<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 June 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 July 31, 1999.
1
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KELLSTROM INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C> <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.............................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................ 16
PART II
-------
Item 1. Legal Proceedings.................................................................. 17
Item 2. Changes in Securities and Use of Proceeds ......................................... 17
Item 3. Defaults Upon Senior Securities.................................................... 17
Item 4. Matters Submitted to a Vote of Security Holders.................................... 17
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)
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents 2,197,187 $ 1,107,102
Trade receivables, net of allowances for returns and
doubtful accounts of $6,700,239 and $5,417,996
for 1999 and 1998, respectively 54,379,437 31,367,337
Inventories 189,909,954 149,957,320
Equipment under short-term operating leases 72,777,475 77,201,289
Prepaid expenses 9,573,786 3,166,158
Deferred tax assets 7,780,015 9,730,577
------------- -------------
Total current assets 336,617,854 272,529,783
Equipment under long-term operating leases, net 78,067,310 63,323,008
Property, plant and equipment, net 19,681,057 16,755,185
Goodwill, net 80,513,857 71,501,153
Other assets 9,662,483 9,941,367
------------- -------------
Total Assets $ 524,542,561 $ 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 22,898,906 13,333,709
Accrued expenses 20,511,744 25,715,518
Income taxes payable 2,622,027 779,972
------------- -------------
Total current liabilities 48,378,597 42,147,181
Long-term debt, less current maturities 166,623,919 97,336,821
Convertible subordinated notes 140,250,000 140,250,000
Deferred tax liabilities 5,117,255 4,557,256
------------- -------------
Total Liabilities 360,369,771 284,291,258
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 121,103,655 120,007,268
Retained earnings 44,314,603 31,133,280
Loans receivable from directors and officers (1,256,492) (1,393,072)
Accumulated other comprehensive income (887) --
------------- -------------
Total Stockholders' Equity 164,172,790 149,759,238
------------- -------------
Total Liabilities and Stockholders' Equity $ 524,542,561 $ 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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales of aircraft and engine parts, net $ 77,318,790 $ 30,177,845 $146,030,885 $ 55,513,541
Rental revenues 10,908,109 7,885,272 21,252,023 11,640,147
------------ ------------ ------------ ------------
Total revenues 88,226,899 38,063,117 167,282,908 67,153,688
Cost of goods sold 52,126,790 20,325,614 99,510,109 36,993,778
Depreciation of equipment under operating leases 6,887,988 4,120,927 13,184,407 6,164,083
Selling, general and administrative expenses 10,670,399 4,320,998 19,165,909 7,754,953
Depreciation and amortization 1,309,764 668,079 2,511,164 1,261,302
Other non-recurring expenses 2,200,000 -- 2,200,000 --
------------ ------------ ------------ ------------
Total operating expenses 73,194,941 29,435,618 136,571,589 52,174,116
Operating income 15,031,958 8,627,499 30,711,319 14,979,572
Interest expense, net of interest income 5,294,802 2,765,934 9,452,475 4,403,888
------------ ------------ ------------ ------------
Income before income taxes 9,737,156 5,861,565 21,258,844 10,575,684
Income taxes 3,704,161 2,180,501 8,077,521 3,953,010
------------ ------------ ------------ ------------
Net income $ 6,032,995 $ 3,681,064 $ 13,181,323 $ 6,622,674
============ ============ ============ ============
Earnings per common share - basic $ 0.51 $ 0.42 $ 1.12 $ 0.79
============ ============ ============ ============
Earnings per common share - diluted $ 0.41 $ 0.34 $ 0.88 $ 0.63
============ ============ ============ ============
Weighted average number of common shares outstanding
- - basic 11,826,704 8,751,400 11,799,984 8,435,039
============ ============ ============ ============
Weighted average number of common shares outstanding
- - diluted 17,724,910 12,642,833 17,772,912 12,222,479
============ ============ ============ ============
</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>
Six Months Ended June 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,181,323 $ 6,622,674
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 2,511,164 1,261,302
Depreciation of equipment under operating leases 13,184,407 6,164,083
Amortization of deferred financing costs 1,004,174 532,956
Deferred income taxes (1,605,508) 521,420
Loss on sales of investment securities -- 18,626
Changes in operating assets and liabilities:
Increase in trade receivables, net (18,941,485) (1,414,612)
Increase in inventories (26,348,165) (28,952,244)
Increase in equipment under operating leases (23,504,895) (43,229,961)
Decrease (increase) in prepaid expenses and other current assets (5,953,767) 1,552,028
Decrease (increase) in other assets (284,924) 104,674
Increase (decrease) in accounts payable 4,906,947 (151,401)
Increase (decrease) in accrued expenses (278,072) 463,548
Increase in income taxes payable 1,418,620 --
------------- -------------
Net cash used in operating activities (40,710,181) (56,506,907)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired (16,718,685) (62,861,587)
Acquisition earn-out payments (4,932,999) --
Purchase of property, plant and equipment (3,951,369) (4,067,276)
Proceeds from sales of property, plant and equipment 56,763 --
Proceeds from sales of investment securities -- 710,079
------------- -------------
Net cash used in investing activities (25,546,290) (66,218,784)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit agreement 71,633,019 (8,403,611)
Debt repayment, including capital lease obligation (5,045,207) (4,582,080)
Proceeds from the issuance of common stock 1,096,536 68,022,433
Proceeds from the issuance of convertible subordinated notes -- 72,750,000
Proceeds from repayment of loans to directors and officers 136,580 (660,757)
Payment of deferred financing costs (474,372) (2,813,058)
------------- -------------
Net cash provided by financing activities 67,346,556 124,312,927
------------- -------------
NET INCREASE IN CASH & CASH EQUIVALENTS 1,090,085 1,587,236
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 1,107,102 462,676
------------- -------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 2,197,187 $ 2,049,912
============= =============
</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>
Six Months Ended June 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 $ -- $ 287,000
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,194,567 $ 4,107,613
=========== ===========
Income taxes $ 7,840,974 $ 4,483,105
=========== ===========
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 9,958,109 33,363,315
Other assets 85,280 158,703
----------- -----------
Total assets $27,082,431 $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 16,718,685 64,266,587
Less warrants issued to seller -- 1,405,000
----------- -----------
Net cash used in acquisitions $16,718,685 $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 June 30, 1999, the
condensed consolidated results of operations for the three and six
month periods ended June 30, 1999 and 1998, and the condensed
consolidated statements of cash flows for the six month periods ended
June 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.
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 (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 six month periods ended
June 30, 1999 and 1998 were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 6,032,995 $ 3,681,064 $13,181,323 $ 6,622,674
Income adjustment relating to reduction of debt
based on the if converted method 1,216,557 592,578 2,433,113 1,077,734
----------- ----------- ----------- -----------
Net income available to common and
common equivalent shares $ 7,249,552 $ 4,273,642 $15,614,436 $ 7,700,408
=========== =========== =========== ===========
Weighted average number of common shares
outstanding - basic 11,826,704 8,751,400 11,799,984 8,435,039
Dilutive common stock equivalents from stock
options and warrants based on the treasury
stock method 1,280,724 1,594,464 1,355,446 1,657,137
Dilutive convertible subordinated notes based
on the if converted method 4,617,482 2,296,969 4,617,482 2,130,303
----------- ----------- ----------- -----------
Weighted average number of common shares
outstanding - diluted 17,724,910 12,642,833 17,772,912 12,222,479
=========== =========== =========== ===========
</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 six month periods ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Commercial engine $ 67,114,838 $ 33,532,408 $122,293,942 $ 57,065,585
Defense 10,324,140 4,530,709 19,828,462 10,088,103
Avionics and rotables 10,787,921 -- 25,160,504 --
------------ ------------ ------------ ------------
Total revenue $ 88,226,899 $ 38,063,117 $167,282,908 $ 67,153,688
============ ============ ============ ============
GROSS MARGIN
Commercial engine $ 22,700,239 $ 12,081,359 $ 41,201,263 $ 20,551,197
Defense 3,677,465 1,535,217 7,141,323 3,444,630
Avionics and rotables 2,834,417 -- 6,245,806 --
------------ ------------ ------------ ------------
Total gross margin $ 29,212,121 $ 13,616,576 $ 54,588,392 $ 23,995,827
============ ============ ============ ============
</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 six month periods ended June 30, 1999 and 1998 was as
follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 6,032,995 $ 3,681,064 $ 13,181,323 $ 6,622,674
Unrealized gain on investment securities, net of taxes -- (16,593) -- 343,934
Foreign currency translation adjustments 31,178 -- (887) --
------------ ------------ ------------ ------------
Other comprehensive income, net of taxes 31,178 (16,593) (887) 343,934
------------ ------------ ------------ ------------
Total Comprehensive income $ 6,064,173 $ 3,664,471 $ 13,180,436 $ 6,966,608
============ ============ ============ ============
</TABLE>
9
<PAGE> 10
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.
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.
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<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 six
month periods ended June 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 June 30, Six Months Ended June 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Sales of aircraft and engine parts, net 87.6% 79.3% 87.3% 82.7%
Rental revenues 12.4% 20.7% 12.7% 17.3%
Total revenues 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Cost of goods sold 59.1% 53.4% 59.4% 55.1%
Depreciation of equipment under operating leases 7.8% 10.8% 7.9% 9.2%
Selling, general and administrative expenses 12.1% 11.4% 11.5% 11.5%
Depreciation and amortization expense 1.5% 1.8% 1.5% 1.9%
Other non-recurring expenses 2.5% 0.0% 1.3% 0.0%
Total operating expenses 83.0% 77.3% 81.6% 77.7%
Operating income 17.0% 22.7% 18.4% 22.3%
Interest expense (net of interest income) 6.0% 7.3% 5.7% 6.6%
Income before income taxes 11.0% 15.4% 12.7% 15.7%
Income taxes 4.2% 5.7% 4.8% 5.9%
Net income 6.8% 9.7% 7.9% 9.9%
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Net sales of aircraft and engine parts increased by 156% to $77.3
million for the three months ended June 30, 1999 as compared to $30.2 million
for the three months ended June 30, 1998. The increase in net sales of aircraft
and engine parts was primarily due to (i) growth of sales of approximately $36.4
million due to additional inventory availability as a result of the Company's
increased capital resources as well as the acquisitions of Aerocar and Certified
being combined into Kellstrom, and (ii) incremental sales of approximately $10.8
million related to the acquisition of Solair.
Rental revenues increased by 38% to $10.9 million for the three months
ended June 30, 1999 as compared to $7.9 million for the three months ended June
30, 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 acquisition of Aerocar 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 rental revenues will decrease in
the future.
Cost of goods sold increased by 156% to $52.1 million for the three
months ended June 30, 1999 as compared to $20.3 million for the three months
ended June 30, 1998. The increase in cost of goods sold was primarily due to
increased sales volume across all product lines. Gross profit margin on aircraft
and engine part sales was unchanged for the three months ended June 30, 1999 at
32.6%, as compared with the three months ended June 30, 1998. The stable gross
profit margin reflects improved margins from the Company's defense division
offset by expected lower margins from the Solair division.
Depreciation of equipment under operating leases increased by 67% to
$6.9 million for the three months ended June 30, 1999 as compared to $4.1
million for the three months ended June 30, 1998. The increase in depreciation
of equipment under operating leases was primarily due to the increase in rental
revenues. Gross profit margin on rental revenues decreased to 36.9% in 1999 from
47.7% in 1998. The decrease in the gross profit margin was primarily due to a
continued shift in the Company's lease portfolio to medium term leases. 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.
12
<PAGE> 13
Selling, general and administrative expenses increased by 147% to $10.7
million for the three months ended June 30, 1999 as compared to $4.3 million for
the three months ended June 30, 1998. The increase in selling, general and
administrative expenses was primarily due to (i) the acquisitions of 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 whole engine and engine component
transactions and (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 described below. Selling, general and administrative expenses as a
percentage of total revenues increased to 12.1% in 1999 from 11.4% in 1998. The
increase in selling, general and administrative expenses as a percentage of
total revenues was primarily due to the increase in professional service fees as
well as an increase in bad debt expense as a result of the expansion of the
Company's customer base. 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 96% to $1.3 million
for the three months ended June 30, 1999 as compared to $0.7 million for the
three months ended June 30, 1998; however, as a percentage of total revenues,
depreciation and amortization expense decreased to 1.5% in 1999 from 1.8% in
1998. The increase in depreciation and amortization expense was primarily due to
amortization of goodwill related to the 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 three months ended June 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.
Interest expense (net of interest income) increased by 91% to $5.3
million for the three months ended June 30, 1999 as compared to $2.8 million for
the three months ended June 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 June 30,
1999 was 38.0% as compared to 37.2% for the three months ended June 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 64% to $6.0 million for the three months ended
June 30, 1999 as compared to $3.7 million for the three months ended June 30,
1998. Basic earnings per common share increased by 21% to $0.51 for the three
months ended June 30, 1999 as compared to $0.42 for the three months ended June
30, 1998. Diluted earnings per common share increased by 21% to $0.41 for the
three months ended June 30, 1999 as compared to $0.34 for the three months ended
June 30, 1998.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net sales of aircraft and engine parts increased by 163% to $146.0
million for the six months ended June 30, 1999 as compared to $55.5 million for
the three months ended June 30, 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, Aerocar and
Certified being combined into Kellstrom, and (ii) incremental sales of
approximately $25.2 million related to the acquisition of Solair.
13
<PAGE> 14
Rental revenues increased by 83% to $21.3 million for the six months
ended June 30, 1999 as compared to $11.6 million for the six months ended June
30, 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. 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 169% to $99.5 million for the six
months ended June 30, 1999 as compared to $37.0 million for the six months ended
June 30, 1998. The increase in cost of goods sold was primarily due to increased
sales volume across all product lines. Gross profit margin on aircraft and
engine part sales decreased to 31.9% in 1999 from 33.4% 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 114% to
$13.2 million for the six months ended June 30, 1999 as compared to $6.2 million
for the six months ended June 30, 1998. The increase in depreciation of
equipment under operating leases was primarily due to the increase in rental
revenues. Gross profit margin on rental revenue decreased to 38.0% in 1999 from
47.0% in 1998. The decrease in the gross profit margin was primarily due to a
continued shift in the Company's lease portfolio to medium term leases. 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 147% to $19.2
million for the six months ended June 30, 1999 as compared to $7.8 million for
the six months ended June 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 whole engine and engine
component transactions and (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 described above. Selling, general and administrative expenses as a
percentage of total revenues remained unchanged at 11.5% for the six month
period ended June 30, 1999, as compared to the six month period ended June 30,
1998. Selling, general and administrative expenses as a percentage of total
revenues was negatively impacted by an increase in professional service fees as
well as an increase in bad debt expense as a result of the expansion of the
Company's customer base 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 99% to $2.5 million
for the six months ended June 30, 1999 as compared to $1.3 million for the six
months ended June 30, 1998; however, as a percentage of total revenues,
depreciation and amortization expense decreased to 1.5% in 1999 from 1.9% 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 six months ended June 30, 1999
reflects the aforementioned $2.2 million charge to fulfill the Company's
obligation under the settlement of a lawsuit.
Interest expense (net of interest income) increased by 115% to $9.5
million for the six months ended June 30, 1999 as compared to $4.4 million for
the six months ended June 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
14
<PAGE> 15
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 six months ended June 30, 1999
was 38.0% as compared to 37.4% for the six months ended June 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 99% to $13.2 million for the six months ended
June 30, 1999 as compared to $6.6 million for the six months ended June 30,
1998. Basic earnings per common share increased by 42% to $1.12 for the six
months ended June 30, 1999 as compared to $0.79 for the six months ended June
30, 1998. Diluted earnings per common share increased by 40% to $0.88 for the
six months ended June 30, 1999 as compared to $0.63 for the six months ended
June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES.
As of June 30, 1999, the Company's liquidity and capital resources
included cash and cash equivalents of $2.2 million and working capital of $288.2
million. At June 30, 1999, total outstanding debt was $309.2 million as compared
to $239.9 million as of December 31, 1998. As of June 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 $155.6 million was outstanding and $45.6 million was available.
Cash flow used in operating activities for the six months ended June
30, 1999 was $40.7 million compared with $56.5 million for the six months ended
June 30, 1998. The primary uses of cash for operating activities was due to
increases in inventories and equipment under operating leases of $26.3 million
and $23.5 million, respectively, to support the Company's growth and an increase
in accounts receivable of $18.9 million due to a larger portion of the Company's
sales occurring during the latter half of the quarter. The primary sources of
cash from operating activities for the six months ended June 30, 1999 was due to
net income of $13.2 million, plus non-cash expenses related to depreciation and
amortization of $15.7 million.
Cash flow used for investing activities for the six months ended June
30, 1999 was $25.5 million compared with $66.2 million for the six months ended
June 30, 1998. The primary uses of cash for investing activities was
attributable to the acquisition of Certified for $16.7 million, earn-out
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 of $4.0
million.
Cash flow provided by financing activities for the six months ended
June 30, 1999 was $67.3 million compared with $124.3 million for the six months
ended June 30, 1998. The primary source of cash from financing activities was an
increase in borrowings under the Company's line of credit agreement of $71.6
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 plans to establish 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 manage the operations of those partnerships. This
action, which 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 commercial
banks, is expected to take place over the course of the third and fourth
quarters of this year.
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
15
<PAGE> 16
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. 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 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
16
<PAGE> 17
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.
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 June 30, 1999, the Company had approximately
$155.6 million in variable rate indebtedness outstanding under the credit
facility, representing approximately, 50% of the Company's total debt
outstanding, at an average interest rate of 7.2%. 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
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.
(a) The Annual Meeting of Stockholders of Kellstrom Industries,
Inc. was held on June 4, 1999 pursuant to a proxy statement
dated April 30, 1999.
(b) The following matters were submitted to a vote at the meeting:
(1) Election of the following nominees as Class I directors for
a two year term:
<TABLE>
<CAPTION>
Director's Name: Niv Harizman General William Lyon David Jan Mitchell
------------ -------------------- ------------------
<S> <C> <C> <C>
Votes in favor: 9,093,967 9,094,712 9,097,357
Votes against: 0 0 0
Abstentions: 39,546 38,801 39,156
</TABLE>
(2) Consider and vote upon a proposal to approve and adopt the
Company's 1998 Stock Option Plan providing for the issuance
of stock options to newly-hired employees and non-employee
directors:
Votes in favor: 6,601,628
Votes against: 2,513,544
Abstentions: 18,341
18
<PAGE> 19
(3) Ratify the reappointment of KPMG LLP as the Company's
independent certified public accountants:
Votes in favor: 9,120,194
Votes against: 7,750
Abstentions: 5,566
A total of 9,133,513 shares were represented at the meeting,
constituting a quorum in accordance with the applicable provisions of
the By-laws of the Company.
ITEM 5. OTHER INFORMATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED
The condensed consolidated statement of earnings of the Company for the
six months ended June 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 six months ended June 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 six months ended June 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.
19
<PAGE> 20
KELLSTROM INDUSTRIES, INC.
Pro Forma Condensed Consolidated Statements of Earnings
(Unaudited)
Six Months Ended June 30,
---------------------------
1999 1998
------------ ------------
Actual Pro Forma
------------ ------------
Sales of aircraft and engine parts, net $146,030,885 $101,833,781
Rental revenues 21,252,023 15,632,494
------------ ------------
Total revenues 167,282,908 117,466,275
Cost of goods sold 99,510,109 71,005,344
Depreciation of equipment under operating leases 13,184,407 10,025,617
Selling, general and administrative expenses 19,165,909 17,787,944
Depreciation and amortization 2,511,164 2,073,730
Other non-recurring expenses 2,200,000 --
------------ ------------
Total operating expenses 136,571,589 100,892,635
Operating income 30,711,319 16,573,640
Interest expense, net of interest income 9,452,475 8,855,576
------------ ------------
Income before income taxes 21,258,844 7,718,064
Income taxes 8,077,521 2,896,514
------------ ------------
Net income $ 13,181,323 $ 4,821,550
============ ============
Earnings per common share - basic $ 1.12 $ 0.42
============ ============
Earnings per common share - diluted $ 0.88 $ 0.37
============ ============
Weighted average number of common shares
outstanding - basic 11,799,984 11,368,372
============ ============
Weighted average number of common shares
outstanding - diluted 17,772,912 13,026,022
============ ============
Unaudited - See accompanying notes to pro forma condensed consolidated
statements of earnings.
20
<PAGE> 21
KELLSTROM INDUSTRIES, INC.
Pro Forma Condensed Consolidated Statements of Earnings
Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------------------------------
KELLSTROM ITC AEROCAR SOLAIR
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales of aircraft and engine parts, net $ 55,513,541 $ 8,036,576 $ 3,458,512 $ 34,825,152
Rental revenues 11,640,147 538,306 3,454,041 --
------------- ------------- ------------- -------------
Total revenues 67,153,688 8,574,882 6,912,553 34,825,152
Cost of goods sold 36,993,778 4,997,742 1,724,577 27,289,247
Depreciation of equipment under operating leases 6,164,083 289,317 757,895 2,814,322
Selling, general and administrative expenses 7,754,953 640,591 1,443,646 8,393,915
Depreciation and amortization 1,261,302 3,498 -- 240,273
------------- ------------- ------------- -------------
Total operating expenses 52,174,116 5,931,148 3,926,118 38,737,757
Operating income 14,979,572 2,643,734 2,986,435 (3,912,605)
Interest expense, net of interest income 4,403,888 160,492 87,257 2,644,579
------------- ------------- ------------- -------------
Income before income taxes 10,575,684 2,483,242 2,899,178 (6,557,184)
Income taxes 3,953,010 -- -- --
------------- ------------- ------------- -------------
Net income $ 6,622,674 $ 2,483,242 $ 2,899,178 $ (6,557,184)
============= ============= ============= =============
Earnings per common share - basic $ 0.79
=============
Earnings per common share - diluted $ 0.63
=============
Weighted average number of common shares
outstanding - basic 8,435,039
=============
Weighted average number of common shares
outstanding - diluted 12,222,479
=============
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------
(A) (B) (C) PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales of aircraft and engine parts, net $ -- $ -- $ 101,833,781
Rental revenues -- -- 15,632,494
------------- ------------- ------------- -------------
Total revenues -- -- -- 117,466,275
Cost of goods sold -- -- 71,005,344
Depreciation of equipment under operating leases -- -- 10,025,617
Selling, general and administrative expenses (43,161) (132,000) (270,000) 17,787,944
Depreciation and amortization 40,785 431,194 96,678 2,073,730
------------- ------------- ------------- -------------
Total operating expenses (2,376) 299,194 (173,322) 100,892,635
Operating income 2,376 (299,194) 173,322 16,573,640
Interest expense, net of interest income (160,492) (219,633) (2,739,840) 8,855,576
548,851 2,061,530 2,068,944
------------- ------------- ------------- -------------
Income before income taxes (385,983) (2,141,091) 844,218 7,718,064
Income taxes 781,758 297,155 (2,135,409) 2,896,514
Net income $ (1,167,741) $ (2,438,246) $ 2,979,627 $ 4,821,550
============= ============= ============= =============
Earnings per common share - basic $ 0.42
=============
Earnings per common share - diluted $ 0.37
=============
Weighted average number of common shares
outstanding - basic 11,368,372
=============
Weighted average number of common shares
outstanding - diluted 13,026,022
=============
</TABLE>
Unaudited - See accompanying notes to pro forma condensed consolidated
statement of earnings.
21
<PAGE> 22
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>
Six Months Ended
June 30, 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>
Six Months Ended
June 30, 1998
-------------
<S> <C>
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)
===========
</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>
Six Months Ended
June 30, 1998
-------------
<S> <C>
Increase (decrease) in income:
Reduction in selling, general and administrative expenses for elimination of Banner management fees $ 270,000
Amortization of goodwill related to Solair acquisition (96,678)
Reduction in interest expense due to pay-off of Solair debt 2,739,840
Increase in interest expense from acquisition debt (2,068,944)
-----------
844,218
Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes 2,135,409
-----------
Net adjustment $ 2,979,627
===========
</TABLE>
22
<PAGE> 23
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.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 12, 1999 KELLSTROM INDUSTRIES, INC.
(Registrant)
/s/ Michael W. Wallace
---------------------------------
Michael W. Wallace
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
KELLSTROM INDUSTRIES, INC. BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE
PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,197
<SECURITIES> 0
<RECEIVABLES> 54,379
<ALLOWANCES> 6,700
<INVENTORY> 189,910
<CURRENT-ASSETS> 336,618
<PP&E> 19,681
<DEPRECIATION> 3,973
<TOTAL-ASSETS> 524,543
<CURRENT-LIABILITIES> 48,379
<BONDS> 140,250
0
0
<COMMON> 12
<OTHER-SE> 164,161
<TOTAL-LIABILITY-AND-EQUITY> 524,543
<SALES> 167,283
<TOTAL-REVENUES> 167,283
<CGS> 112,695
<TOTAL-COSTS> 136,572
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,452
<INCOME-PRETAX> 21,259
<INCOME-TAX> 8,078
<INCOME-CONTINUING> 13,181
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,181
<EPS-BASIC> 1.12
<EPS-DILUTED> 0.88
</TABLE>
