converted method.......................... 415,709 -- --
---------- ---------- ----------
Weighted average shares
outstanding -- diluted....................... 9,394,439 4,759,890 3,609,956
========== ========== ==========
Fully diluted earnings per common share........ $ 0.95 $ 0.56 $ 0.10
========== ========== ==========
</TABLE>
F-22
<PAGE> 87
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. BUSINESS AND CREDIT CONCENTRATIONS
The Company's business is impacted by the general economic conditions of
the commercial aviation industry. Airlines and other operators recognize the
need to cut costs, shift inventory requirements, and conserve capital to sustain
profitability. The Company's industry is also subject to regulation by various
governmental agencies with responsibilities over civil aviation. Increased
regulations imposed by organizations such as the Federal Aviation Administration
may significantly affect industry operations. Accordingly economic and
regulatory changes in the marketplace may significantly affect management's
estimates and future performance.
Total revenues derived from sales to domestic and international customers
collectively accounted for 79% and 21%, respectively, for the year ended
December 31, 1997, 77% and 23%, respectively, for the year ended December 31,
1996 and 95% and 5%, respectively, for the year ended December 31, 1995. For the
years ended December 31, 1997, 1996 and 1995, the five largest customers
collectively accounted for approximately 38%, 55% and 96%, respectively, of the
Company's consolidated revenues.
The Company estimates an allowance for doubtful accounts based on the
credit worthiness of its customers as well as general economic conditions.
Consequently an adverse change in those factors could affect the Company's
estimate of its bad debts.
15. OTHER MATTERS
At December 31, 1997 there were no material legal proceedings pending
against the Company or any of its property. However, the Company may become
party to various claims, legal actions and complaints arising in the ordinary
course of business. While any proceeding or litigation has an element of
uncertainty, management believes that the disposition of any matter that may
arise will not have a material impact on the financial condition, results of
operations or cash flows of the Company.
The Company has certain employment agreements with officers with terms of
five to seven years. The employment agreement provides that such officers may
earn bonuses, based on the Company achieving certain target net income levels.
Further, each of the employment agreements provide that in the event of
termination without cause, the employment agreement shall be terminable by the
mutual agreement between the Company and the officers, or by either party upon
sixty days notice and provides for certain levels of severance compensation.
16. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1996, the Company paid Yoav Stern and
Joram D. Rosenfeld, and in each case entities controlled by them, an aggregate
of $90,000, each for services rendered by Yoav Stern and Joram D. Rosenfeld as
Co-Chairmen of the Company's Board of Directors. These payments were terminated
for Yoav Stern in December 1996 and for Joram D. Rosenfeld in March 1997.
Payments to Joram D. Rosenfeld during 1997 amounted to $16,200.
On March 28, 1997, the Company engaged Helix Management Company II, LLC and
Helix Capital Services, LLC (collectively "Helix"), in which Yoav Stern,
Chairman, and Zivi Nedivi, President and Chief Executive Officer, own a majority
interest, to act as the Company's exclusive financial advisor with respect to
merger and acquisition transactions and as principal financial advisor with
respect to other transactions for an initial term of eighteen months beginning
January 1, 1997. Under the terms of the agreement, Helix will receive a monthly
retainer of $25,000. The agreement entered into between the Company and Helix on
December 24, 1996 was terminated.
F-23
<PAGE> 88
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, under the terms of the agreement, a success fee is to be
determined by the Company on a per transaction basis, not to fall below 2% of
the aggregate consideration in connection with the applicable transaction.
During the year ended December 31, 1997, the Company paid $519,000 and issued
warrants for the purchase of an aggregate 7,500 shares of the Company's Common
Stock at an exercise price of $19.00 and $22.00 per share, expiring in three to
five years, to Helix relating to such agreement.
17. SUBSEQUENT EVENTS
On February 1, 1998, the Company sponsored a 401(k) savings plan covering
most employees. Contributions made by the Company to the 401(k) savings plan are
based on a specified percentage of employee contributions.
On February 27, 1998, the Company signed a definitive agreement to acquire
privately held Integrated Technology Corporation ("ITC") for approximately
$20,225,000 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 FAA-approved overhaul facility.
18. SUPPLEMENTAL FINANCIAL DATA
(A) QUARTERLY DATA -- UNAUDITED
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenues:
1997................................. $16,466,073 $17,949,910 $20,352,441 $24,670,725
1996................................. 5,270,995 5,917,832 6,462,088 7,270,672
Earnings from continuing operations:
1997................................. $ 1,659,368 $ 1,941,214 $ 2,326,652 $ 2,615,285
1996................................. 516,707 828,409 662,133 639,094
Net earnings:
1997................................. $ 1,659,368 $ 1,941,214 $ 2,326,652 $ 2,615,285
1996................................. 516,707 828,409 662,133 639,094
Earnings per common share for
continuing operations -- diluted:
1997................................. $ 0.21 $ 0.22 $ 0.25 $ 0.27
1996................................. 0.13 0.17 0.14 0.12
Net earnings per common share --
diluted:
1997................................. $ 0.21 $ 0.22 $ 0.25 $ 0.27
1996................................. 0.13 0.17 0.14 0.12
</TABLE>
(B) PRO FORMA CONSOLIDATED COMBINED STATEMENTS OF OPERATIONS -- UNAUDITED
The Company acquired substantially all of the assets and operations of IASI
on January 15, 1997 (see Note 2). Accordingly, the Company's Consolidated
Statement of Earnings for the year ended December 31, 1996 reflects the
operations of Kellstrom. The operations of IASI for the period January 1, 1997
to January 14, 1997 were immaterial and are included in the Pro Forma
Consolidated Statements of Earnings under the caption of Kellstrom. In addition,
the Company acquired substantially all of the assets and operations of Aero
Support on September 10, 1997 (see Note 2). Accordingly, the Company's
Consolidated Statements of Earnings for the year ended December 31, 1997 reflect
the operations of Aero Support from September 10, 1997 through December 31,
1997.
F-24
<PAGE> 89
KELLSTROM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pro forma Consolidated Statements of Earnings have been provided herein to
report the results of operations for the years ended December 31, 1997 and 1996
as though the companies had combined at the beginning of the periods being
reported. The pro forma consolidated results do not purport to be indicative of
results that would have occurred had the acquisitions been in effect for the
periods presented, nor do they purport to be indicative of the results that will
be obtained in the future.
F-25
<PAGE> 90
KELLSTROM INDUSTRIES, INC.
PRO FORMA CONSOLIDATED COMBINED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996
------------ ------------
PRO FORMA PRO FORMA
COMBINED COMBINED
------------ ------------
<S> <C> <C>
Sales of aircraft and engine parts, net..................... $ 84,758,251 $ 61,805,644
Rental revenues............................................. 7,904,610 2,783,274
------------ ------------
Total revenues.............................................. 92,662,861 64,588,918
Cost of goods sold.......................................... (55,801,704) (40,939,792)
Depreciation of equipment under operating leases............ (4,594,399) (1,809,128)
Selling, general and administrative expenses................ (11,712,409) (8,243,017)
Depreciation and amortization............................... (2,108,837) (2,989,380)
------------ ------------
Total operating expenses.................................... (74,217,349) (53,981,317)
Operating income.......................................... 18,445,512 10,607,601
Interest expense, net of interest income.................... (5,061,649) (4,543,090)
------------ ------------
Income before income taxes................................ 13,383,863 6,064,511
Income taxes................................................ (4,989,397) (2,158,359)
------------ ------------
Net income................................................ $ 8,394,466 $ 3,906,152
============ ============
Earnings per common share -- basic.......................... $ 1.16 $ 1.33
============ ============
Earnings per common share -- diluted........................ $ 0.88 $ 0.66
============ ============
Weighted average number of shares outstanding -- Basic...... 7,266,534 2,943,902
============ ============
Weighted average number of shares outstanding -- Diluted.... 9,587,564 5,908,675
============ ============
</TABLE>
Unaudited -- See accompanying notes to pro forma consolidated combined
statements of earnings
F-26
<PAGE> 91
KELLSTROM INDUSTRIES, INC.
PRO FORMA CONSOLIDATED COMBINED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------
HISTORICAL PRO FORMA PRO FORMA
KELLSTROM AERO SUPPORT ADJUSTMENTS(A) COMBINED
------------ ------------ -------------- -----------
<S> <C> <C> <C> <C>
Sales of aircraft and engine
parts, net.................... $ 71,534,539 $20,041,644 $(6,817,932) $84,758,251
Rental revenues................. 7,904,610 -- -- 7,904,610
------------ ----------- ----------- -----------
Total revenues.................. 79,439,149 20,041,644 (6,817,932) 92,662,861
Cost of goods sold.............. (46,800,589) (13,162,382) 4,161,267 (55,801,704)
Depreciation of equipment under
operating leases.............. (4,594,399) -- -- (4,594,399)
Selling, general and
administrative expenses....... (8,877,598) (3,690,856) 856,045 (11,712,409)
Depreciation and amortization... (1,555,673) (68,583) 16,500 (2,108,837)
(659,517)
158,436
------------ ----------- ----------- -----------
Total operating expenses........ (61,828,259) (16,921,821) 4,532,731 (74,217,349)
Operating income.............. 17,610,890 3,119,823 (2,285,201) 18,445,512
Interest expense, net of
interest income............... (3,991,212) (197,011) 197,011 (5,061,649)
(1,070,437)
------------ ----------- ----------- -----------
Income before income taxes.... 13,619,678 2,922,812 (3,158,627) 13,383,863
Income taxes.................... (5,077,159) (196,401) 284,163 (4,989,397)
------------ ----------- ----------- -----------
Net income.................... $ 8,542,519 $ 2,726,411 $(2,874,464) $ 8,394,466
============ =========== =========== ===========
Earnings per common share --
basic......................... $ 1.18 $ 1.16
============ ===========
Earnings per common share --
diluted....................... $ 0.95 $ 0.88
============ ===========
Weighted average number of
common shares outstanding --
basic...................... 7,266,534 7,266,534
============ ===========
Weighted average number of
common shares outstanding --
diluted.................... 9,394,439 9,587,564
============ ===========
</TABLE>
Unaudited -- See accompanying notes to pro forma consolidated combined
statements of earnings
F-27
<PAGE> 92
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:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Increase (decrease) in income:
Reversal of Aero Support revenues for the period September
10, 1997 to December 31, 1997............................. $(6,817,932)
Reversal of Aero Support cost of goods sold for the period
September 10, 1997 to December 31, 1997................... 4,161,267
Reversal of Aero Support selling, general and administrative
expenses
for the period September 10, 1997 to December 31, 1997.... 856,045
Reversal of Aero Support depreciation and amortization for
the period
September 10, 1997 to December 31, 1997................... 16,500
Amortization of goodwill and non-compete agreement related
to Aero Support Acquisition............................ (659,517)
Elimination of leasehold amortization expense for assets not
acquired.................................................. 158,436
Reduction in interest expense due to pay-off of debt on Aero
Support line of credit.................................... 197,011
Interest expense on acquisition debt and debt incurred to
repay existing Aero Support line of credit................ (1,070,437)
-----------
(3,158,627)
Tax effect of pro forma adjustments......................... 284,163
-----------
Net adjustment.............................................. $(2,874,464)
===========
</TABLE>
F-28
<PAGE> 93
KELLSTROM INDUSTRIES, INC.
PRO FORMA CONSOLIDATED COMBINED STATEMENT OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------------------
HISTORICAL PRO FORMA PRO FORMA
KELLSTROM IASI AERO SUPPORT ADJUSTMENTS(A) ADJUSTMENTS(B) COMBINED
------------ ------------ ------------ -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Sales of aircraft and engine parts,
net............................... $ 24,019,999 20,982,061 $ 17,297,718 $ (494,134) $ -- $ 61,805,644
Rental revenues..................... 901,588 1,881,686 -- -- -- 2,783,274
------------ ------------ ------------ ------------ ------------ ------------
Total revenues...................... 24,921,587 22,863,747 17,297,718 (494,134) -- 64,588,918
Cost of goods sold.................. (15,649,127) (13,860,420) (11,797,863) 367,618 -- (40,939,792)
Depreciation of equipment under
operating leases.................. (586,032) (1,223,096) -- -- -- (1,809,128)
Selling, general and administrative
expenses.......................... (3,491,457) (1,744,434) (3,700,602) 693,476 -- (8,243,017)
Depreciation and amortization....... (441,854) (937,716) (139,193) 23,952 (875,928) (2,989,380)
(690,068) 71,427
------------ ------------ ------------ ------------ ------------ ------------
Total operating expenses............ (20,168,470) (17,765,666) (15,637,658) 394,978 (804,501) (53,981,317)
Operating income.................... 4,753,117 5,098,081 1,660,060 (99,156) (804,501) 10,607,601
Interest expense, net of interest
income............................ (644,527) (1,023,141) (181,962) 942,515 182,918 (4,543,090)
(2,521,555) (1,297,338)
Expenses related to sale of
business.......................... -- (234,866) -- 234,866 -- --
------------ ------------ ------------ ------------ ------------ ------------
Income before income taxes........ 4,108,590 3,840,074 1,478,098 (1,443,330) (1,918,921) 6,064,511
Income taxes........................ (1,462,247) (3,075) -- (849,926) 156,889 (2,158,359)
------------ ------------ ------------ ------------ ------------ ------------
Net income........................ $ 2,646,343 $ 3,836,999 $ 1,478,098 $(2,293,256) $ (1,762,032) $ 3,906,152
============ ============ ============ ============ ============ ============
Earnings per common share --basic... $ 0.90 $ 1.33
============ ============
Earnings per common
share -- diluted.................. $ 0.56 $ 0.66
============ ============
Weighted average number of common
shares outstanding -- basic....... 2,943,902 2,943,902
============ ============
Weighted average number of common
shares outstanding -- diluted..... 4,759,890 5,908,675
============ ============
</TABLE>
Unaudited -- See accompanying notes to pro forma consolidated combined statement
of earnings
F-29
<PAGE> 94
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 operations, the following adjustments have been made for the IASI
acquisition:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Increase (decrease) in income:
Decrease in net revenues from inter-company sales........... $ (494,134)
Decrease in cost of goods sold from inter-company sales..... 367,618
Decrease in IASI selling, general and administrative
expenses due to elimination of pension plan and bonus
program and consolidation of insurance policies........... 693,476
Elimination of IASI goodwill amortization expense........... 23,952
Amortization of goodwill related to acquisition............. (690,068)
Reduction of bank interest expense -- exercise of
warrants.................................................. 942,515
Interest expense on acquisition debt........................ (2,521,555)
Elimination of expenses related to the sale of IASI......... 234,866
-----------
(1,443,330)
Tax effect of pro forma adjustments......................... (849,926)
-----------
Net adjustment............................................ $(2,293,256)
===========
</TABLE>
(B) For purposes of presenting the pro forma consolidated combined
statement of operations, the following adjustments have been made for the Aero
Support acquisition:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Increase (decrease) in income:
Amortization of goodwill and non-compete agreement related
to Aero Support acquisition............................... $ (875,928)
Elimination of leasehold amortization expense on assets not
acquired ................................................. 71,427
Reduction of interest expense due to pay-off of debt on Aero
Support line of credit.................................... 182,918
Interest expense on Aero Support acquisition debt and debt
incurred to repay existing Aero Support line of credit.... (1,297,338)
-----------
(1,918,921)
Tax effect of pro forma adjustments......................... 156,889
-----------
Net adjustment............................................ $(1,762,032)
===========
</TABLE>
F-30
<PAGE> 95
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........................... $ 700,548 $ 462,676
Trade receivables, net of allowances for returns and
doubtful accounts of $350,796 and $335,786 in
1998 and 1997, respectively...................... 14,808,120 10,189,082
Notes receivable.................................... -- 2,475,856
Inventories......................................... 48,530,789 35,965,376
Prepaid expenses and other current assets........... 1,246,379 2,646,629
Income tax receivable............................... -- 531,762
Deferred tax assets................................. 693,824 636,115
Investment in securities............................ 162,740 425,759
------------ ------------
Total current assets........................ 66,142,400 53,333,255
Equipment under operating leases, net................. 72,173,042 39,932,388
Property, plant and equipment, net.................... 6,132,273 5,027,096
Goodwill, net......................................... 29,413,528 29,775,709
Other assets.......................................... 6,350,586 6,293,050
------------ ------------
Total Assets................................ $180,211,829 $134,361,498
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term notes payable............................ $ -- $ 6,759,013
Current maturities of long-term debt................ -- 1,079,787
Accounts payable.................................... 9,927,653 6,183,762
Accrued expenses.................................... 3,103,762 4,996,963
Income taxes payable................................ 1,368,815 --
------------ ------------
Total current liabilities................... 14,400,230 19,019,525
Long-term debt, less current maturities............... 57,960,732 11,250,000
Convertible subordinated notes........................ 54,000,000 54,000,000
Deferred tax liabilities.............................. 321,064 180,053
------------ ------------
Total Liabilities........................... 126,682,026 84,449,578
Stockholders' Equity:
Preferred stock, $.001 par value; 1,000,000 shares
authorized; none issued.......................... -- --
Common stock, $.001 par value; 20,000,000 shares
authorized; 8,185,255 and 7,879,356 shares issued
and outstanding in 1998 and 1997, respectively... 8,185 7,879
Additional paid-in capital.......................... 39,376,323 39,027,053
Retained earnings................................... 14,496,771 11,555,161
Loans receivable from directors and officers........ (339,311) (362,415)
Unrealized loss on investment securities, net....... (12,165) (315,758)
------------ ------------
Total Stockholders' Equity.................. 53,529,803 49,911,920
------------ ------------
Total Liabilities and Stockholders'
Equity.................................... $180,211,829 $134,361,498
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-31
<PAGE> 96
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Sales of aircraft and engine parts, net..................... $ 25,335,696 $ 15,458,916
Rental revenues............................................. 3,754,875 1,007,157
------------ ------------
Total revenues.................................... 29,090,571 16,466,073
Cost of goods sold.......................................... (16,668,164) (10,072,332)
Depreciation of equipment under operating leases............ (2,043,156) (654,653)
Selling, general and administrative expenses................ (3,433,955) (1,770,329)
Depreciation and amortization............................... (593,223) (288,879)
------------ ------------
Total operating expenses.......................... (22,738,498) (12,786,193)
Operating income.................................. 6,352,073 3,679,880
Interest expense............................................ (1,714,723) (1,102,742)
Interest income............................................. 76,769 66,884
------------ ------------
Income before income taxes........................ 4,714,119 2,644,022
Income taxes................................................ (1,772,509) (984,654)
------------ ------------
Net income........................................ $ 2,941,610 $ 1,659,368
============ ============
Earnings per common share -- basic.......................... $ 0.36 $ 0.29
============ ============
Earnings per common share -- diluted........................ $ 0.29 $ 0.21
============ ============
Weighted average number of common shares outstanding --
basic..................................................... 8,118,711 5,725,255
============ ============
Weighted average number of common shares outstanding --
diluted................................................... 11,739,791 7,922,924
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-32
<PAGE> 97
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 2,941,610 $ 1,659,368
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 593,223 288,879
Depreciation of equipment under operating leases....... 2,043,156 654,653
Amortization of deferred financing costs............... 284,700 246,838
Purchase of equipment under operating leases........... (39,635,531) --
Deferred income taxes.................................. (131,712) (752)
Loss on sales of investment securities................. 56,934 --
Changes in operating assets and liabilities:
Increase in trade receivables, net..................... (4,619,038) (2,652,130)
Increase in inventory.................................. (7,213,692) (192,727)
Decrease in prepaid expenses and other current
assets............................................... 3,876,106 303,743
Decrease in income tax receivable...................... 531,762 --
Decrease in other assets............................... 53,246 130,540
(Decrease) increase in accounts payable................ 3,735,854 (1,550,116)
Decrease in accrued expenses........................... (1,893,201) (633,104)
Increase in income taxes payable....................... 1,367,922 840,406
------------ ------------
Net cash used in operating activities............. (38,008,661) (904,402)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of IASI assets, net of cash acquired............... -- (25,053,141)
Proceeds from the sale of investment securities............. 692,856 --
Purchases of property, plant and equipment.................. (1,234,519) (111,269)
Other....................................................... (47,700) --
------------ ------------
Net cash used in investing activities............. (589,363) (25,164,410)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreements.............. 41,560,342 --
Proceeds from the issuance of debt.......................... -- 32,618,696
Debt repayment, including capital lease obligations......... (2,688,410) (18,412,235)
Proceeds from the issuance of common stock.................. 357,613 20,647,414
Net repayments for corporate loans.......................... 23,104 --
Payment of deferred financing costs......................... (416,753) (1,299,784)
------------ ------------
Net cash provided by financing activities......... 38,835,896 33,554,091
------------ ------------
NET INCREASE IN CASH & CASH EQUIVALENTS..................... 237,872 7,485,279
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD................ 462,676 154,254
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD...................... $ 700,548 $ 7,639,533
============ ============
</TABLE>
(continued)
See accompanying notes to condensed consolidated financial statements
F-33
<PAGE> 98
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Supplemental disclosures of non-cash investing and financing
activities:
IASI assets acquired for warrants......................... $ -- $ 1,173,134
=========== ===========
Deferred financing costs paid through the issuance of
warrants............................................... $ -- $ 1,530,446
=========== ===========
Net transfer of equipment under operating leases to
inventories............................................ $ 5,351,721 $ --
=========== ===========
Unrealized gain/(loss) on investment securities, net...... $ 303,593 $ (58,148)
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................. $ 1,072,093 $ 448,745
=========== ===========
Income taxes.............................................. $ 200,750 $ 177,596
=========== ===========
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>
See accompanying notes to condensed consolidated financial statements
F-34
<PAGE> 99
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
March 31, 1998, and the condensed consolidated results of earnings for the three
month periods ended March 31, 1998 and 1997 and the condensed consolidated
statements of cash flows for the three month periods ended March 31, 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. Inc., 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 a related FAA-approved overhaul facility. The Company funded the purchase
from its current banking facility.
F-35
<PAGE> 100
NOTE 3 -- EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standard ("SFAS") No. 128, "Earnings per Share." All prior period
earnings per share data presented were restated to conform with the provisions
of SFAS No. 128. Basic and diluted earnings per share for the three months ended
March 31, 1998 and 1997 were calculated based on the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
BASIC EARNINGS PER COMMON SHARE:
Net income............................................. $ 2,941,610 $ 1,659,368
=========== ===========
Weighted average common shares outstanding............. 8,118,711 5,725,255
=========== ===========
Basic earnings per common share........................ $ 0.36 $ 0.29
=========== ===========
DILUTED EARNINGS PER COMMON SHARE:
Net income............................................. $ 2,941,610 $ 1,659,368
Income adjustment relating to reduction of debt based
on the if converted method........................... 484,380 --
----------- -----------
Net income available to common and common equivalent
shares............................................... $ 3,425,990 $ 1,659,368
=========== ===========
Weighted average common shares outstanding............. 8,118,711 5,725,255
Net effect of dilutive stock options and warrant based
on the treasury stock method......................... 1,657,444 2,197,669
Net effect of dilutive convertible subordinated notes
based on the if converted method..................... 1,963,636 --
----------- -----------
Weighted average common shares outstanding -- diluted.. 11,739,791 7,922,924
=========== ===========
Diluted earnings per common share...................... $ 0.29 $ 0.21
=========== ===========
</TABLE>
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 months ended
March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income................................................ $2,941,610 $1,659,368
Other comprehensive income, net of taxes.................. 360,527 (58,148)
---------- ----------
Total comprehensive income.............................. $3,302,137 $1,601,220
========== ==========
</TABLE>
F-36
<PAGE> 101
INTEGRATED TECHNOLOGY CORP.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
The following should be read in conjunction with the Company's financial
statements and pro forma financial information included in the Company's Form
8-K/A filed on May 18, 1998.
F-37
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
The Stockholder
Integrated Technology Corp.:
We have audited the accompanying balance sheet of Integrated Technology
Corp. as of December 31, 1997, and the related statements of earnings,
stockholder's equity and cash flows for the year ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Technology Corp.
as of December 31, 1997 and the results of its operations and its cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Ft. Lauderdale, Florida
May 12, 1998
F-38
<PAGE> 103
INTEGRATED TECHNOLOGY CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 426,457
Trade receivables, net of allowances for returns and
doubtful accounts of $2,555,451........................ 851,516
Inventories............................................... 18,972,857
Prepaid expenses.......................................... 1,699,491
-----------
Total current assets................................... 21,950,321
-----------
Equipment under operating leases, net....................... 3,592,773
Equipment, net.............................................. 35,384
Other assets................................................ 19,171
-----------
Total assets........................................... $25,597,649
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Notes payable to bank..................................... $ 5,585,000
Accounts payable.......................................... 6,279,775
Accrued expenses.......................................... 1,246,932
Due to stockholder........................................ 467,902
-----------
Total liabilities...................................... 13,579,609
-----------
Stockholder's equity:
Common stock, no par value; 1,500 shares authorized; 100
shares issued and outstanding.......................... 100,000
Retained earnings......................................... 11,918,040
-----------
Total stockholder's equity............................. 12,018,040
Commitments and contingencies...............................
Total liabilities and stockholder's equity............. $25,597,649
===========
</TABLE>
See accompanying notes to financial statements
F-39
<PAGE> 104
INTEGRATED TECHNOLOGY CORP.
STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Sales of engines and engine parts, net...................... $28,214,141
Rental revenues............................................. 738,636
-----------
Total revenues.............................................. 28,952,777
-----------
Cost of goods sold.......................................... 17,034,996
Depreciation of equipment under operating leases............ 449,673
Selling, general and administrative expenses................ 5,615,848
Depreciation................................................ 12,758
-----------
Total operating expenses.................................... 23,113,275
-----------
Operating income............................................ 5,839,502
Interest expense............................................ 481,812
-----------
Net income................................................ $ 5,357,690
===========
</TABLE>
See accompanying notes to financial statements
F-40
<PAGE> 105
INTEGRATED TECHNOLOGY CORP.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ -------- ----------- -----------
<S> <C> <C> <C> <C>
Balances, December 31, 1996..................... 100 $100,000 9,012,083 9,112,083
Net income...................................... -- -- 5,357,690 5,357,690
Stockholder distributions....................... -- -- (2,451,733) (2,451,733)
--- -------- ----------- -----------
Balances, December 31, 1997..................... 100 $100,000 $11,918,040 $12,018,040
=== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-41
<PAGE> 106
INTEGRATED TECHNOLOGY CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 5,357,690
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 12,758
Purchases of equipment under operating lease.............. (2,529,492)
Depreciation of equipment under operating lease........... 449,673
Changes in operating assets and liabilities:
Decrease in trade receivables, net........................ 3,478,138
Increase in inventories................................... (5,174,090)
Increase in prepaid expenses.............................. (821,263)
Increase in other assets.................................. (5,100)
Decrease in accounts payable.............................. (1,167,531)
Increase in accrued expenses.............................. 613,749
-----------
Net cash provided by operating activities.............. 214,532
-----------
Cash flows from investing activities:
Purchases of equipment.................................... (12,333)
-----------
Net cash used in investing activities.................. (12,333)
Cash flows from financing activities:
Borrowings under line of credit with bank................. 3,100,000
Repayments under line of credit with bank................. (1,000,000)
Distributions to stockholder.............................. (2,451,733)
Increase in due to affiliate.............................. 464,971
-----------
Net cash provided by financing activities.............. 113,238
Net increase in cash........................................ 315,437
Cash, beginning of period................................... 111,020
Cash, end of period......................................... $ 426,457
===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest.................... $ 587,293
===========
</TABLE>
See accompanying notes to financial statements
F-42
<PAGE> 107
INTEGRATED TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
International Technology Corp. ("ITC" or the "Company") was incorporated in
New Jersey on March 18, 1994. The principal business of the Company is the
purchasing, refurbishing (through subcontractors), reselling, and leasing of
aircraft jet engines and jet engine parts. The Company's customers are comprised
of both domestic and international commercial airlines, jet engine repair
facilities and brokers.
(B) REVENUE RECOGNITION
Revenue is recognized upon shipment of the product to the customer net of
an estimated allowance for sales returns. Revenue from equipment under operating
leases is recognized as rental revenue on a straight-line basis over the lease
term.
(C) CASH
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(D) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is primarily
determined using an average cost method. Inventories are made up primarily of
new, refurbished and as removed engines and engine parts.
(E) EQUIPMENT UNDER OPERATING LEASES
The cost of the asset under lease is the original purchase price plus
overhaul costs. Depreciation of the cost is computed based on a straight-line
method. Maintenance and repair costs are expensed as incurred.
(F) EQUIPMENT
Equipment is stated at cost. Depreciation on equipment is calculated using
the straight-line method over the following estimated useful lives: office
equipment -- five years and furniture and fixtures -- five years.
(G) INCOME TAXES
The Company is taxed as an S corporation for income tax purposes, whereby
the Company's income is reported by the Company's stockholder. Accordingly, no
provision has been made for federal income taxes.
(H) PENSION PLAN
The Company has a defined benefit pension plan covering substantially all
of its employees. The benefits are based on years of service and the employee's
compensation during the five years before retirement.
F-43
<PAGE> 108
INTEGRATED TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(I) FINANCIAL INSTRUMENTS
The fair value of financial instruments, including cash, accounts
receivable, accounts payable, accrued expenses, and notes payable to bank
approximate fair value due to the short maturities of these instruments.
(J) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(K) IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" on
January 1, 1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. Adoption of this statement did not have a material effect on the Company's
financial position and results of operations.
(2) EQUIPMENT UNDER OPERATING LEASES, NET
Equipment under operating leases consists primarily of aircraft and engines
with typical lease terms of two years. At December 31, 1997, equipment under
operating leases consists of the following:
<TABLE>
<S> <C>
Equipment under operating leases............................ $4,054,492
Accumulated depreciation.................................... (461,719)
----------
$3,592,773
==========
</TABLE>
At December 31, 1997, future minimum rental revenue on equipment under
operating leases is as follows:
<TABLE>
<S> <C>
1998 $1,755,000
1999 1,389,935
2000 249,400
----------
$3,394,335
==========
</TABLE>
F-44
<PAGE> 109
INTEGRATED TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) EQUIPMENT, NET
Equipment, net at December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Office equipment............................................ $ 52,502
Furniture and fixtures...................................... 17,444
Accumulated depreciation.................................... (34,562)
--------
$ 35,384
========
</TABLE>
(4) NOTES PAYABLE TO BANK
The Company has two short-term bank lines of credit. The borrowings under
the lines bear interest at 0.5 percent above prime and 1 percent above prime
payable monthly. Both obligations are collateralized by all of the Company's
assets. The Company is subject to certain financial restrictions and the
maintenance of certain minimum financial amounts and ratios (see note 10).
(5) COMMITMENTS AND CONTINGENCIES
The Company has several operating leases for facilities that expire over
the next two years. These leases generally require the Company to pay all
executory costs such as maintenance and insurance and provide for early
termination at stipulated values. Future minimum lease payments under operating
lease agreements having an initial or remaining non-cancelable term in excess of
one year as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $42,512
1999 12,650
-------
$55,162
=======
</TABLE>
Total rent expense for all operating leases for the year ended December 31,
1997 approximated $108,000.
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and lawsuits, in the
aggregate, will not have a material adverse effect on the Company's financial
condition, results of its operations or its cash flows.
F-45
<PAGE> 110
INTEGRATED TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) PENSION BENEFITS
The Company has a defined benefit pension plan covering substantially all
of its employees. The benefits are based on years of service and the employee's
compensation during the five years prior to termination of employment. The
following table sets forth the plan's funded status and amounts recognized in
the Company's balance sheet at December 31, 1997:
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................. $(353,484)
=========
Accumulated benefit obligation............................ $(590,097)
=========
Projected benefit obligation.............................. $(914,033)
Plan assets at fair value................................. 494,514
---------
Projected benefit obligation in excess of plan
assets............................................... (419,519)
Unrecognized net loss..................................... 88,755
Prior service cost not yet recognized in net periodic
pension cost........................................... 244,940
Additional minimum liability.............................. (9,759)
---------
Pension liability included in accrued expenses......... $ (95,583)
=========
</TABLE>
Approximately 56 percent of plan assets are invested in mutual funds. The
remainder of plan assets are invested in a money market fund.
Net pension cost for 1997 included the following components:
<TABLE>
<S> <C>
Service cost -- benefits earned during the period........... $109,853
Interest cost on projected benefit obligation............... 56,106
Actual return on plan assets................................ (52,361)
Net amortization and deferral............................... 38,674
--------
Net pension cost............................................ $152,272
========
</TABLE>
Assumptions used in accounting for the pension plan as of December 31, 1997
were:
<TABLE>
<S> <C>
Discount rates.............................................. 7.5%
Rates of increase in compensation levels.................... 5.0%
Expected long-term rate of return on assets................. 8.0%
</TABLE>
(7) DUE TO STOCKHOLDER
Due to stockholder represents a loan from the Company's president. This
loan bears no interest and is payable upon demand.
(8) RELATED PARTY TRANSACTIONS
The Company has entered into an inventory exchange program with Flight
Support, Inc. ("FSI"), owned 49 percent by the sole stockholder and president of
ITC. As of December 31, 1997, included in trade receivables is an outstanding
receivable balance from FSI of $743,365. Sales to FSI in 1997 amounted to
approximately $1,400,000.
The Company pays the premiums for a $10 million key man life insurance
policy for the president of the Company. The policy collateralizes the
borrowings on the Company's lines of credit and an affiliated company's note
payable, related by virtue of common ownership.
F-46
<PAGE> 111
INTEGRATED TECHNOLOGY CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) BUSINESS AND CREDIT CONCENTRATIONS
The Company's business is impacted by the general economic conditions of
the commercial aviation industry. Airlines and other operators recognize the
need to cut costs, shift inventory requirements, and conserve capital to sustain
profitability. The Company's industry is also subject to regulation by various
governmental agencies with responsibilities over civil aviation. Increased
regulations imposed by organizations such as the Federal Aviation Administration
may significantly affect industry operations. Accordingly, economic and
regulatory changes in the marketplace may significantly affect management's
estimates and future performance.
The financial instrument which potentially subjects the Company to
concentrations of credit risk is accounts receivable. At December 31, 1997,
approximately 43 percent of the Company's accounts receivable, net of
allowances, were represented by five customers. The Company estimates an
allowance for doubtful accounts based on the creditworthiness of its customers
as well as general economic conditions. For the year ended December 31, 1997,
the five largest customers collectively accounted for approximately 56 percent
of the Company's revenues. Sales to the four largest international customers
accounted for approximately 51 percent of the Company's 1997 revenues.
(10) SUBSEQUENT EVENT
In April 1998, substantially all of the assets of the Company were acquired
by Kellstrom Industries, Inc. ("Kellstrom"). Upon consummation of this
acquisition, the Company's notes payable to bank were assumed by Kellstrom and
immediately paid.
F-47
<PAGE> 112
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
The following should be read in conjunction with the Company's financial
statements and pro forma financial information included in the Company's Form
8-K filed on May 18, 1998.
F-48
<PAGE> 113
INDEPENDENT AUDITOR'S REPORT
The Shareholders
Aerocar Aviation Corp. and
Aerocar Parts, Inc.:
We have audited the accompanying combined balance sheet of Aerocar Aviation
Corp. and Aerocar Parts, Inc. (collectively, the "Company") as of December 31,
1997, and the related combined statements of earnings, shareholders' equity and
cash flows for the year then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Aerocar Aviation
Corp. and Aerocar Parts, Inc. as of December 31, 1997 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Fort Lauderdale, Florida
May 13, 1998
F-49
<PAGE> 114
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
ASSETS
Cash and cash equivalents................................... $ 7,163,060
Trade receivables........................................... 1,073,850
Inventories................................................. 4,100,157
Equipment under operating leases, net....................... 14,869,339
Equipment, furniture and fixtures, net...................... 148,377
Other assets................................................ 161,578
-----------
Total assets........................................... $27,516,361
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses....................... $ 3,061,346
Notes payable............................................... 5,601,303
Note payable to shareholder................................. 250,000
Security deposits on leased equipment....................... 448,000
-----------
Total liabilities...................................... 9,360,649
Shareholders' equity:
Common stock, $1 par value; 1,000 shares authorized; 400
shares issued and outstanding.......................... 400
Additional paid-in capital................................ 266,267
Retained earnings......................................... 17,889,045
-----------
Total shareholders' equity............................. 18,155,712
-----------
Total liabilities and shareholders' equity............. $27,516,361
===========
</TABLE>
See accompanying notes to combined financial statements
F-50
<PAGE> 115
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
COMBINED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Sales of aircraft engines and engine parts.................. $31,693,131
Rental revenues............................................. 10,784,562
-----------
Total revenues......................................... 42,477,693
-----------
Cost of goods sold.......................................... 11,957,687
Depreciation of equipment under operating leases............ 3,025,095
Selling, general and administrative expenses................ 4,600,069
Depreciation................................................ 31,592
-----------
Total operating expenses............................... 19,614,443
-----------
Operating income............................................ 22,863,250
Interest expense............................................ (321,461)
Interest income............................................. 179,749
Other....................................................... 49,604
-----------
Net income............................................. $22,771,142
===========
</TABLE>
See accompanying notes to combined financial statements
F-51
<PAGE> 116
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
COMBINED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
COMMON ADDITIONAL RETAINED
STOCK PAID-IN CAPITAL EARNINGS TOTAL
------ --------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996............ $400 $266,267 $ 12,218,486 $ 12,485,153
Net income............................ -- -- 22,771,142 22,771,142
Distributions to shareholders......... -- -- (17,100,583) (17,100,583)
---- -------- ------------ ------------
Balance at December 31, 1997............ $400 $266,267 $ 17,889,045 $ 18,155,712
==== ======== ============ ============
</TABLE>
See accompanying notes to combined financial statements
F-52
<PAGE> 117
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Cash flows from operating activities:
Net income................................................ $ 22,771,142
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 31,592
Depreciation of equipment under operating leases....... 3,025,095
Purchases of equipment under operating leases.......... (9,017,197)
Changes in operating assets and liabilities:
Increase in trade receivables........................ (407,955)
Decrease in inventories.............................. 4,525,020
Increase in other assets............................. (76,093)
Decrease in accounts payable and accrued expenses.... (930,536)
Decrease in security deposits on leased equipment.... (238,500)
------------
Net cash provided by operating activities......... 19,682,568
------------
Cash flows from investing activities:
Purchases of equipment, furniture and fixtures............ (107,953)
------------
Net cash used in financing activities............. (107,953)
------------
Cash flows from financing activities:
Proceeds from notes payable............................... 5,892,493
Repayments of notes payable............................... (2,301,190)
Distributions to shareholders............................. (17,100,583)
------------
Net cash provided by financing activities......... (13,509,280)
------------
Net increase in cash.............................. 6,065,335
Cash and cash equivalents, beginning of year................ 1,097,725
------------
Cash and cash equivalents, end of year...................... $ 7,163,060
============
Supplemental disclosure of cash flow information:
Interest paid during the year............................. $ 179,749
============
</TABLE>
See accompanying notes to combined financial statements
F-53
<PAGE> 118
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(1) DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Aerocar Aviation Corp. ("Aviation") and Aerocar Parts, Inc. ("Parts")
(collectively, the "Company") are entities under common ownership. Aviation and
Parts were incorporated in Florida on May 16, 1985 and June 18, 1992,
respectively. Aviation purchases, refurbishes (through subcontractors), markets,
leases and resells commercial aircraft engines and engine parts to air carriers,
manufacturers and overhaul/repair facilities. Parts purchases and resells spare
engine parts primarily to Aviation.
(B) PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Aviation and
Parts. All significant intercompany balances and transactions have been
eliminated in combination.
(C) REVENUE RECOGNITION
Revenue from leasing of aircraft assets is recognized as operating lease
revenue over the terms of the applicable lease agreements. Included in rental
revenue are non-refundable maintenance payments from lessees. Revenue on the
sale of aircraft engines and engine parts is recognized upon shipment of the
product to the customer net of an estimated allowance for sales returns.
(D) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
(E) INVENTORIES
Inventories consist of the following as of December 31, 1997:
<TABLE>
<S> <C>
Aircraft and engines........................................ $3,221,134
Spare parts................................................. 879,023
----------
$4,100,157
==========
</TABLE>
Inventories are stated at the lower of cost or market. Cost is primarily
determined using the specific identification method.
(F) EQUIPMENT UNDER OPERATING LEASES
The cost of the asset under lease is the original purchase price plus
overhaul costs. Depreciation of the cost is computed on a usage-variable method
to a salvage value representing the core value before overhaul, which reflects
the usage levels of the equipment based on cycles. Maintenance and repair costs
are expensed as incurred.
F-54
<PAGE> 119
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(G) EQUIPMENT, FURNITURE AND FIXTURES, NET
Equipment, furniture and fixtures are stated at cost. Depreciation is
calculated, using the straight-line method, over the estimated useful lives of
the assets as follows:
<TABLE>
<S> <C>
Machinery and equipment................................... 7 and 5 years
Furniture and fixtures.................................... 5 years
Automobiles............................................... 3 years
</TABLE>
Expenditures for maintenance and repairs are charged to operations, as
incurred, while renewals and betterments are capitalized.
(H) INCOME TAXES
The Company, with the consent of its shareholders, has elected to be taxed
as an S corporation, wherein the income is taxable to the shareholders and not
to the Company. Therefore, no provision or liability for federal income taxes
has been included in these combined financial statements.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments, consisting of cash and cash
equivalents, trade receivables, other assets, equipment under operating leases,
accounts payable and accrued expenses and note payable to shareholder, is based
on the short maturity of these instruments which approximates fair value at
December 31, 1997. The fair value of notes payable approximated carrying value
due to the repricing of the interest rates.
(J) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosures of
contingent assets and liabilities to prepare these combined financial statements
in conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
(K) IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
F-55
<PAGE> 120
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(2) EQUIPMENT UNDER OPERATING LEASES, NET
Equipment under operating leases consists primarily of aircraft engines
with typical lease terms of less than 18 months. Equipment under operating
leases consists of the following as of December 31, 1997:
<TABLE>
<S> <C>
Equipment under operating leases........................... $17,791,486
Less accumulated depreciation.............................. 2,922,147
-----------
$14,869,339
===========
</TABLE>
As of December 31, 1997, future minimum rental revenue on equipment under
operating leases is as follows:
<TABLE>
<S> <C>
1998........................................................ $3,147,500
1999........................................................ 496,000
----------
$3,643,500
==========
</TABLE>
(3) EQUIPMENT, FURNITURE AND FIXTURES, NET
Equipment, furniture and fixtures consists of the following as of December
31, 1997:
<TABLE>
<S> <C>
Machinery and equipment..................................... $215,156
Furniture and fixtures...................................... 129,053
Automobiles................................................. 24,493
--------
368,702
Less accumulated depreciation............................... 220,325
--------
$148,377
========
</TABLE>
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following as of
December 31, 1997:
<TABLE>
<S> <C>
Accounts payable............................................ $1,894,769
Accrual for state taxes (see note 10)....................... 1,073,313
Other....................................................... 93,264
----------
$3,061,346
==========
</TABLE>
F-56
<PAGE> 121
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(5) NOTES PAYABLE
Notes payable consists of the following as of December 31, 1997:
<TABLE>
<S> <C>
Term loan bearing interest at 30-day LIBOR plus 2.7 percent
(8.7 percent at December 31, 1997) payable in 84 monthly
installments with final payment due August 1, 2004;
secured by two specific engines and guaranteed by the
Company's majority shareholder............................ $5,541,303
Borrowings under revolving credit facility, interest, at
prime plus 0.25 percent (8.8 percent at December 31,
1997), is payable monthly; the revolving credit facility
expires in March, 1999; secured by select engines in the
Company's lease pool and guaranteed by the Company's
majority shareholder...................................... 60,000
----------
$5,601,303
==========
</TABLE>
Effective August 1, 1997, the Company entered into an interest rate hedge
agreement known as a Convertible CAP ("CAP") with the term loan financial
institution to reduce the potential impact of increases in interest rates on the
floating rate term loan. The agreement expires on August 1, 2000. The agreement
states if market fixed interest rates defined as LIBOR plus 270 basis points are
equal to or less than 8.7 percent, the financial institution has the right to
fix the interest rate at 8.7 percent until expiration of the CAP agreement. If
market interest rates are equal to or greater than 10.5 percent, the Company's
interest rate on the term loan cannot exceed 10.5 percent. The interest rate on
the outstanding balance as of December 31, 1997 was 8.7 percent.
On August 6, 1996, as amended, the Company entered into a $6.0 million
revolving credit facility for the purpose of financing the acquisition of
certain aircrafts, aircraft engines and parts. The Company pays a quarterly
facility fee equal to 0.125 percent of the average unused amount of the note.
Availability under the revolving credit facility is reduced by standby letters
of credit totaling approximately $2,598,000, maturing on various dates in 1998.
The letters of credit were not drawn upon as of December 31, 1997.
The term loan and revolving credit facility agreement contain various
affirmative and negative covenants, including maintenance of total liabilities
to tangible net worth and debt service ratios and limitations on the disposition
of the assets and change of ownership (see note 11). A default under any other
commitment or loan also constitutes a default under the term loan and revolving
credit facility agreement. As of December 31, 1997, the Company was in default
of an affirmative covenant. The Company subsequently was granted a waiver from
the lender through June 30, 1998.
The aggregate maturities of notes payable for each of the five years
subsequent to December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998...................................................... $ 841,784
1999...................................................... 901,784
2000...................................................... 841,784
2001...................................................... 841,784
2002...................................................... 841,784
Thereafter................................................ 1,332,383
----------
$5,601,303
==========
</TABLE>
F-57
<PAGE> 122
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(6) NOTE PAYABLE TO SHAREHOLDER
On May 23, 1991, as amended, the Company entered into an unsecured
promissory note with the majority shareholder. The note matures on December 31,
1998 and bears interest at 12.0 percent. Accrued interest of $10,000 is included
in accounts payable and accrued expenses as of December 31, 1997.
(7) LEASES
The Company leases its office facilities from a related party under a lease
which expires in April 2012. This lease requires the Company to pay all
executory costs such as maintenance, insurance and property taxes.
Future minimum lease payments as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998...................................................... $ 235,200
1999...................................................... 235,200
2000...................................................... 235,200
2001...................................................... 235,200
2002...................................................... 235,200
Thereafter................................................ 2,195,200
----------
$3,371,200
==========
</TABLE>
Total rental expense for the year ended December 31, 1997 approximated
$224,000.
(8) EMPLOYEE BENEFIT PLAN
The Company offers a profit sharing plan (the "Plan") to substantially all
employees. Contributions to the Plan are at the discretion of the Company's
management. Contributions for the year ended December 31, 1997 approximated
$79,000.
(9) CONCENTRATIONS OF BUSINESS AND CREDIT RISK
The Company's business is impacted by the general economic conditions of
the commercial aviation industry. Airlines and other operators recognize the
need to cut costs, shift inventory requirements and conserve capital to sustain
profitability. The Company's industry is also subject to regulation by various
governmental agencies with responsibilities over civil aviation. Increased
regulations imposed by organizations such as the Federal Aviation Administration
may significantly affect industry operations. Accordingly, economic and
regulatory changes in the marketplace may significantly affect management's
estimates and future performance.
A significant percentage of the aircraft engines and aircraft engine parts
purchases for the year ended December 31, 1997 are from Pratt & Whitney. The
loss of this vendor could have an adverse impact on the Company.
The Company estimates an allowance for doubtful accounts based on the
credit worthiness of its customers as well as general economic conditions. No
allowance was recorded as of December 31, 1997. Consequently, an adverse change
in those factors could affect the Company's estimate of its bad debts.
F-58
<PAGE> 123
AEROCAR AVIATION CORP. AND AEROCAR PARTS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES
The Florida Department of Revenue ("DOR") delivered a Notice of Assessment
("Assessment") to the Company on January 23, 1997. The Assessment alleges the
Company owes the State of Florida sales taxes, penalties and interest totaling
approximately $1.1 million. The DOR's legal basis for the Assessment is that the
Company failed to obtain resale exemption certificates from purchasers of parts
sold by the Company in the ordinary course of business in violation of Florida
Administrative Rule 12A-1.038(4).
The Company filed a Protest of the Notice of Assessment on February 17,
1997. On April 23, 1998, the DOR delivered to the Company a Notice of
Reconsideration stating that it would not modify the Assessment. On May 1, 1998,
the Company filed a Petition for Formal Administration Hearing ("Petition") with
the DOR. On May 11, 1998, the Company received a letter from DOR acknowledging
the filing of the Petition and referred the matter to the Florida Attorney
General's office for representation of the DOR.
The Company believes that the accruals, included in accounts payable and
accrued expenses, provided in connection with this matter are adequate and that
the resolution of this matter will not have a material adverse effect on the
combined financial condition, results of operations or cash flow of the Company
(see note 4).
The Company is a party to various claims, legal actions and complaints
arising in the normal course of business. While any proceeding or litigation has
an element of uncertainty, management believes that the disposition of any
matter that may arise will not have a material adverse effect on the combined
financial condition, results of operations or cash flow of the Company.
(11) SUBSEQUENT EVENTS
On May 6, 1998, the Company entered into a Stock Purchase Agreement (the
"Agreement") to sell 100 percent of its common stock to Kellstrom Industries,
Inc. ("Kellstrom") for approximately $49.0 million. The Company expects to
consummate this transaction upon the fulfillment of certain conditions as
outlined in the Agreement
Sales of aircraft and engine parts for the year ended December 31, 1997
included the sale of eight aircraft engines and three aircraft with three
engines each with a net book value of approximately $4.3 million for
approximately $20.3 million to Kellstrom.
F-59
<PAGE> 124
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 12
Use of Proceeds....................... 17
Concurrent Common Stock Offering...... 17
Price Range of Common Stock........... 18
Dividend Policy....................... 18
Capitalization........................ 19
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 32
Management............................ 43
Description of Notes.................. 46
Certain Federal Tax Considerations.... 57
Validity of the Notes................. 60
Experts............................... 61
Available Information................. 61
Incorporation of Certain Documents by
Reference........................... 61
Underwriting.......................... 63
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
$75,000,000
(Kellstrom Industries Logo)
Kellstrom Industries, Inc.
5 1/2% Convertible Subordinated
Notes Due 2003
----------------------
PROSPECTUS
----------------------
BT Alex. Brown
Brean Murray & Co., Inc.
June 11, 1998
======================================================
