<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-23764
KELLSTROM INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3753725
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 INTERNATIONAL PARKWAY, SUNRISE, FLORIDA 33323
- -------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(954) 845-0427
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date: 11,784,515 shares of
common stock, $.001 par value per share, were outstanding as of April 30, 1999.
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KELLSTROM INDUSTRIES, INC.
--------------------------
INDEX
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<TABLE>
<CAPTION>
PAGE NUMBER
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PART I
------
<S> <C> <C>
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets .................................................. 3
Condensed Consolidated Statements of Earnings .......................................... 4
Condensed Consolidated Statements of Cash Flows ........................................ 5
Notes to Condensed Consolidated Financial Statements ................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................. 14
PART II
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Item 1. Legal Proceedings........................................................................ 15
Item 2. Changes in Securities and Use of Proceeds .............................................. 15
Item 3. Defaults Upon Senior Securities.......................................................... 15
Item 4. Matters Submitted to a Vote of Security Holders.......................................... 15
Item 5. Other Information........................................................................ 15
Item 6. Exhibits and Reports on Form 8-K......................................................... 19
</TABLE>
2
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Item 1. Financial Statements
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 1,099,761 $ 1,107,102
Trade receivables, net of allowances for returns and
doubtful accounts of $5,427,996 and $5,417,996
for 1999 and 1998, respectively 37,966,363 31,367,337
Inventories 157,703,904 149,957,320
Equipment under short-term operating leases 82,999,105 77,201,289
Prepaid expenses 2,816,182 3,166,158
Deferred tax assets 9,432,796 9,730,577
------------- -------------
Total current assets 292,018,111 272,529,783
Equipment under long-term operating leases, net 66,864,824 63,323,008
Property, plant and equipment, net 18,006,968 16,755,185
Goodwill, net 71,199,188 71,501,153
Other assets 10,844,993 9,941,367
------------- -------------
Total Assets $ 458,934,084 $ 434,050,496
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term notes payable $ 2,311,598 $ 2,317,982
Current maturities of long-term debt 200,000 --
Accounts payable 20,969,857 13,333,709
Accrued expenses 19,797,805 25,715,518
Income taxes payable 6,327,179 779,972
------------- -------------
Total current liabilities 49,606,439 42,147,181
Long-term debt, less current maturities 108,458,339 97,336,821
Convertible subordinated notes 140,250,000 140,250,000
Deferred tax liabilities 3,544,762 4,557,256
------------- -------------
Total Liabilities 301,859,540 284,291,258
Stockholders' Equity:
Common stock, $ .001 par value; 50,000,000 shares authorized; 11,784,515
shares and 11,762,015 shares issued and outstanding
in 1999 and 1998, respectively 11,785 11,762
Additional paid-in capital 120,188,185 120,007,268
Retained earnings 38,281,608 31,133,280
Loans receivable from directors and officers (1,374,969) (1,393,072)
Foreign currency translation adjustment (32,065) --
------------- -------------
Total Stockholders' Equity 157,074,544 149,759,238
------------- -------------
Total Liabilities and Stockholders' Equity $ 458,934,084 $ 434,050,496
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales of aircraft and engine parts, net $ 68,712,095 $ 25,335,696
Rental revenues 10,343,914 3,754,875
------------ ------------
Total revenues 79,056,009 29,090,571
Cost of goods sold (47,383,319) (16,668,164)
Depreciation of equipment under operating leases (6,296,419) (2,043,156)
Selling, general and administrative expenses (8,495,510) (3,433,955)
Depreciation and amortization (1,201,400) (593,223)
------------ ------------
Total operating expenses (63,376,648) (22,738,498)
Operating income 15,679,361 6,352,073
Interest expense (4,321,028) (1,714,723)
Interest income 163,355 76,769
------------ ------------
Income before income taxes 11,521,688 4,714,119
Income taxes (4,373,360) (1,772,509)
------------ ------------
Net income $ 7,148,328 $ 2,941,610
============ ============
Earnings per common share - basic $ 0.61 $ 0.36
============ ============
Earnings per common share - diluted $ 0.47 $ 0.29
============ ============
Weighted average number of common shares
outstanding - basic 11,773,265 8,118,711
============ ============
Weighted average number of common shares
outstanding - diluted 17,820,915 11,739,791
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
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KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,148,328 $ 2,941,610
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 1,201,400 593,223
Depreciation of equipment under operating leases 6,296,419 2,043,156
Amortization of deferred financing costs 485,619 284,700
Deferred income taxes (2,358,461) (131,712)
Loss on sales of investment securities -- 56,934
Changes in operating assets and liabilities:
Increase in trade receivables, net (6,099,026) (4,619,038)
Increase in inventories (7,020,536) (12,565,413)
Increase in equipment under operating leases (15,636,051) (34,283,810)
Increase in prepaid expenses and other current assets 349,976 3,876,106
Decrease in income tax receivable -- 531,762
Decrease (increase) in other assets (1,045,092) 53,246
Increase in accounts payable 7,636,148 3,735,854
Decrease in accrued expenses (1,008,263) (1,893,201)
Increase in income taxes payable 5,547,207 1,367,922
------------ ------------
Net cash used in operating activities (4,502,332) (38,008,661)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investment securities -- 692,856
Purchase of property, plant and equipment (1,674,450) (1,234,519)
Acquisition earn-out payments (4,932,999) --
Other -- (47,700)
------------ ------------
Net cash used in investing activities (6,607,449) (589,363)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement 11,313,003 41,560,342
Debt repayment, including capital lease obligation (6,385) (2,688,410)
Proceeds from the issuance of common stock 180,940 357,613
Proceeds from repayment of loans to directors and officers 18,103 23,104
Payment of deferred financing costs (403,221) (416,753)
------------ ------------
Net cash provided by financing activities 11,102,440 38,835,896
------------ ------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (7,341) 237,872
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 1,107,102 462,676
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 1,099,761 $ 700,548
============ ============
</TABLE>
(continued)
See accompanying notes to condensed consolidated financial statements
5
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KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Supplemental disclosures of non-cash investing and financing activities:
Unrealized gain/(loss) on investment securities, net $ -- $ 303,593
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $1,822,696 $1,072,093
========== ==========
Income taxes $1,184,614 $ 200,750
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
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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, 1998 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, 1999, and the condensed consolidated
results of earnings for the three month periods ended March 31, 1999
and 1998 and the condensed consolidated statements of cash flows for
the three month periods ended March 31, 1999 and 1998. The results of
operations for such interim periods are not necessarily indicative of
the results for the full year.
NOTE 2 - ACQUISITIONS
On April 29, 1999, the Company completed the acquisition of privately
held Certified Aircraft Parts, Inc. ("Certified"). Certified is a
provider of parts, after-market support and logistics for the Lockheed
Martin C-130/L100 Hercules aircraft and will complement the activities
of the Company's small engine and military segment, which is involved
in supplying inventory management for C-130 engines. Kellstrom paid
approximately $16 million in cash at closing, and assumed approximately
$2.8 million in debt, financed through its credit facility.
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NOTE 3 - EARNINGS PER SHARE
Diluted earnings per share for the three month periods ended March 31,
1999 and 1998 were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net income $ 7,148,328 $ 2,941,610
Income adjustment relating to reduction of debt
based on the if converted method 1,216,557 484,380
----------- -----------
Net income available to common and
common equivalent shares $ 8,364,885 $ 3,425,990
=========== ===========
Weighted average number of common shares
outstanding - basic 11,773,265 8,118,711
Dilutive common stock equivalents from stock
options and warrants based on the treasury
stock method 1,430,168 1,657,444
Dilutive convertible subordinated notes based
on the if converted method 4,617,482 1,963,636
----------- -----------
Weighted average number of common shares
outstanding - diluted 17,820,915 11,739,791
=========== ===========
</TABLE>
NOTE 4 - SEGMENT REPORTING
The Company is organized based on the products that it offers. Under
this organizational structure, the Company has three reportable
segments: commercial engine, small engine and military and avionics and
rotables. The commercial engine segment is involved in the business of
purchasing, overhauling (primarily through subcontractors), reselling
and leasing of aircraft, and engines and engine parts for large
turbo-fan engines manufactured by CFM International, General Electric,
Pratt & Whitney and Rolls Royce. The small engine and military segment
is an after-market reseller of aircraft parts and turbojet engines and
engine parts for large transport aircraft and helicopters. The
segment's primary focus is on the Lockheed Martin C-130 Hercules
aircraft, a widely used military transport aircraft, the Allison (Rolls
Royce) T56/501 engine, which powers this aircraft, and the Allison 250,
with approximately 16,000 units actively in use by helicopters. The
Company entered the small engine and military segment in 1997 with the
acquisition of Aero Support USA, Inc. ("Aero Support"). The acquisition
of Certified on April 29, 1999 enhanced the company's presence in this
market segment. The avionics and rotables segment is engaged in the
sale of a wide variety of aircraft rotables and expendable components
including flight data recorders, electrical and mechanical equipment
and radar and navigation systems. The Company entered the avionics and
rotables segment in 1998 with the acquisition of Solair, Inc.
("Solair").
The Company's reportable segments are managed separately because each
business requires different technology and marketing strategies. The
Company does not allocate selling, general and administrative expenses,
depreciation and amortization, interest expense or income taxes to its
business segments. Rather, the Company evaluates performance of the
business segments based on revenue and gross margins. The accounting
policies of the segments are the same as those described in the summary
of significant accounting policies. The following table sets forth the
revenue and margins for each of the Company's business segments for the
three months ended March 31, 1999 and 1998:
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<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Revenues
Commercial engine $55,179,104 $23,533,177
Small engine and military 9,504,322 5,557,394
Avionics and rotables 14,372,583 --
----------- -----------
Total revenue $79,056,009 $29,090,571
=========== ===========
Gross margin
Commercial engine $18,501,024 $ 8,469,838
Small engine and military 3,463,858 1,909,413
Avionics and rotables 3,411,389 --
----------- -----------
Total gross margin $25,376,271 $10,379,251
=========== ===========
</TABLE>
NOTE 5 - Comprehensive Income
The Company's total comprehensive income, comprised of unrealized gain
on investment securities and foreign currency translation adjustments,
for the three months ended March 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Net income $7,148,328 $2,941,610
Unrealized gain on investment securities, net of taxes -- 360,527
Foreign currency translation adjustments (32,065) --
---------- ----------
Other comprehensive income, net of taxes (32,065) 360,527
---------- ----------
Total Comprehensive income $7,116,263 $3,302,137
========== ==========
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with the Kellstrom
Industries, Inc. (the "Company") unaudited condensed consolidated financial
statements and the related notes thereto included elsewhere herein. In addition,
reference should be made to the Company's audited consolidated financial
statements and notes thereto and related Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's most
recent Annual Report on Form 10-K.
This quarterly report on Form 10-Q contains or may contain certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to the Company's business, financial
condition and results of operations. The words "estimate," "project," "intend,"
"expect," and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
contemplated in such forward-looking statements, including those described
below. Investors are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
GENERAL
The Company is a leader in the airborne equipment segments of the
international aviation services after-market. The Company's principal business
is the purchasing, overhauling (primarily through subcontractors), reselling and
leasing of aircraft, avionics and aircraft rotables, and engines and engine
parts. The Company's historical growth has resulted from a number of factors,
including the expansion of the Company's product lines, customer base and market
share, increases in the Company's internal growth, cost controls and overall
operating efficiencies, acquisitions in existing and adjacent markets and
significant capital investments.
On April 1, 1998, June 17, 1998 and December 31, 1998 the Company
acquired Integrated Technology Corporation ("ITC"), Aerocar Aviation Corp.
("Aerocar Aviation") and Aerocar Parts, Inc. ("Aerocar Parts", and together with
Aerocar Aviation, "Aerocar") and Solair, respectively. These acquisitions were
accounted for using the purchase method of accounting for business combinations
and accordingly, those companies' operating results have been included in the
Company's results of operations since the date of acquisition. Consequently, the
results of operations for the three months ended March 31, 1999 are not
comparable to the corresponding period of the prior year in certain material
respects.
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 condensed consolidated statements of earnings.
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<TABLE>
<CAPTION>
Percentage of Total Revenues
----------------------------
Three Months Ended March 31,
----------------------------
1999 1998
-------------- -----------
<S> <C> <C>
Revenues:
Sales of aircraft and engine parts, net 86.9% 87.1%
Rental revenues 13.1% 12.9%
Total revenues 100.0% 100.0%
Operating expenses:
Cost of goods sold 59.9% 57.3%
Depreciation of equipment under operating leases 8.0% 7.0%
Selling, general and administrative expenses 10.7% 11.8%
Depreciation and amortization expense 1.5% 2.0%
Total operating expenses 80.1% 78.1%
Interest expense (net of interest income) 5.3% 5.6%
Income before income taxes 14.6% 16.3%
Income taxes 5.5% 6.1%
Net income 9.1% 10.2%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Net sales of aircraft and engine parts increased by 171% to $68.7
million for the three months ended March 31, 1999 as compared to $25.3 million
for the three months ended March 31, 1998. The increase in net sales of aircraft
and engine parts was primarily due to (i) growth of sales of approximately $29.0
million due to additional inventory availability as a result of the Company's
increased capital resources as well as the acquisitions of ITC and Aerocar being
combined into Kellstrom, and (ii) incremental sales of approximately $14.4
million related to the acquisition of Solair.
Rental revenues increased by 175% to $10.3 million for the three months
ended March 31, 1999 as compared to $3.8 million for the three months ended
March 31, 1998. The increase in rental revenues was primarily due to the
Company's continued expansion into the leasing business through purchases of
individual assets as well as the acquisitions of ITC and Aerocar being combined
into Kellstrom.
Cost of goods sold increased by 184% to $47.4 million for the three
months ended March 31, 1999 as compared to $16.7 million for the three months
ended March 31, 1998; the gross profit margin decreased to 31.0% in 1999 from
34.2% in 1998. The increase in cost of goods sold was primarily due to increased
sales volume across all product lines. The decrease in the gross profit margin
was primarily due to expected lower margins from the Solair division.
Depreciation of equipment under operating leases increased by 208% to
$6.3 million for the three months ended March 31, 1999 as compared to $2.0
million for the three months ended March 31, 1998. The increase in depreciation
of equipment under operating leases was primarily due to the Company's continued
expansion into the leasing business through purchases of individual assets as
well as the acquisitions of ITC and Aerocar being combined into Kellstrom.
Selling, general and administrative expenses increased by 147% to $8.5
million for the three months ended March 31, 1999 as compared to $3.4 million
for the three months ended March 31, 1998; however, as a percentage of total
revenues, selling, general and administrative expenses decreased to 10.7% in
1999 from 11.8% in 1998. The increase in selling, general and administrative
expenses was primarily due to (i) the acquisitions of ITC, Aerocar and Solair
being combined into Kellstrom and (ii) the continued expansion of the Company's
sales and warehouse operations to support a higher level of revenue and a
corresponding greater number of whole engine and engine component transactions.
This expansion has resulted in the continued addition of marketing and
management personnel necessary to achieve and administer the revenue growth
opportunities that are available due to the Company's expanded level of
inventory investment as well as the acquisitions of ITC, Aerocar and Solair.
Selling, general and administrative expenses as a percentage of total revenues
decreased during 1999 primarily due to economies of scale and operating
efficiencies derived from the consolidation of operations related to completed
acquisitions. The Company expects selling, general and
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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 103% to $1.2 million
for the three months ended March 31, 1999 as compared to $0.6 million for the
three months ended March 31, 1998; however, as a percentage of total revenues,
depreciation and amortization expense decreased to 1.5% in 1999 from 2.0% in
1998. The increase in depreciation and amortization expense was primarily due to
amortization of goodwill related to the ITC, Aerocar and Solair acquisitions.
Interest expense (net of interest income) increased by 154% to $4.2
million for the three months ended March 31, 1999 as compared to $1.6 million
for the three months ended March 31, 1998. The increase in interest expense was
primarily driven by an increase in the Company's average debt levels during
1999, resulting from the acquisitions of ITC and Solair and growth in
inventories and 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 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 143% to $7.1 million for the three months ended
March 31, 1999 as compared to $2.9 million for the three months ended March 31,
1998. Basic earnings per common share increased by 69% to $0.61 for the three
months ended March 31, 1999 as compared to $0.36 for the three months ended
March 31, 1998. Diluted earnings per common share increased by 62% to $0.47 for
the three months ended March 31, 1999 as compared to $0.29 for the three months
ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES.
As of March 31, 1999, the Company's liquidity and capital resources
included cash and cash equivalents of $1.1 million and working capital of $242.4
million. At March 31, 1999, total outstanding debt was $251.2 million as
compared to $239.9 million as of December 31, 1998. As of March 31, 1999, the
outstanding principal balance on the Company's convertible subordinated notes
was $140.3 million and the Company had contractual lines of credit totaling
$256.7 million of which $95.3 million was outstanding and $52.7 million was
available.
Cash flows used in operating activities for the three months ended
March 31, 1999 was $4.5 million compared with $38.0 million for the three months
ended March 31, 1998. The primary uses of cash for operating activities during
the three months ended March 31, 1999 was due to increases in inventories and
equipment under operating leases of $7.0 million and $15.6 million,
respectively, and an increase in accounts receivable of $6.1 million. The
primary sources of cash for operating activities for the three months ended
March 31, 1999 was due to net income of $7.1 million, coupled with total
depreciation and amortization of $7.5 million and increases in accounts payable
and income taxes payable of $7.6 million and $5.5 million, respectively.
Cash flows used in investing activities for the three months ended
March 31, 1999 was $6.6 million compared with $0.6 million for the three months
ended March 31, 1998. The primary uses of cash for investing activities for the
three months ended March 31, 1999 was related to earnout payments in connection
with the acquisitions of Aero Support and ITC of $4.9 million in the aggregate
and purchases of property, plant and equipment for $1.7 million.
Cash flows provided by financing activities for the three months ended
March 31, 1999 was $11.1 million compared with $38.8 million for the three
months ended March 31, 1998. The primary sources of cash for financing
activities for the three months ended March 31, 1999 related to an increase in
borrowings under line of credit agreements of $11.3 million offset by payment of
deferred financing costs of $0.4 million. The increase in borrowings under line
of credit agreements includes the $6.7 million letter of credit component of the
$256.7 million syndicated credit facility, which was specifically committed to
the permanent financing of the Company's new world headquarters.
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 aircraft
and aircraft parts, engines and engine parts and avionics and rotables. 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 syndicated credit
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facility, and through the employment of its cash flows. In the future, the
Company may require additional sources of capital to continue to fund its
expansion.
The Company's management believes that free cash flow (net income plus
depreciation of property, plant and equipment and amortization of goodwill),
combined with the Company's syndicated credit facility should be sufficient for
the Company's current level of operations. However, the Company may elect to
seek equity capital or other debt financing in the future depending upon market
conditions and the capital needs of the Company.
YEAR 2000 ISSUE
The Year 2000 problem is primarily the result of computer programs
being written using two digits rather than four to define the applicable year.
Such programs will be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, including possible
miscalculations, and a disruption in the operation of such systems. This is
commonly referred to as the Year 2000 issue.
The Company and each of its operating subsidiaries are executing a plan
to identify and address any possible business issues related to the impact of
the Year 2000 problem on both its information technology ("IT") and non-IT
systems (e.g., embedded technology). This plan addresses the Year 2000 issue in
multiple phases, including (i) determining an initial inventory of the Company's
systems, equipment (including embedded technology in the Company's aircraft,
engine and parts inventory as well as leased equipment), vendors, customers and
third party administrators that may be vulnerable to system failures or
processing errors as a result of Year 2000 issues, (ii) assessment and
prioritization of inventoried items to determine risks associated with their
failure to be Year 2000 compliant, (iii) testing of systems and equipment to
determine Year 2000 compliance, (iv) remediation and implementation of systems
and equipment, and (v) contingency planning to assess reasonably likely
worst-case scenarios. As part of the Company's plan, the Company has retained a
third party Year 2000 solution provider to assist with a risk analysis of the
Company's Year 2000 issue and assist with project office management. For those
systems which the Company determines are not currently Year 2000 compliant,
implementation of the required changes is expected to be completed by September
1999.
Incremental costs, which include consulting costs and costs associated
with internal resources to modify existing systems in order to achieve Year 2000
compliance are charged to expense as incurred. The Company does not expect the
cost of making the required system changes to exceed $500,000. The anticipated
costs of the project and the dates on which the Company believes it will
complete the Year 2000 modifications and assessments are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources. There can be
no guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area and the ability to locate and correct all
relevant systems.
With respect to the Company's customers, suppliers and vendors, the
Company is in the process of contacting customers, suppliers and vendors to
assess the potential impact on operations if such third parties are not
successful in ensuring that their systems and operations are Year 2000 compliant
in a timely manner. The Company's Year 2000 issues and any potential business
interruptions, costs, damages or losses related thereto, are also dependent upon
the Year 2000 compliance of other third parties such as governmental agencies
(e.g., Federal Aviation Administration and foreign equivalents). To date, the
Company is unable to determine whether it will be materially affected by the
failure of any of its customers, suppliers, vendors or other third parties to be
Year 2000 compliant. The Company believes that its compliance efforts have and
will reduce the impact on the Company of any such failures. Failure of any third
parties with which the Company interacts to achieve Year 2000 compliance could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Risk assessment, readiness evaluation, action plans and contingency
plans related to the Company's suppliers, vendors and other third parties are
expected to be completed by September 1999. The Company's risk management
program includes emergency backup and recovery procedures to be followed in the
event of failure of a business critical system. These procedures will be
expanded to include specific procedures for the potential Year 2000 issue.
Contingency plans to protect the Company from Year 2000-related interruptions
are also being developed and are expected to be completed by September 1999.
These plans will include development of backup procedures, identification of
alternate suppliers, possible increases in inventory levels and other
appropriate measures.
13
<PAGE> 14
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which became
effective for the Company beginning January 1, 1999. SOP 98-1 outlines the
accounting treatment for certain costs related to the development or purchase of
software to be used internally and requires that costs incurred during the
preliminary project and post-implementation/operation stages be expensed, and
costs incurred during the application development stage be capitalized and
amortized over the estimated useful life of the software. Adoption of this
statement did not have a material impact on the Company's results of operations
or financial position.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-up Activities." SOP 98-5, which became effective for the Company beginning
January 1, 1999, requires that all costs of start-up activities, including
organization costs, be expensed as incurred. Adoption of this statement did not
have a material impact on the Company's results of operations or financial
position.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires companies to
recognize all derivative contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. Management does not anticipate a
significant impact of the adoption of SFAS No. 133 on the Company's consolidated
financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk is limited primarily to the
fluctuating interest rates associated with variable rate indebtedness
outstanding under the Company's $256.7 million bank credit facility. The bank
credit facility, which expires in 2003, bears interest at the bank's prime rate
plus 0-50 basis points or, at the Company's option, LIBOR plus 150-250 basis
points. These variable interest rates are subject to interest rate changes in
the United States and Eurodollar markets. The Company does not currently use,
and has not historically used, derivative financial instruments to hedge against
such market interest rate risk. At March 31, 1999, the Company had approximately
$95.3 million in variable rate indebtedness outstanding under the credit
facility, representing approximately, 38% of the Company's total debt
outstanding, at an average interest rate of 6.95%. An increase in interest rates
by 1% would not have a material impact on the financial condition, results of
operations or cash flows of the Company.
14
<PAGE> 15
PART II
ITEM 1. LEGAL PROCEEDINGS
See Item 3 of the Company's Form 10-K for the year ended December 31,
1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
The condensed consolidated statement of earnings of the Company for
the three months ended March 31, 1999 are the Company's actual
results, as they reflect the operations of ITC, Aerocar and Solair for
the entire period being presented. The pro forma condensed
consolidated statement of earnings of the Company for the three months
ended March 31, 1998 are based on historical financial statements of
the Company and have been adjusted to reflect the acquisitions of ITC,
Aerocar and Solair as though the companies had combined at the
beginning of the period being reported. Also, the pro forma condensed
consolidated statement of earnings for the three months ended March
31, 1998 reflect the effect of the Company's secondary public offering
of common stock and convertible subordinated notes as though they had
occurred at the beginning of the period being reported.
The pro forma condensed consolidated statement of earnings does not
purport to be indicative of results that would have occurred had the
acquisition been in effect for the period presented, nor does it
purport to be indicative of the results that will be obtained in the
future. The pro forma condensed consolidated financial information is
based on certain assumptions and adjustments described in the notes
hereto and should be read in conjunction therewith.
15
<PAGE> 16
KELLSTROM INDUSTRIES, INC.
Pro Forma Condensed Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1999 1998
------------ ------------
Pro Forma
Actual Combined
------------ ------------
<S> <C> <C>
Sales of aircraft and engine parts, net $ 68,712,095 $ 57,831,030
Rental revenues 10,343,914 6,178,897
------------ ------------
Total revenues 79,056,009 64,009,927
Cost of goods sold (47,383,319) (41,979,818)
Depreciation of equipment under operating leases (6,296,419) (2,791,080)
Selling, general and administrative expenses (8,495,510) (8,211,575)
Depreciation and amortization (1,201,400) (1,046,467)
------------ ------------
Total operating expenses (63,376,648) (54,028,940)
Operating income 15,679,361 9,980,987
Interest expense, net of interest income (4,157,673) (4,093,177)
------------ ------------
Income before income taxes 11,521,688 5,887,810
Income taxes (4,373,360) (2,205,411)
------------ ------------
Net income $ 7,148,328 $ 3,682,399
============ ============
Earnings per common share - basic $ 0.61 $ 0.33
============ ============
Earnings per common share - diluted $ 0.47 $ 0.28
============ ============
Weighted average number of common shares
outstanding - basic 11,773,265 11,281,211
============ ============
Weighted average number of common shares
outstanding - diluted 17,820,915 17,556,136
============ ============
</TABLE>
Unaudited - See accompanying notes to pro forma condensed
consolidated statements of earnings.
16
<PAGE> 17
KELLSTROM INDUSTRIES, INC.
Pro Forma Condensed Consolidated Statements of Earnings
Three Months Ended March 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
-----------------------------------------------------------------
HISTORICAL
-----------------------------------------------------------------
KELLSTROM ITC AEROCAR SOLAIR
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Sales of aircraft and engine parts, net $ 25,335,696 $ 8,036,576 $ 2,508,565 $ 21,950,193
Rental revenues 3,754,875 538,306 1,885,716 --
------------ ------------ ----------- ------------
Total revenues 29,090,571 8,574,882 4,394,281 21,950,193
Cost of goods sold (16,668,164) (4,997,742) (626,097) (19,687,815)
Depreciation of equipment under operating leases (2,043,156) (289,317) (458,607) --
Selling, general and administrative expenses (3,433,955) (640,591) (616,605) (3,757,927)
Depreciation and amortization (593,223) (3,498) (8,799) (137,807)
------------ ------------ ----------- ------------
Total operating expenses (22,738,498) (5,931,148) (1,710,108) (23,583,549)
Operating income 6,352,073 2,643,734 2,684,173 (1,633,356)
Interest expense, net of interest income (1,637,954) (160,492) (28,711) (1,195,321)
------------ ------------ ----------- ------------
Income before income taxes 4,714,119 2,483,242 2,655,462 (2,828,677)
Income taxes (1,772,509) -- -- --
------------ ------------ ----------- ------------
Net income $ 2,941,610 $ 2,483,242 $ 2,655,462 $ (2,828,677)
============ ============ =========== ============
Earnings per common share - basic $ 0.36
============
Earnings per common share - diluted $ 0.29
============
Weighted average number of common shares
outstanding - basic 8,118,711
============
Weighted average number of common shares
outstanding - diluted 11,739,791
============
</TABLE>
<TABLE>
----------------------------------------------------------------
PRO FORMA ADJUSTMENTS
--------------------------------------------- PRO FORMA
(A) (B) (C) COMBINED
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Sales of aircraft and engine parts, net $ -- $ -- $ 57,831,030
Rental revenues -- -- 6,178,897
----------- ----------- ----------- ------------
Total revenues -- -- -- 64,009,927
Cost of goods sold -- -- (41,979,818)
Depreciation of equipment under operating leases -- -- (2,791,080)
Selling, general and administrative expenses 43,161 59,342 135,000 (8,211,575)
Depreciation and amortization (40,785) (215,597) (46,758) (1,046,467)
----------- ----------- ----------- ------------
Total operating expenses 2,376 (156,255) 88,242 (54,028,940)
Operating income 2,376 (156,255) 88,242 9,980,987
Interest expense, net of interest income 160,492 (1,030,765) 1,219,985 (4,093,177)
(548,851) 125,607 (997,167)
----------- ----------- ----------- ------------
Income before income taxes (385,983) (1,061,413) 311,060 5,887,810
Income taxes (781,758) (597,768) 946,624 (2,205,411)
----------- ----------- ----------- ------------
Net income $(1,167,741) $(1,659,181) $ 1,257,684 $ 3,682,399
=========== =========== =========== ============
Earnings per common share - basic $ 0.33
===========
Earnings per common share - diluted $ 0.28
===========
Weighted average number of common shares
outstanding - basic 11,281,211
===========
Weighted average number of common shares
outstanding - diluted 17,556,136
===========
</TABLE>
Unaudited - See accompanying notes to pro forma condensed
consolidated statement of earnings.
17
<PAGE> 18
KELLSTROM INDUSTRIES, INC.
Notes to Pro Forma Condensed Consolidated Statements of Earnings
(Unaudited)
(A) For the purpose of presenting the pro forma consolidated statements of
earnings, the following adjustments have been made for the ITC acquisition:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
--------------
<S> <C>
Increase (decrease) in income:
Reduction in selling, general and administrative expense due to elimination of pension expense $ 43,161
Amortization of goodwill and non-compete agreement related to ITC acquisition (40,785)
Reduction in interest expense due to pay-off of debt on ITC line of credit 160,492
Interest expense on acquisition debt and debt incurred on ITC's line of credit (548,851)
-----------
(385,983)
Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (781,758)
-----------
Net adjustment $(1,167,741)
===========
</TABLE>
(B) For the purpose of presenting the pro forma consolidated statements of
earnings, the following adjustments have been made for the Aerocar Aviation and
Aerocar Parts acquisitions:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
--------------
<S> <C>
Increase (decrease) in income:
Elimination of Aerocar Aviation and Aerocar Parts officer's salary and bonus $ 59,342
Amortization of goodwill and non-compete related to Aerocar Aviation and Aerocar Parts acquisition
Increase in interest expense from acquisition debt (215,597)
Reduction in interest expense due to pay-off of debt on Aerocar Aviation and Aerocar Parts line of credit (1,030,765)
125,607
-----------
(1,061,413)
Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (597,768)
-----------
Net adjustments $(1,659,181)
===========
</TABLE>
(C) For the purpose of presenting the pro forma consolidated statements of
earnings, the following adjustments have been made for the Solair acquisition:
<TABLE>
<CAPTION>
Three Months Ended
March 31, 1998
--------------
<S> <C>
Increase (decrease) in income:
Reduction in selling, general and administrative expenses for elimination of Banner management fees $ 135,000
Amortization of goodwill related to Solair acquisition (46,758)
Reduction in interest expense due to pay-off of Solair debt 1,219,985
Increase in interest expense from acquisition debt (997,167)
-----------
311,060
Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes 946,624
-----------
Net adjustment $ 1,257,684
===========
</TABLE>
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 - Financial Data Schedule (for SEC use only).
(b) Reports on Form 8-K.
The Company filed a Report on Form 8-K dated January 14, 1999,
which included a copy of a press release regarding the purchase
of all of the issued and outstanding shares of capital stock of
Solair, Inc.
The Company filed a Report on Form 8-K/A dated March 16, 1999,
which announced the completion of the purchase of all of the
issued and outstanding shares of capital stock of Solair, Inc.
19
<PAGE> 20
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 14, 1999 KELLSTROM INDUSTRIES, INC.
(Registrant)
/s/ Michael W. Wallace
-----------------------
Michael W. Wallace
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
KELLSTROM INDUSTRIES, INC. BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE
PERIOD ENDED MARHC 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,100
<SECURITIES> 0
<RECEIVABLES> 37,966
<ALLOWANCES> 5,428
<INVENTORY> 157,704
<CURRENT-ASSETS> 292,018
<PP&E> 18,007
<DEPRECIATION> 3,427
<TOTAL-ASSETS> 458,934
<CURRENT-LIABILITIES> 49,606
<BONDS> 140,250
0
0
<COMMON> 12
<OTHER-SE> 157,063
<TOTAL-LIABILITY-AND-EQUITY> 458,934
<SALES> 79,056
<TOTAL-REVENUES> 79,056
<CGS> 53,680
<TOTAL-COSTS> 63,377
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,158
<INCOME-PRETAX> 11,522
<INCOME-TAX> 4,373
<INCOME-CONTINUING> 7,148
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,148
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.47
</TABLE>
