<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 11,910,981 shares of
common stock, $.001 par value per share, were outstanding as of October 31,
1999.
1
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KELLSTROM INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I
------
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................................................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................... 17
PART II
-------
Item 1. Legal Proceedings..................................................................... 18
Item 2. Changes in Securities and Use of Proceeds............................................. 18
Item 3. Defaults Upon Senior Securities....................................................... 18
Item 4. Matters Submitted to a Vote of Security Holders....................................... 18
Item 5. Other Information..................................................................... 18
Item 6. Exhibits and Reports on Form 8-K...................................................... 22
</TABLE>
2
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,209,753 $ 1,107,102
Trade receivables, net of allowances for returns and
doubtful accounts of $6,783,769 and $5,417,996
for 1999 and 1998, respectively 48,253,747 31,367,337
Inventories 202,896,753 149,957,320
Equipment under short-term operating leases, net 86,606,045 77,201,289
Prepaid expenses 5,918,654 3,166,158
Deferred tax assets 7,036,388 9,730,577
------------ ------------
Total current assets 357,921,340 272,529,783
Equipment under long-term operating leases, net 72,402,175 63,323,008
Property, plant and equipment, net 25,411,699 16,755,185
Goodwill, net 83,096,769 71,501,153
Other assets 9,045,191 9,941,367
------------ ------------
Total Assets $547,877,174 $434,050,496
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term notes payable $ 2,145,920 $ 2,317,982
Current maturities of long-term debt 200,000 --
Accounts payable 18,552,549 13,333,709
Accrued expenses 21,236,502 25,715,518
Income taxes payable -- 779,972
------------ ------------
Total current liabilities 42,134,971 42,147,181
Long-term debt, less current maturities 192,846,145 97,336,821
Convertible subordinated notes 140,250,000 140,250,000
Deferred tax liabilities 5,385,359 4,557,256
------------ ------------
Total Liabilities 380,616,475 284,291,258
Stockholders' Equity:
Common stock, $ .001 par value; 50,000,000 shares authorized;
11,910,981 and 11,762,015 shares issued and outstanding
in 1999 and 1998, respectively 11,911 11,762
Additional paid-in capital 121,103,657 120,007,268
Retained earnings 47,725,955 31,133,280
Loans receivable from directors and officers (1,585,730) (1,393,072)
Accumulated other comprehensive income 4,906 --
------------ ------------
Total Stockholders' Equity 167,260,699 149,759,238
------------ ------------
Total Liabilities and Stockholders' Equity $547,877,174 $ $434,050,496
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ----------------------------------
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Sales of aircraft and engine parts, net $59,607,297 $42,750,180 $205,638,182 $ 98,263,721
Rental revenues 11,123,405 10,056,337 32,375,428 21,696,484
----------- ----------- ------------ ------------
Total revenues 70,730,702 52,806,517 238,013,610 119,960,205
Cost of goods sold 40,396,903 28,607,924 139,907,012 65,601,702
Depreciation of equipment under operating leases 7,405,205 5,653,955 20,589,612 11,818,038
Selling, general and administrative expenses 10,233,587 5,082,717 29,399,496 12,837,670
Depreciation and amortization 1,405,755 886,938 3,916,919 2,148,240
Other non-recurring expenses -- -- 2,200,000 --
----------- ----------- ------------ ------------
Total operating expenses 59,441,450 40,231,534 196,013,039 92,405,650
Operating income 11,289,252 12,574,983 42,000,571 27,554,555
Interest expense, net of interest income 5,865,778 2,695,546 15,318,253 7,099,434
----------- ----------- ------------ ------------
Income before income taxes 5,423,474 9,879,437 26,682,318 20,455,121
Income taxes 2,012,122 3,676,120 10,089,643 7,629,130
----------- ----------- ------------ ------------
Net income $ 3,411,352 $ 6,203,317 $ 16,592,675 $ 12,825,991
=========== =========== ============ ============
Earnings per common share - basic $ 0.29 $ 0.53 $ 1.40 $ 1.34
=========== =========== ============ ============
Earnings per common share - diluted $ 0.27 $ 0.42 $ 1.17 $ 1.06
=========== =========== ============ ============
Weighted average number of common shares
outstanding - basic 11,910,981 11,646,801 11,836,984 9,553,238
=========== =========== ============ ============
Weighted average number of common shares
outstanding - diluted 14,471,242 17,698,307 16,672,356 14,131,293
=========== =========== ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
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KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,592,675 $ 12,825,991
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 3,916,919 2,148,240
Depreciation of equipment under operating leases 20,589,612 11,818,038
Amortization of deferred financing costs 1,523,333 948,508
Deferred income taxes (641,854) 31,888
Loss on sales of investment securities -- 561,683
Changes in operating assets and liabilities:
Increase in trade receivables, net (12,815,795) (2,013,983)
Increase in inventories (39,611,046) (32,280,460)
Increase in equipment under operating leases (39,073,535) (66,165,926)
Decrease (increase) in prepaid expenses and other current assets (2,298,635) 1,709,999
Decrease (increase) in other assets (245,792) (341,659)
Increase (decrease) in accounts payable 560,590 830,296
Increase (decrease) in accrued expenses 470,514 862,688
Increase in income taxes payable (1,203,407) 2,512,622
------------ ------------
Net cash used in operating activities (52,236,421) (66,552,075)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (19,694,299) (62,861,587)
Acquisition earn-out payments (5,058,887) --
Purchase of property, plant and equipment (10,204,051) (5,790,465)
Proceeds from sales of property, plant and equipment 56,763 --
Proceeds from sales of investment securities -- 812,553
Other -- (284,890)
------------ ------------
Net cash used in investing activities (34,900,474) (68,124,389)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement 97,855,245 (5,150,390)
Debt repayment, including capital lease obligation (5,045,207) (19,909,307)
Proceeds from the issuance of common stock 1,096,538 78,431,985
Proceeds from the issuance of convertible subordinated notes -- 86,250,000
Loans to directors and officers (192,658) (1,030,657)
Payment of deferred financing costs (474,372) (3,482,789)
------------ ------------
Net cash provided by financing activities 93,239,546 135,108,842
------------ ------------
NET INCREASE IN CASH & CASH EQUIVALENTS 6,102,651 432,378
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 1,107,102 462,676
------------ ------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 7,209,753 $ 895,054
============ ============
</TABLE>
(continued)
See accompanying notes to condensed consolidated financial statements
5
<PAGE> 6
KELLSTROM INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Supplemental disclosures of non-cash investing and financing activities:
Aerocar assets acquired for warrants $ -- $ 1,405,000
=========== ===========
Unrealized gain/(loss) on investment securities, net $ -- $ 315,758
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $12,116,504 $ 4,752,586
=========== ===========
Income taxes $14,660,263 $ 3,676,680
=========== ===========
Supplemental disclosure of fair value of assets acquired and liabilities
assumed in connection with acquisitions:
Receivables 3,570,615 6,568,343
Inventory 13,014,566 26,649,456
Prepaid expenses and other current assets 453,861 29,553
Engines under operating leases -- 25,332,461
Property, plant and equipment -- 184,224
Goodwill 12,933,723 33,363,315
Other assets 85,280 158,703
----------- -----------
Total assets $30,058,045 $92,286,055
=========== ===========
Accrued expenses $ 368,219 $ 3,147,436
Accounts payable 4,658,250 5,505,215
Income taxes payable 423,435 --
Notes payable 2,727,224 19,366,817
Deferred tax liabilities 2,186,618 --
----------- -----------
Total liabilities $10,363,746 $28,019,468
=========== ===========
Net assets acquired 19,694,299 64,266,587
Less warrants issued to seller -- 1,405,000
----------- -----------
Net cash used in acquisitions $19,694,299 $62,861,587
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE> 7
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 the Company as of September 30,
1999, the condensed consolidated results of operations for the three
and nine month periods ended September 30, 1999 and 1998, and the
condensed consolidated statements of cash flows for the nine month
periods ended September 30, 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 1, 1998, the Company acquired substantially all of the assets
and assumed certain liabilities of Integrated Technology Corp. ("ITC")
for $20.5 million in cash, plus up to $10.0 million cash consideration
which may be paid in the form of an earn-out payable over three years
based on certain specified criteria, of which $3.3 million was earned
during 1998. In addition, the Company received a three-year option to
purchase a 49% interest in a related FAA-approved overhaul facility.
On June 17, 1998, the Company acquired all of the outstanding capital
stock of Aerocar Aviation Corp. ("Aerocar Aviation") and Aerocar Parts,
Inc. ("Aerocar Parts," and together with Aerocar Aviation, "Aerocar")
for $42.3 million in cash, warrants to purchase an aggregate of 250,000
shares of the Company's common stock, exercisable at $26.00 per share,
expiring on June 17, 2001 plus an additional $5.0 million payable
within a two-year period after closing, either in cash, or at the
option of the Company, in shares of common stock having an equivalent
value as of the date of acquisition.
On December 31, 1998, the Company acquired all of the outstanding
capital stock of Solair, Inc. ("Solair"), a wholly-owned subsidiary of
Banner Aerospace, Inc. for $57.4 million in cash and a warrant to
purchase 300,000 shares of common stock at an exercise price of $27.50
per share, expiring on December 31, 2002. During the third quarter of
1999, the Company made an additional $2.9 million purchase price
adjustment payment in accordance with the terms of the original
agreement.
On April 29, 1999, the Company acquired all of the outstanding capital
stock of Certified Aircraft Parts, Inc. ("Certified") for $16.7 million
in cash, and assumed $2.7 million in debt.
7
<PAGE> 8
Each of the companies acquired are in the business of purchasing,
overhauling (primarily through subcontractors), reselling or leasing of
aircraft, avionics and aircraft rotables, or engines and engine parts.
Each of these acquisitions were accounted for using the purchase method
of accounting for business combinations and accordingly, the condensed
consolidated financial statements reflect the results of operations of
the acquired businesses from the respective dates of acquisition.
NOTE 3 - EARNINGS PER SHARE
Diluted earnings per share for the three and nine month periods ended
September 30, 1999 and 1998 were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 3,411,352 $ 6,203,317 $16,592,675 $12,825,991
Income adjustment relating to reduction of debt
based on the if converted method 488,261 1,232,253 2,921,374 2,196,679
----------- ----------- ----------- -----------
Net income available to common and
common equivalent shares $ 3,899,613 $ 7,435,570 $19,514,049 $15,022,670
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic 11,910,981 11,646,801 11,836,984 9,553,238
Dilutive common stock equivalents from stock
options and warrants based on the treasury
stock method 596,625 1,392,558 1,102,505 1,612,727
Dilutive convertible subordinated notes based
on the if converted method 1,963,636 4,658,948 3,732,867 2,965,328
----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding - diluted 14,471,242 17,698,307 16,672,356 14,131,293
----------- ----------- ----------- -----------
</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: (i) commercial engine, (ii) defense and (iii) avionics and
rotables. The commercial engine segment is involved in the business of
purchasing, overhauling (primarily through subcontractors), reselling
and leasing of aircraft, engines and engine parts for large turbo-fan
engines manufactured by CFM International, General Electric, Pratt &
Whitney and Rolls Royce. The defense 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 engine, with
approximately 16,000 units actively in use by helicopters. The Company
entered the defense 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.
8
<PAGE> 9
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 and nine month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Revenues
Commercial engine $ 44,328,976 $ 47,217,617 $ 166,622,917 $ 104,283,202
Defense 13,679,164 5,588,900 33,507,626 15,677,003
Avionics and rotables 12,722,562 -- 37,883,067 --
------------ ------------ ------------- -------------
Total revenue $ 70,730,702 $ 52,806,517 $ 238,013,610 $ 119,960,205
============ ============ ============= =============
Gross margin
Commercial engine $ 14,359,840 $ 16,343,514 $ 55,561,105 $ 36,894,711
Defense 4,846,416 2,201,124 11,987,739 5,645,754
Avionics and rotables 3,722,338 -- 9,968,142 --
------------ ------------ ------------- -------------
Total gross margin $ 22,928,594 $ 18,544,638 $ 77,516,986 $ 42,540,465
------------ ------------ ------------- -------------
</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 and nine month periods ended September 30, 1999 and 1998
was as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 3,411,352 $ 6,203,317 $16,592,675 $12,825,991
Unrealized gain on investment securities, net of taxes -- 64,513 -- 390,787
Foreign currency translation adjustments 5,793 -- 4,906 --
----------- ----------- ----------- -----------
Other comprehensive income, net of taxes 5,793 64,513 4,906 390,787
----------- ----------- ----------- -----------
Total Comprehensive income $ 3,417,145 $ 6,267,830 $16,597,581 $13,216,778
----------- ----------- ----------- -----------
</TABLE>
NOTE 6 - OTHER MATTERS
On July 7, 1999, the Company settled a lawsuit brought by the Estate of
the late Mr. Joram Rosenfeld (a former Co-Chairman of the Company) with
respect to, among other things, a claim alleging entitlement to a stock
option grant in late 1996. The settlement was entered into in order to
limit the expense of litigating the suit as well as the protracted use
of management's time and related corporate resources. For the second
quarter ended June 30, 1999, the Company recorded a one-time pre-tax
charge of approximately $2.2 million to fulfill its obligation under
the settlement and for accrued legal expenses.
9
<PAGE> 10
The Company is not aware of any 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 or otherwise. The Company cannot
determine whether such actions would have a material impact on the
financial condition, results of operations or cash flows of the
Company.
10
<PAGE> 11
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, December 31, 1998 and April 29, 1999
the Company acquired ITC, Aerocar, Solair and Certified, 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 respective dates
of acquisition. Consequently, the results of operations for the three and nine
month periods ended September 30, 1999 are not comparable to the corresponding
periods 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.
11
<PAGE> 12
<TABLE>
<CAPTION>
Percentage of Total Revenues Percentage of Total Revenues
-------------------------------- -------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Sales of aircraft and engine parts, net 84.3% 81.0% 86.4% 81.9%
Rental revenues 15.7% 19.0% 13.6% 18.1%
Total revenues. 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of goods sold 57.1% 54.2% 58.8% 54.7%
Depreciation of equipment under operating leases 10.5% 10.7% 8.7% 9.9%
Selling, general and administrative expenses 14.5% 9.6% 12.4% 10.7%
Depreciation and amortization expense 2.0% 1.7% 1.6% 1.8%
Other non-recurring expenses 0.0% 0.0% 0.9% 0.0%
Total operating expenses 84.0% 76.2% 82.4% 77.0%
Operating income 16.0% 23.8% 17.6% 23.0%
Interest expense (net of interest income) 8.3% 5.1% 6.4% 5.9%
Income before income taxes 7.7% 18.7% 11.2% 17.1%
Income taxes 2.8% 7.0% 4.2% 6.4%
Net income 4.8% 11.7% 7.0% 10.7%
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales of aircraft and engine parts increased by 39% to $59.6
million for the three months ended September 30, 1999 as compared to $42.8
million for the three months ended September 30, 1998. The increase in net sales
of aircraft and engine parts was primarily due to (i) growth in part sales of
approximately $12.9 million due to additional inventory availability as a result
of the Company's increased capital resources as well as the acquisition of
Certified being combined into Kellstrom, and (ii) incremental sales of
approximately $12.7 million related to the acquisition of Solair. The increase
in parts sales was partially offset by a decrease in sales of whole aircraft and
engines of approximately $8.7 million as a result of the Company's proposed
initiative to spin-off its aircraft and engine lease portfolio, discussed in the
liquidity and capital resources section below.
Rental revenues increased by 11% to $11.1 million for the three months
ended September 30, 1999 as compared to $10.1 million for the three months ended
September 30, 1998. The increase in rental revenues was primarily due to the
increase in the Company's aircraft and engine lease portfolio partially offset
by higher levels of idle equipment. In connection with the proposed off-balance
sheet initiative for the Company's aircraft and engine lease portfolio discussed
in the liquidity and capital resources section below, the Company expects rental
revenues will decrease in the future.
Cost of goods sold increased by 41% to $40.4 million for the three
months ended September 30, 1999 as compared to $28.6 million for the three
months ended September 30, 1998. Gross profit margin on aircraft and engine part
sales was 32.2% for the three months ended September 30, 1999 as compared with
33.1% for the three months ended September 30, 1998. The slight decrease in
gross profit margin reflects lower margins on sales of whole aircraft and
engines along with expected lower margins from Solair partially offset by
improved margins on sales of commercial engine parts.
Depreciation of equipment under operating leases increased by 31% to
$7.4 million for the three months ended September 30, 1999 as compared to $5.7
million for the three months ended September 30, 1998. Gross profit margin on
rental revenues decreased to 33.4% in 1999 from 43.8% in 1998. The decrease in
the gross profit margin was primarily due to a continued shift in the Company's
lease portfolio to longer term leases and newer equipment as well as the impact
of depreciation expense incurred in connection with the slightly higher levels
of idle equipment. In connection with the proposed off-balance sheet initiative
for the Company's aircraft
12
<PAGE> 13
and engine lease portfolio discussed in the liquidity and capital resources
section below, the Company expects depreciation of equipment under operating
leases will decrease in the future.
Selling, general and administrative expenses increased by 101% to $10.2
million for the three months ended September 30, 1999 as compared to $5.1
million for the three months ended September 30, 1998. The increase in selling,
general and administrative expenses was primarily due to (i) the acquisitions of
Solair and Certified being combined into Kellstrom, (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 aircraft and engine component
transactions, (iii) increased professional service fees incurred in connection
with the design of the Company's new management information system and (iv) an
increase in bad debt expense as a result of the expansion of the Company's
customer base. Selling, general and administrative expenses as a percentage of
total revenues increased to 14.5% in 1999 from 9.6% in 1998. The increase in
selling, general and administrative expenses as a percentage of total revenues
was primarily due to the reduction in revenues resulting from lower sales of
whole aircraft and engines in connection with the Company's proposed initiative
to spin-off part of the lease portfolio, coupled with the increase in
professional service fees and bad debt expense. 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 58% to $1.4 million
for the three months ended September 30, 1999 as compared to $0.9 million for
the three months ended September 30, 1998; as a percentage of total revenues,
depreciation and amortization expense increased to 2.0% during the three months
ended September 30, 1999 from 1.7% during the same period in 1998. The increase
in depreciation and amortization expense was primarily due to amortization of
goodwill related to the Solair and Certified acquisitions in addition to
depreciation of the Company's new headquarters facility which was completed in
December 1998.
Interest expense (net of interest income) increased by 118% to $5.9
million for the three months ended September 30, 1999 as compared to $2.7
million for the three months ended September 30, 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 Solair and Certified and growth
in inventories and equipment under operating leases. Except for the expected
impact on interest expense of the proposed off-balance sheet initiative for the
Company's aircraft and engine lease portfolio discussed in the liquidity and
capital resources section below, 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.
The Company's effective tax rate for the three months ended September
30, 1999 was 37.1% as compared to 37.2% for the three months ended September 30,
1998.
Net income decreased by 45% to $3.4 million for the three months ended
September 30, 1999 as compared to $6.2 million for the three months ended
September 30, 1998. Basic earnings per common share decreased by 45% to $0.29
for the three months ended September 30, 1999 as compared to $0.53 for the three
months ended September 30, 1998. Diluted earnings per common share decreased by
36% to $0.27 for the three months ended September 30, 1999 as compared to $0.42
for the three months ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net sales of aircraft and engine parts increased by 109% to $205.6
million for the nine months ended September 30, 1999 as compared to $98.3
million for the nine months ended September 30, 1998. The increase in net sales
of aircraft and engine parts was primarily due to (i) growth in part sales of
approximately $39.5 million due to additional inventory availability as a result
of the Company's increased capital resources as well as the acquisitions of ITC,
Aerocar and Certified being combined into Kellstrom, (ii) incremental sales of
approximately $37.9 million related to the acquisition of Solair, and (iii)
growth in whole aircraft and engine sales of approximately $29.9 million due to
additional inventory availability as a result of the Company's increased capital
resources, an increase in the Company's lease portfolio, as well as the
acquisitions of ITC and Aerocar
13
<PAGE> 14
being combined into Kellstrom. In connection with the proposed off-balance sheet
initiative for the Company's aircraft and engine lease portfolio discussed in
the liquidity and capital resources section below, the Company expects sales of
whole aircraft and engines will decrease in the future.
Rental revenues increased by 49% to $32.4 million for the nine months
ended September 30, 1999 as compared to $21.7 million for the nine months ended
September 30, 1998. The increase in rental revenues was primarily due to the
increase in the Company's aircraft and engine lease portfolio offset by slightly
higher levels of idle equipment. In connection with the proposed off-balance
sheet initiative for the Company's aircraft and engine lease portfolio discussed
in the liquidity and capital resources section below, the Company expects rental
revenues will decrease in the future.
Cost of goods sold increased by 113% to $139.9 million for the nine
months ended September 30, 1999 as compared to $65.6 million for the nine months
ended September 30, 1998. Gross profit margin on aircraft and engine part sales
decreased to 32.0% for the nine months ended September 30, 1999 from 33.2%
during the same period in 1998. 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 74% to
$20.6 million for the nine months ended September 30, 1999 as compared to $11.8
million for the nine months ended September 30, 1998. Gross profit margin on
rental revenue decreased to 36.4% for the nine months ended September 30, 1999
from 45.5% during the same period in 1998. The decrease in the gross profit
margin was primarily due to a continued shift in the Company's lease portfolio
to longer term leases and newer equipment as well as the impact of depreciation
expense incurred in connection with the slightly higher levels of idle
equipment. In connection with the proposed off-balance sheet initiative for the
Company's aircraft and engine lease portfolio discussed in the liquidity and
capital resources section below, the Company expects depreciation of equipment
under operating leases will decrease in the future.
Selling, general and administrative expenses increased by 129% to $29.4
million for the nine months ended September 30, 1999 as compared to $12.8
million for the nine months ended September 30, 1998. The increase in selling,
general and administrative expenses was primarily due to (i) the acquisitions of
ITC, Aerocar, Solair and Certified being combined into Kellstrom, (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 aircraft and
engine component transactions, (iii) increased professional service fees
incurred in connection with (a) the design of the Company's new management
information system and (b) pre-settlement legal fees incurred in connection with
defending the lawsuit brought by the Estate of the late Co-Chairman of the
Company and (iv) an increase in bad debt expense as a result of the expansion of
the Company's customer base. Selling, general and administrative expenses as a
percentage of total revenues increased to 12.4% for the nine month period ended
September 30, 1999, as compared to 10.7% for the nine month period ended
September 30, 1998. The increase in selling, general and administrative expenses
as a percentage of total revenues was primarily due to the reduction in revenues
resulting from lower sales of whole aircraft and engines in connection with the
Company's proposed initiative to spin-off part of the lease portfolio, coupled
with the increase in professional service fees and bad debt expense offset by
economies of scale and operating efficiencies derived from the consolidation of
operations related to completed acquisitions. 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 82% to $3.9 million
for the nine months ended September 30, 1999 as compared to $2.1 million for the
nine months ended September 30, 1998; however, as a percentage of total
revenues, depreciation and amortization expense decreased to 1.6% during the
nine months ended September 30, 1999 from 1.8% during the same period in 1998.
The increase in depreciation and amortization expense was primarily due to
amortization of goodwill related to the ITC, Aerocar, Solair and Certified
acquisitions in addition to depreciation of the Company's new headquarters
facility which was completed in December 1998.
Other non-recurring expenses for the nine months ended September 30,
1999 reflect a $2.2 million charge to fulfill the Company's obligation under
the settlement of a lawsuit brought by the Estate of the late Co-Chairman of the
Company, with respect to, among other things, a claim alleging entitlement to a
stock option grant in late 1996, and for accrued legal expenses incurred in
connection with the settlement.
14
<PAGE> 15
Interest expense (net of interest income) increased by 116% to $15.3
million for the nine months ended September 30, 1999 as compared to $7.1 million
for the nine months ended September 30, 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, Solair and Certified and growth in
inventories and equipment under operating leases. Except for the expected impact
on interest expense of the off-balance sheet initiative for the Company's
aircraft and engine lease portfolio discussed in the liquidity and capital
resources section below, 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.
The Company's effective tax rate for the nine months ended September
30, 1999 was 37.8% as compared to 37.3% for the nine months ended September 30,
1998. The higher 1999 effective tax rate resulted from higher non-deductible
expenses incurred primarily in connection with the acquisition of Solair.
Net income increased by 29% to $16.6 million for the nine months ended
September 30, 1999 as compared to $12.8 million for the nine months ended
September 30, 1998. Basic earnings per common share increased by 5% to $1.40 for
the nine months ended September 30, 1999 as compared to $1.34 for the nine
months ended September 30, 1998. Diluted earnings per common share increased by
10% to $1.17 for the nine months ended September 30, 1999 as compared to $1.06
for the nine months ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's liquidity and capital resources
included cash and cash equivalents of $7.2 million and working capital of $315.8
million. At September 30, 1999, total outstanding debt was $335.4 million as
compared to $239.9 million as of December 31, 1998. As of September 30, 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 $181.8 million was outstanding and $25.0
million was available.
Cash flow used in operating activities for the nine months ended
September 30, 1999 was $52.2 million compared with $66.6 million for the nine
months ended September 30, 1998. The primary uses of cash for operating
activities were to support increases in inventories and equipment under
operating leases of $39.6 million and $39.1 million, respectively, to support
the Company's growth and an increase in accounts receivable of $12.8 million due
to the overall growth of the Company and the acquisition of Certified in April
of 1999. The primary sources of cash from operating activities for the nine
months ended September 30, 1999 were net income of $16.6 million, plus non-cash
expenses related to depreciation and amortization of $24.5 million.
Cash flow used for investing activities for the nine months ended
September 30, 1999 was $34.9 million compared with $68.1 million for the nine
months ended September 30, 1998. The primary uses of cash for investing
activities was attributable to the acquisition of Certified for $16.7 million, a
$2.9 million purchase price adjustment payment related to the Solair
acquisition, earn-out payments in connection with the acquisitions of Aero
Support and ITC of $5.1 million in the aggregate and purchases of property,
plant and equipment of $10.2 million.
Cash flow provided by financing activities for the nine months ended
September 30, 1999 was $93.2 million compared with $135.1 million for the nine
months ended September 30, 1998. The primary source of cash from financing
activities was an increase in borrowings under the Company's line of credit
agreement of $97.9 million offset by debt payments of $5.0 million. The increase
in borrowings under the line of credit agreement 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
headquarters facility.
The Company is evaluating the possibility of establishing partnerships
with financial/leasing organizations for the continued expansion of its aircraft
and engine sales and leasing business. Under the proposed initiative, the
Company expects that it would retain a minority ownership stake in the proposed
partnerships and continue to
15
<PAGE> 16
manage the operations of those partnerships. This action, if consummated, could
give the Company a cash infusion which it expects would be used to pay down a
substantial portion of its line of credit with its commercial banks. It is
expected to take place if and when one or more appropriate financial/leasing
organizations are identified and transaction terms are finalized.
The Company expects that the proposed initiative, if implemented, would
have the effect of reducing debt and interest expense, improving cash flow, and
freeing up capital for strategic business initiatives. While the Company would
forego the revenues and some of the profits expected to be generated by its
existing lease portfolio, the Company would continue to receive a pro-rata share
of any partnership profits.
The Company intends to take advantage of growth opportunities that are
consistent with the Company's expansion and profit objectives. It is anticipated
that such 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
facility, and through 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 have executed 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 addressed 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 determined were not currently Year 2000 compliant,
implementation of the required changes was completed during the third quarter of
fiscal 1999.
Incremental costs, which include consulting costs and costs associated
with internal resources to modify existing systems in order to achieve Year 2000
compliance, were charged to expense as incurred. The Company's cost of making
the required system changes did not exceed $250,000.
With respect to the Company's customers, suppliers and vendors, the
Company has contacted customers, suppliers and vendors and has assessed 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
16
<PAGE> 17
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 were
completed during the third quarter of fiscal 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
have been developed and were completed during the third quarter of fiscal 1999.
These plans include development of backup procedures, identification of
alternate suppliers, possible increases in inventory levels and other
appropriate measures.
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 consolidated 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 consolidated 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. In June 1999, the FASB issued SFAS
No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133" which changed the effective
date of SFAS No. 133 to fiscal years beginning after June 15, 2000. 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 September 30, 1999, the Company had
approximately $181.8 million in variable rate indebtedness outstanding under the
credit facility, representing approximately 54% of the Company's total debt
outstanding, at an average interest rate of 7.6%. 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.
17
<PAGE> 18
PART II
ITEM 1. LEGAL PROCEEDINGS
As previously reported on July 7, 1999, the Company settled a lawsuit
brought by the Estate of the late Mr. Joram Rosenfeld (a former
Co-Chairman of the Company) with respect to, among other things, a
claim alleging entitlement to a stock option grant in late 1996. The
settlement was entered into in order to limit the expense of
litigating the suit as well as the protracted use of management's time
and related corporate resources. For the second quarter ended June 30,
1999, the Company recorded a one-time pre-tax charge of approximately
$2.2 million to fulfill its obligation under the settlement and for
accrued legal expenses.
The Company is not aware of any 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 or otherwise. The Company cannot
determine whether such actions would have a material impact on the
financial condition, results of operations or cash flows of the
Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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
nine months ended September 30, 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 nine months ended
September 30, 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 nine months ended September
30, 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
acquisitions 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.
18
<PAGE> 19
KELLSTROM INDUSTRIES, INC.
Pro Forma Condensed Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1999 1998
------------ ------------
Actual Pro Forma
------------ ------------
<S> <C> <C>
Sales of aircraft and engine parts, net $205,638,182 $157,458,920
Rental revenues 32,375,428 25,688,831
------------ ------------
Total revenues 238,013,610 183,147,751
Cost of goods sold 139,907,012 107,214,699
Depreciation of equipment under operating leases 20,589,612 12,865,250
Inventory write-down -- 5,628,643
Selling, general and administrative expenses 29,399,496 27,371,648
Depreciation and amortization 3,916,919 3,176,682
Other non-recurring expenses 2,200,000 --
------------ ------------
Total operating expenses 196,013,039 156,256,922
Operating income 42,000,571 26,890,829
Interest expense, net of interest income 15,318,253 12,403,081
------------ ------------
Income before income taxes 26,682,318 14,487,748
Income taxes 10,089,643 5,417,441
------------ ------------
Net income $ 16,592,675 $ 9,070,307
============ ============
Earnings per common share - basic $ 1.40 $ 0.79
============ ============
Earnings per common share - diluted $ 1.17 $ 0.56
============ ============
Weighted average number of common shares
outstanding - basic 11,836,984 11,517,668
============ ============
Weighted average number of common shares
outstanding - diluted 16,672,356 16,095,723
============ ============
</TABLE>
Unaudited - See accompanying notes to pro forma condensed
consolidated statements of earnings.
19
<PAGE> 20
KELLSTROM INDUSTRIES, INC.
Pro Forma Condensed Consolidated Statements of Earnings
Nine Months Ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
HISTORICAL PRO FORMA ADJUSTMENTS
-------------------------------------------------- --------------------------------------
KELLSTROM ITC AEROCAR SOLAIR (A) (B) (C) PRO FORMA
------------ ---------- ---------- ------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales of aircraft and
engine parts, net $ 98,263,721 $8,036,576 $3,458,512 $ 47,700,111 $ -- $ -- $ 157,458,920
Rental revenues 21,696,484 538,306 3,454,041 -- -- -- 25,688,831
------------ ---------- ---------- ------------ ----------- ----------- ---------- ------------
Total revenues 119,960,205 8,574,882 6,912,553 47,700,111 -- -- -- 183,147,751
Cost of goods sold 65,601,702 4,997,742 1,724,577 34,890,678 -- -- 107,214,699
Depreciation of equipment
under operating leases 11,818,038 289,317 757,895 -- -- -- 12,865,250
Inventory write-down -- -- -- 5,628,643 -- -- -- 5,628,643
Selling, general and
administrative expenses 12,837,670 640,591 1,443,646 13,029,902 (43,161) (132,000) (405,000) 27,371,648
Depreciation and
amortization 2,148,240 3,498 -- 342,738 40,785 431,194 210,227 3,176,682
------------ ---------- ---------- ------------ ----------- ----------- ---------- ------------
Total operating expenses 92,405,650 5,931,148 3,926,118 53,891,961 (2,376) 299,194 (194,773) 156,256,922
Operating income 27,554,555 2,643,734 2,986,435 (6,191,850) 2,376 (299,194) 194,773 26,890,829
Interest expense, net
interest income 7,099,434 160,492 87,257 4,093,837 (160,492) (219,633) (4,259,695) 12,403,081
548,851 2,061,530 2,991,500
------------ ---------- ---------- ------------ ----------- ----------- ---------- ------------
Income before income taxes 20,455,121 2,483,242 2,899,178 (10,285,687) (385,983) (2,141,091) 1,462,968 14,487,748
Income taxes 7,629,130 -- -- -- 781,758 297,155 (3,290,602) 5,417,441
------------ ---------- ---------- ------------ ----------- ----------- ---------- ------------
Net income $ 12,825,991 $2,483,242 $2,899,178 $(10,285,687) $(1,167,741) $(2,438,246) $4,753,570 $ 9,070,307
============ ========== ========== ============ =========== =========== ========== ============
Earnings per common
share - basic $ 1.34 $ 0.79
============ ============
Earnings per common
share - diluted $ 1.06 $ 0.56
============ ============
Weighted average number
of common shares
outstanding - basic 9,553,238 11,517,668
============ ============
Weighted average number
of common shares
outstanding - diluted 14,131,293 16,095,723
============ ============
</TABLE>
Unaudited - See accompanying notes to pro forma condensed
consolidated statement of earnings.
20
<PAGE> 21
KELLSTROM INDUSTRIES, INC.
Notes to Pro Forma Condensed Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
(A) For the purpose of presenting the pro forma consolidated statements
of earnings, the following adjustments have been made for the ITC acquisition:
Nine Months Ended
September 30, 1998
------------------
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)
==================
(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:
Nine Months Ended
September 30, 1998
------------------
Increase (decrease) in income:
Elimination of Aerocar Aviation and Aerocar Parts officer's salary and bonus $ 132,000
Amortization of goodwill and non-compete related to Aerocar Aviation and Aerocar Parts acquisition (431,194)
Reduction in interest expense due to pay-off of debt on Aerocar Aviation and Aerocar Parts line of credit 219,633
Increase in interest expense from acquisition debt (2,061,530)
------------------
(2,141,091)
Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (297,155)
------------------
Net adjustments $ (2,438,246)
==================
(C) For the purpose of presenting the pro forma consolidated statements of earnings,
the following adjustments have been made for the Solair acquisition:
Nine Months Ended
September 30, 1998
------------------
Increase (decrease) in income:
Reduction in selling, general and administrative expenses for elimination of Banner management fees $ 405,000
Amortization of goodwill related to Solair acquisition (210,227)
Reduction in interest expense due to pay-off of Solair debt 4,259,695
Increase in interest expense from acquisition debt (2,991,500)
------------------
1,462,968
Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes 3,290,602
------------------
Net adjustment $ 4,753,570
==================
</TABLE>
21
<PAGE> 22
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 July 7, 1999,
which included a copy of a press release announcing the
settlement of a lawsuit brought by the Estate of the late
Co-Chairman of the Company.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
November 15, 1999 KELLSTROM INDUSTRIES, INC.
(Registrant)
/s/ Michael W. Wallace
--------------------------------
Michael W. Wallace
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
23
<PAGE> 24
Exhibit Index
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
KELLSTROM INDUSTRIES, INC. BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE
PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,210
<SECURITIES> 0
<RECEIVABLES> 48,254
<ALLOWANCES> 6,784
<INVENTORY> 202,897
<CURRENT-ASSETS> 357,921
<PP&E> 25,412
<DEPRECIATION> 4,446
<TOTAL-ASSETS> 547,877
<CURRENT-LIABILITIES> 42,135
<BONDS> 140,250
0
0
<COMMON> 12
<OTHER-SE> 167,249
<TOTAL-LIABILITY-AND-EQUITY> 547,877
<SALES> 238,014
<TOTAL-REVENUES> 238,014
<CGS> 160,497
<TOTAL-COSTS> 196,013
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,318
<INCOME-PRETAX> 26,682
<INCOME-TAX> 10,090
<INCOME-CONTINUING> 16,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,593
<EPS-BASIC> 1.40
<EPS-DILUTED> 1.17
</TABLE>
