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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File No. 1-11775
AVIATION SALES COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 65-0665658
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6905 NW 25TH STREET, MIAMI, FLORIDA 33122
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(Address of principal executive offices) (Zip Code)
(305) 592-4055
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(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, par value $.001 per share New York Stock Exchange
Securities registered pursuant to section 12(g) of the Exchange Act:
None
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter periods 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of April 13, 2000, 15,015,317 shares of Common Stock were
outstanding and the aggregate market value (based on the closing price on the
New York Stock Exchange on April 13, 2000, which was $6.25 per share) of the
Common Stock held by non-affiliates was approximately $74.3 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for its 2000
Annual Meeting of Stockholders (which Proxy Statement will be filed on or before
120 days after the end of the Registrant's fiscal year ended December 31, 1999)
are incorporated by reference into Part III hereof. Certain exhibits listed in
Part IV of this Annual Report on Form 10-K are incorporated by reference from
prior filings made by the Registrant under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended.
PART I
ITEM 1. BUSINESS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "AVIATION SALES,"
"WE," "OUR" AND "US" IN THIS ANNUAL REPORT ON FORM 10-K INCLUDES AVIATION SALES
COMPANY AND ITS SUBSIDIARIES. THIS ANNUAL REPORT ON FORM 10-K CONTAINS OR MAY
CONTAIN FORWARD-LOOKING STATEMENTS, SUCH AS STATEMENTS REGARDING OUR GROWTH
STRATEGY AND ANTICIPATED TRENDS IN THE INDUSTRY IN WHICH WE OPERATE. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON OUR CURRENT EXPECTATIONS AND ARE SUBJECT
TO A NUMBER OF RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATING TO OUR OPERATIONS
AND RESULTS OF OPERATIONS, COMPETITIVE FACTORS, SHIFTS IN MARKET DEMAND, AND
OTHER RISKS AND UNCERTAINTIES, INCLUDING, IN ADDITION TO THOSE DESCRIBED BELOW
AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, AVAILABLE CAPITAL TO CONTINUE
TO SUPPORT OUR CURRENT OPERATIONS AND FUTURE GROWTH, OUR MAINTAINING GOOD
WORKING RELATIONSHIPS WITH OUR VENDORS AND CUSTOMERS, OUR ABILITY TO REDUCE OUR
INDEBTEDNESS FROM ITS CURRENT LEVELS THROUGH SALES OF OUR ASSETS, OUR ABILITY TO
ACQUIRE ADEQUATE INVENTORY AND TO OBTAIN FAVORABLE PRICING FOR SUCH INVENTORY,
COMPETITIVE PRICING FOR OUR PRODUCTS AND SERVICES, INCREASED COMPETITION IN THE
AIRCRAFT SPARE PARTS REDISTRIBUTION AND MAINTENANCE, REPAIR AND OVERHAUL
MARKETS, OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL IN OUR
BUSINESSES, OUR ABILITY TO CONSUMMATE SUITABLE ACQUISITIONS AND/OR TO CONTINUE
TO DEVELOP OUR BUSINESS INTERNALLY, UTILIZATION RATES FOR OUR MR&O FACILITIES,
OUR ABILITY TO EFFECTIVELY INTEGRATE ACQUISITIONS, OUR ABILITY TO EFFECTIVELY
MANAGE THE GROWTH OF OUR BUSINESS, ECONOMIC FACTORS WHICH AFFECT THE AIRLINE
INDUSTRY AND CHANGES IN GOVERNMENT REGULATIONS. SHOULD ONE OR MORE OF THESE
RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE
INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM RESULTS EXPRESSED OR
IMPLIED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US IN THIS ANNUAL REPORT ON
FORM 10-K. WE DO NOT UNDERTAKE ANY OBLIGATION TO REVISE THESE FORWARD-LOOKING
STATEMENTS TO REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
GENERAL
Aviation Sales is a leading provider of aviation inventory and
maintenance, repair and overhaul services. We believe that we are one of the
largest redistributors of aircraft spare parts in the world and the largest
independent provider of heavy maintenance services for aircraft in North
America. We sell aircraft spare parts and provide inventory management services
and aircraft maintenance, repair and overhaul services to commercial passenger
airlines, air cargo carriers, maintenance and repair facilities and other
redistributors throughout the world. We sell airframe and engine components for
commercial aircrafts, including Boeing, Lockheed and Airbus aircraft and jet
engines manufactured by Pratt & Whitney, General Electric and Rolls Royce.
We offer maintenance and repair services through our eleven repair
stations licensed by the Federal Aviation Authority (FAA). These services
include maintenance, repair and modification services for aircraft, and repair
and overhaul services on a wide range of aircraft components. We provide
inventory management services including purchasing services, repair management,
aircraft disassembly services and consignment and leasing of inventories of
aircraft parts and engines. We also manufacture various aircraft parts for sale
to original equipment manufacturers, including precision engine parts.
Our strategy is to be the vendor of choice to our customers, providing
total inventory management solutions (TIM) and total aircraft maintenance
solutions (TAM) to meet our customers' spare parts and maintenance, repair and
overhaul requirements. We believe our future growth will come from internal
growth. We also intend to continue our growth through selective acquisitions of
companies which add to or expand our existing product and service offerings once
we overcome our current liquidity situation and reduce our debt levels. We
expect to achieve internal growth through:
o increased customer penetration in existing markets;
o improved capacity utilization of our maintenance and repair
facilities; and
o continued expansion of the number of products and services
which we offer to our customers.
The services we offer allow our customers to reduce their costs by
outsourcing some or all of their maintenance, repair and overhaul functions and
maximize the value realized for their spare parts inventories by having us
manage the marketing process. As a leading redistributor of aircraft spare
parts, we are able to better service our maintenance and repair customers, due
to the timely availability of our extensive parts inventory. Similarly, as a
leading provider of maintenance and repair services, we are able to market our
aircraft spare parts to our airline customers.
INDUSTRY OVERVIEW
We believe that the annual worldwide market for aircraft spare parts is
approximately $11.0 billion, of which approximately $1.3 billion reflects annual
sales of aircraft spare parts in the redistribution market. We believe that the
total worldwide market for maintenance and repair services is approximately
$27.0 billion annually and that $5.3 billion of that amount represents
maintenance, repair and modification services being provided in North America.
We believe airlines perform approximately 75% of the North American services,
outsourcing the balance to independent providers like Aviation Sales.
Due to the trends currently affecting our industry, we believe that the
demand for maintenance and repair services from large, fully integrated
independent service providers such as Aviation Sales will continue to increase
in the future. Some of the trends currently affecting our industry include:
GROWTH IN THE MARKET FOR AIRCRAFT PARTS AND MAINTENANCE AND REPAIR
SERVICES
The Boeing 1999 Current Market Outlook report projects that:
- the worldwide fleet of commercial aircrafts will more than
double by 2018;
- the number of cargo jet aircraft will increase significantly
between 1998 and 2018; and
- the aircraft fleet will continue to age.
We believe that a combination of these factors will increase the demand
for aircraft spare parts from the redistribution market and for maintenance and
repair services.
INCREASED OUTSOURCING OF INVENTORY MANAGEMENT AND MAINTENANCE AND
REPAIR REQUIREMENTS
Airlines incur substantial expenditures in connection with fuel, labor
and aircraft ownership. Airlines have come under increasing pressure during the
last decade to reduce the costs associated with providing air transportation
services. While several of the expenditures required to operate an airline are
beyond the direct control of airline operators, such as the price of fuel and
labor costs, we believe that obtaining replacement parts from the redistribution
market and outsourcing inventory management and maintenance and repair functions
are areas in which airlines can reduce their operating costs. Outsourcing of
inventory management and maintenance and repair functions by airlines allows an
integrated service provider such as Aviation Sales to achieve economies of scale
unavailable to individual airlines and to handle these functions less
expensively and more efficiently on its customers' behalf.
REDUCTIONS IN NUMBER OF APPROVED VENDORS
In order to reduce costs and streamline decisions, airlines have been
reducing the number of their approved vendors. During the last few years,
several major airlines have reduced their supplier lists from as many as 50 to a
core group of five to ten suppliers. As a result of reductions in the supplier
base by airlines, there has been and we believe there will continue to be a
consolidation in the redistribution market.
CONSIGNMENT
Some of our customers adjust inventory levels periodically by disposing
of excess aircraft parts. Traditionally, larger airlines have used internal
sales agents to manage these dispositions. We believe that major airlines and
other owners
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of aircraft spare parts, in order to concentrate on their core businesses and to
more effectively redistribute their excess parts inventories, enter into
long-term consignment agreements with redistributors. Consigning inventories to
a redistributor like Aviation Sales allows customers to distribute their
aircraft spare parts to a larger number of prospective inventory buyers, and
allows the customers to maximize the value of their inventory. Consignment also
enables us to offer for sale a significant parts inventory at minimal capital
cost to us. Consignment agreements are generally entered into on a long-term
basis for a large group of parts or entire aircrafts which are disassembled for
sale of the individual parts. The Boeing 1999 Current Market Outlook report
projects that the operators and owners will remove approximately 2,300 aircraft
from active commercial service between 1999 and 2008 with two out of three
expected to be removed during the next five years. Many of these aircraft will
be disassembled in order to sell their parts.
COMPETITIVE STRENGTHS
We believe that our strong competitive position is based on our diverse
product and service offerings, our reputation for quality products and service
offerings, our sophisticated inventory management information systems and a
consistent record of meeting rigorous customer requirements.
DIVERSIFIED PRODUCTS AND SERVICES
We believe that the breadth of our product offerings and services,
including a wide range of aircraft parts, maintenance and repair services
and specialized manufacturing, allows us to be a vendor of choice to our
customers in a highly fragmented industry. Aviation Sales has over 1,000
customers, including commercial passenger airlines, air cargo carriers,
maintenance and repair facilities and other distributors and redistributors.
LARGE INVENTORY BASE
We believe that we have one of the largest inventories of aircraft
spare parts in the world, with over 555,000 line items currently in stock. Our
inventory supports a wide range of aircraft in the worldwide commercial fleet
including Airbus A300, A31x, A32x and A340 series aircraft, Boeing 707, 727,
737, 747, 757, 767 and 777 series aircraft, McDonnell Douglas (now part of
Boeing) DC-8, DC-9, DC-10, MD-8x and MD-11 series aircraft, and the Lockheed
L-1011 aircraft. In addition, we have parts available for a broad range of
General Electric, Pratt & Whitney and Rolls Royce engines.
PROPRIETARY MANAGEMENT INFORMATION SYSTEMS
Our proprietary management information systems (MIS) are an integral
component of our position as a leader in our industry. Documentation and
traceability of aircraft parts have become key factors in determining which
companies will be able to effectively compete in the redistribution business
because industry, regulatory and public awareness have focused on safety. The
requirement to be able to provide documentation about each part sold has also
made it more expensive for new entrants to become involved in the redistribution
market, and therefore may act as a barrier to new entrants into our market. Our
MIS systems collect and report data regarding inventory turnover, documentation,
pricing, market availability and customer demographic information. We have
pricing information on more than 3.7 million inventory line items. Access to
such information enables us to be aware of and to capitalize on the changing
trends in the marketplace. We utilize electronic data scanning and document
image storage technology for rapid and accurate retrieval of inventory
traceability documents. We intend to continue to invest in technology in order
to allow us to maintain our strength in this area.
EMPHASIS ON QUALITY
Our information systems allow us to provide documentation that enables
the aircraft parts we distribute and the maintenance we perform on them to be
traced in a manner that meets or exceeds FAA requirements. As industry,
regulatory and public awareness have focused on safety, our ability to track
this information has become important to customers.
All of our maintenance and repair facilities are licensed by the FAA.
We emphasize quality and on-time delivery to our customers.
WORLDWIDE MARKETING PRESENCE
Our international presence allows us to meet the demands of our global
customer base and to supply parts and services on a timely basis. We sell
aircraft parts to customers located in more than 100 countries and utilize sales
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representatives in 23 countries. During the years ended December 31, 1997, 1998
and 1999, 24%, 18% and 14% of our revenues were derived from sales to
international customers and 76%, 82% and 86% of our revenues were derived from
sales to domestic customers.
SIGNIFICANT INFORMATION RESOURCES
Our market presence, industry experience and sophisticated management
information systems enable us to quickly analyze and complete acquisitions of
inventory, giving us what we believe to be a competitive advantage in the
market.
AIRCRAFT SPARE PARTS
Aircraft spare parts can be categorized by their ongoing ability to be
repaired and returned to service. The general categories are as follows:
o rotable;
o repairable; and
o expendable.
A rotable is a part which is removed periodically as dictated by an
operator's maintenance program or on an as needed basis and is typically
repaired or overhauled and re-used an indefinite number of times. An important
subset of rotables is life limited parts. A life limited rotable has a FAA
mandated designated number of allowable flight hours and/or cycles (one take-
off and landing constitutes one cycle) after which it is rendered unusable. A
repairable is similar to a rotable except that it can only be repaired a limited
number of times before it must be discarded. An expendable is generally a part
which is used and not thereafter repaired for further use. Our inventory
consists in large part of rotable and repairable parts which are regularly
required by our customers. We also maintain an inventory of expendable parts.
Aircraft spare parts conditions are classified within the industry as:
o factory new;
o new surplus;
o overhauled;
o serviceable; and
o as removed.
A factory new or new surplus part is one that has never been installed
or used. Factory new parts are purchased from manufacturers or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other redistributors. An overhauled part has been
completely disassembled, inspected, repaired, reassembled and tested by a
licensed repair facility. An aircraft spare part is classified serviceable if
(1) it is repaired by a licensed repair facility rather than completely
disassembled as in an overhaul or (2) if it is removed by the operator from an
aircraft or engine while operating under an approved maintenance program and is
functional and meets any manufacturer or time and cycle restrictions applicable
to the part. A factory new, new surplus, overhauled or serviceable part
designation indicates that the part is eligible for immediate use on an
aircraft. A part in an as removed condition requires functional testing, repair
or overhaul by a licensed facility prior to being returned to service in an
aircraft.
OUR INVENTORY
Our inventory consists principally of new, overhauled, serviceable and
repairable aircraft parts that we obtain from many sources. Before parts may be
installed in an aircraft, they must meet enumerated standards of condition
established by the FAA and/or the equivalent regulatory agencies in other
countries. Specific regulations vary from country to country,
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although regulatory requirements in other countries generally coincide with FAA
requirements. Parts must also be traceable to sources deemed acceptable by these
agencies.
We currently own four Airbus A-300 aircraft, three of which have been
converted from passenger to freighter configuration. We are currently seeking to
sell or lease these aircraft.
OPERATIONS
Our core business is the buying, selling and leasing of aircraft spare
parts and the providing of maintenance, repair and overhaul of aircraft and
aircraft components and the provision of inventory management services.
Additionally, we manufacture aircraft parts for sale to original equipment
manufacturers.
Since our customers consist of airlines, maintenance and repair
facilities that service airlines and other distributors and redistributors, as
well as original equipment manufacturers, economic factors affecting the airline
industry tend to impact our business. When economic factors adversely affect the
airline industry, they tend to reduce the overall demand for aircraft spare
parts and maintenance and repair services, causing downward pressure on pricing
and increasing the credit risks associated with doing business with airlines.
Additionally, the price of fuel affects the aircraft spare parts and maintenance
and repair markets, since older aircraft, which consume more fuel and which
account for most of our aircraft spare parts and maintenance and repair
business, become less viable as the price of fuel increases. We cannot assure
you that economic and other factors which may affect the airline industry will
not adversely impact our business, financial condition or results of operations.
SALES OF AIRCRAFT SPARE PARTS
Our daily operations encompass inventory sales and exchanging of
aircraft spare parts. We advertise our available inventories held for sale or
exchange on the Inventory Locator Service and the Airline Inventory
Redistribution System electronic databases. Buyers of aircraft spare parts can
access these databases and determine which companies have the desired inventory
available. We estimate that 70% of our daily sales activity results from an
electronic database inquiry. All major airlines and repair agencies subscribe to
one or both of these databases and, accordingly, we maintain continual on-line
direct access with them.
We currently have over 555,000 inventory line items in stock with
market availability, pricing and historical data available on more than 3.7
million inventory line items. We sell parts from our inventory. Additionally, we
will purchase parts on behalf of our customers against specific orders or
against a forecast demand. We also offer a customer exchange program for
rotables. In an exchange transaction, we exchange a new surplus, overhauled or
serviceable component taken from stock with a customer's as-removed unit which
has failed. We receive an exchange fee for completing the transaction, plus
reimbursement from the customer for the cost to overhaul or repair the
as-removed unit. If the as-removed part cannot be repaired, it is returned to
the customer and the exchange transaction is converted to an outright sale at a
sales price agreed upon at the time the exchange transaction was negotiated.
We utilize inside salespersons, regional field salespersons,
independent contract representatives and overseas sales offices in our sales and
marketing efforts. Our outside sales force is responsible for obtaining new
customers and maintaining relationships with existing customers. Our inside
sales force accomplishes the majority of our day-to-day sales.
We staff our South Florida parts distribution facility to provide sales
and delivery services seven days a week, 24 hours a day. This service is
critical to provide support to airline customers which, at any time, may have an
aircraft grounded in need of a particular part. Our South Florida location, with
easy access to Miami International Airport and Fort Lauderdale International
Airport, assists us in providing reliable and timely delivery of purchased
products.
We have over 1,000 customers, which include commercial passenger
airlines, air cargo carriers, maintenance and repair facilities and other
aircraft parts redistribution companies. Our top ten customers combined
accounted for approximately 29%, 38% and 45% of our revenues for the years ended
December 31, 1997, 1998 and 1999, respectively. One customer accounted for
approximately 12% of our 1999 revenues.
INVENTORY MANAGEMENT SERVICES
OUTSOURCING
We are meeting the outsourcing requirements of our customers by
providing a number of inventory management services. These services assist
airlines in streamlining their inventory management operations while utilizing
their capital more efficiently and reducing their costs. Through the offering of
various services, we believe we can provide an inventory management program
geared to a customer's particular requirements. These services include
consignment, repair management, aircraft disassembly, purchasing services and
leasing.
CONSIGNMENT AND OTHER SERVICES
By consigning inventories to Aviation Sales, customers are able to
distribute their aircraft spare parts to a larger number of prospective
inventory buyers, allowing the customers to maximize the value of their
inventory. Consignment also enables us to offer for sale significant parts
inventory at minimal capital cost to us.
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We provide "aircraft disassembly" services at our Ardmore, Oklahoma facility
where we disassemble aircraft and sell the parts in our redistribution business.
We also disassemble a customer's aircraft under consignment arrangements and/or
return the parts from the disassembled aircraft directly to the customer.
LEASING
We provide long-term leasing of inventories of aircraft spare parts and
aircraft engines to airline customers. An increasing number of smaller and
start-up airlines have chosen to lease aircraft spare parts in order to preserve
capital while maintaining adequate spare parts support. We believe that we have
a competitive advantage in aircraft engines and aircraft spare parts leasing due
to our ability to maximize the residual value of the parts after termination of
the lease through sales of the parts in the ordinary course of our business. As
of December 31, 1997, 1998 and 1999, we had $22.8 million, $28.4 million and
$17.4 million of inventories on long-term lease.
MAINTENANCE AND REPAIR SERVICES
In 1997, we made a strategic decision to expand our service offerings
to include the maintenance, repair and overhaul of aircraft and aircraft
components. We made six acquisitions between 1997 and 1999 which allow us to
provide maintenance, repair and overhaul services for passenger, freighter and
military aircraft, including the maintenance and repair of airframe components,
hydraulic, pneumatic, electrical and electromagnetic aircraft components, and
interior cabin components.
COMPONENT REPAIR AND OVERHAUL SERVICES
We provide repair and overhaul services at our FAA-licensed repair
stations. Aerocell specializes in the maintenance, repair and overhaul of
airframe components, including flight surfaces, doors, fairing panels, nacelle
systems and exhaust systems. Caribe Aviation specializes in the maintenance,
repair and overhaul of hydraulic, pneumatic, electrical and electromagnetic
aircraft components, as well as avionics and instruments on Airbus and Boeing
aircraft. Aircraft Interior Design refurbishes aircraft interior components,
including passenger and crew seats. Timco Engine Center refurbishes JT8D
engines.
AIRCRAFT HEAVY MAINTENANCE
We perform maintenance, repair and modification services of aircraft at
TIMCO's five repair stations. These services principally consist of scheduled
"C" and "D" level maintenance checks and the modification of passenger aircrafts
to freighter configurations. "C" and "D" checks each involve a different degree
of inspection, and the services performed at each level vary depending upon the
individual aircraft operator's FAA-approved maintenance program. "C" and "D"
level checks are comprehensive checks and usually take several weeks to
complete, depending upon the scope of the work to be performed.
The "C" level check is an intermediate level service inspection that
typically includes testing and servicing of the aircraft's operational systems,
external and internal cleaning and refurbishing, and servicing of the interior.
Trained mechanics visually inspect the external and internal structure of the
aircraft, repair defects and remove corrosion found, all in a manner as required
by the manufacturer's maintenance and structural repair manuals. The "D" level
check includes all of the work accomplished in the "C" level check, but places a
more detailed emphasis on the integrity of the structure. In the "D" level
check, the aircraft is disassembled to the point where the entire structure can
be inspected and evaluated. Once the inspection, evaluation and repairs have
been completed, the aircraft is reassembled and its systems reinstalled to the
detailed tolerances demanded in each system's specifications. Depending upon the
type of aircraft and the FAA-certified maintenance program being followed,
intervals between "C" level checks can range from 12 to 18 months and 1,000 to
5,000 flight hours and intervals between "D" level checks can range from four to
eight years and 10,000 to 25,000 flight hours. Structural inspections performed
during "C" level and "D" level checks provide personnel with detailed
information about the condition of the aircraft and the need to perform
additional work or repairs not provided for in the original work scope. Project
coordinators and customer support personnel work closely with the aircraft's
customer service representative in evaluating the scope of any additional work
required and in the preparation of a detailed cost estimate for the labor and
materials required to complete the job.
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Each aircraft certified by the FAA is constructed under a "Type
Certificate." Anything which is done subsequently to modify the aircraft from
its original type design requires the review and approval of the FAA. These
modifications are authorized by the issuance of a Supplemental Type Certificate
(STC) or an engineering order issued by the airline's engineering department.
Typical modification services include reconfiguring of passenger interiors,
installing passenger amenities such as telephones and installing crew rest
areas. We also convert passenger aircraft to freighter configuration.
When we convert a passenger plane to freighter configuration we:
o completely strip the interior;
o strengthen the load-bearing capacity of the flooring;
o install the bulkhead or cargo net;
o cut into the fuselage for the installation of a cargo door;
o reinforce the surrounding door structures;
o replace windows with metal plugs;
o fabricate and install the cargo door or cargo doors; and
o install fire detection and suppression systems.
We also need to line the aircraft interior to protect the fuselage
structure from pallet damage and modify the air conditioning system. Conversion
contracts also typically require "C" or "D" level maintenance checks as these
conversion aircraft have usually been out of service for some time and
maintenance is required for the aircraft to comply with current FAA standards.
Additional modification services performed may include cockpit reconfiguration
to upgrade the avionic systems to current technology and the integration of
Traffic Control and Avoidance Systems, windshear detection systems and
navigational aids.
ENGINEERING SERVICES
We recently formed an engineering and manufacturing services group
within our heavy aircraft maintenance operation. This group provides integrated
aircraft engineering, including aircraft certification, design and approval of
modifications to aircraft systems and structures for airlines, leasing companies
and aerospace original equipment manufacturers.
JOINT VENTURE TO CONVERT 727 AIRCRAFT
We own a 50% interest in a joint venture which has a Supplemental Type
Certificate for conversion of Boeing 727 aircraft which is fully compliant with
FAA regulations and requirements for aftermarket aircraft cargo conversions. We
manufacture the kits required to complete conversions of the aircraft based upon
the STC, and operate one of the aircraft maintenance facilities which has been
licensed by the joint venture to install the kits on passenger aircraft being
converted to cargo configuration.
MANUFACTURING SERVICES
The Boeing 1999 Current Market Outlook report projects that:
o global air travel will increase by an average of 4.7% per year
through the year 2008;
o average passenger fleet miles flown will increase
significantly over the next few years, requiring current
operators to increase the size of their fleets; and
o many new airlines will commence operations in the United
States and abroad.
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We currently own two companies which manufacture various aircraft parts
for sale to original equipment manufacturers. Kratz-Wilde specializes in the
manufacture of machined components primarily for jet engines, and also produces
machined parts for other industries including automotive and faucet components.
Kratz-Wilde is a leading supplier of CFM56 and CF6 engine components to General
Electric's Aircraft Engine business. Kratz-Wilde's operations are housed in two
manufacturing facilities in the greater Cincinnati area and one facility in
Juarez, Mexico. Kratz-Wilde provides us with precision manufacturing
capabilities. Apex, located in Phoenix, Arizona, manufactures precision
aerospace parts and specializes in the machining of metal parts, including
precision shafts, fuel shrouds, housings and couplings for aerospace actuating
systems, fuel controls and engines.
We are currently considering attempting to sell our manufacturing
operations to reduce our debt.
MANAGEMENT INFORMATION SYSTEMS
We have developed a proprietary management information system which is
an important component of our business and a significant factor in our leading
position in the redistribution market. Our management information system
collects and reports data regarding inventory turnover and traceability,
pricing, market availability, and other important data. We also maintain
databases on recommended upgrades or replacements, including airworthiness
directives. In addition, we maintain data that allows us to provide our
customers with information with respect to obsolescence and interchangeability
of parts. We utilize electronic data scanning and document image storage
technology for accurate and rapid retrieval of inventory traceability documents
that must accompany all sales. Our customers require these in order for them to
comply with applicable regulatory guidelines.
We believe that to maintain our competitive advantages, accommodate
growth and keep pace with the rapid changes in technology, we must continue to
have state of the art management information systems to ensure the capability to
meet our needs. During 1998 and 1999, we sought to implement an enterprise wide
information system in our redistribution operation, which we were not able to
implement. Instead, we remediated the existing information systems for Year 2000
compliance and are continuing to use those systems. We are currently evaluating
and intend to implement over the next year a new information system in our
redistribution operation.
We also implemented during 1999 new management information systems in
our maintenance, repair and overhaul and manufacturing operations. These new
systems provide access to and improved timeliness of information which can be
used in the management of these operations.
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COMPETITION
There are numerous suppliers of aircraft parts in the aviation market
worldwide and, through inventory listing services, customers have access to a
broad array of suppliers. These include major aircraft manufacturers, airline
and aircraft service companies and aircraft spare parts redistributors.
Competition in the redistribution market is generally based on price,
availability of product and quality, including traceability. Our major
competitors in the redistribution market include AAR Corp., The Ages Group and
The Memphis Group. There is also substantial competition, both domestically and
overseas, from smaller, independent dealers who generally participate in niche
markets.
In the maintenance and repair market, our major competitors are B.F.
Goodrich, Dee Howard Company and Mobile Aerospace Inc. We also compete for
military maintenance and repair contracts. Our principal competitors for
military maintenance and repair contracts include Boeing Military Aircraft,
Lockheed-Martin Aeromod and Raytheon-E Systems.
Since our markets are extremely competitive, we cannot assure you that
competitive pressures will not materially adversely affect our business,
financial condition or results of operations.
GOVERNMENT REGULATION; TRACEABILITY
The aviation industry is highly regulated. While our spare parts
business is not regulated, the aircraft spare parts we sell to our customers
must be accompanied by documentation which enables the customer to comply with
applicable regulatory requirements. Additionally, Aviation Sales must be
certified by the FAA and, in some cases, authorized by original equipment
manufacturers in order to manufacture or repair aircraft components and to
perform maintenance and repair services on aircraft.
The FAA regulates the manufacture, repair and operation of all aircraft
and aircraft equipment operated in the United States. Its regulations are
designed to ensure that all aircraft and aircraft equipment are continuously
maintained in proper condition to ensure safe operation of the aircraft. Similar
rules apply in other countries. All aircraft must be maintained under a
continuous condition monitoring program and must periodically undergo thorough
inspection and maintenance. The inspection, maintenance and repair procedures
for the various types of aircraft and aircraft equipment are prescribed by
regulatory authorities and can be performed only by certified repair facilities
utilizing certified technicians. Certification and conformance is required prior
to installation of a part on an aircraft. Presently, we utilize FAA and/or Joint
Aviation Authority certified repair stations (including our eleven FAA-licensed
repair facilities) to repair and certify parts to ensure worldwide
marketability. We closely monitor the FAA and industry trade groups in an
attempt to understand how possible future regulations might impact us.
An important factor in the aircraft spare parts redistribution market
relates to the documentation or traceability that is supplied with an aircraft
spare part. We require all of our suppliers to provide adequate documentation as
dictated by the appropriate regulatory authority. We utilize electronic data
scanning and storage techniques to maintain complete copies of all
documentation. Documentation required includes, where applicable:
o a maintenance release from a certified airline or repair
facility signed and dated by a licensed airframe and/or power
plant mechanic who repaired the aircraft spare part and an
inspector certifying that the proper methods, materials and
workmanship were used;
o a "teardown" report detailing the discrepancies and corrective
actions taken during the last shop repair; and
o an invoice or purchase order from an approved source.
Before parts may be installed on an aircraft, they must meet standards
of condition established by the FAA and/or the equivalent regulatory agencies in
other countries. Our parts may not meet applicable standards or standards may
change in the future, requiring parts in our inventory to be scrapped or
modified. Aircraft manufacturers may also develop new parts which replace parts
in our inventory. To the extent that we have these parts in our inventory, their
value may be reduced. We also cannot assure you that new or more stringent
regulations if adopted in the future will not adversely impact our business.
9
Further, our operations are also subject to a variety of worker and
community safety laws. In the United States, the Occupational Safety and Health
Act mandates general requirements for safe workplaces for all employees.
Specific safety standards have been promulgated for workplaces engaged in the
treatment, disposal or storage of hazardous waste. We believe that our
operations are in material compliance with health and safety requirements of the
Occupational Safety and Health Act.
PRODUCT LIABILITY
Our business exposes us to possible claims for personal injury or death
which may result from the failure of an aircraft spare part sold, manufactured
or repaired by us or from our negligence in the repair or maintenance of an
aircraft or an aircraft part. We may also have exposure to product liability
claims if the use of our leased aircraft, aircraft engines or aircraft spare
parts inventory is alleged to have resulted in bodily injury or property damage.
While we maintain what we believe to be adequate liability insurance to protect
us from claims of this type, based on our review of the insurance coverages
maintained by similar companies in our industry, we cannot assure you that
claims will not arise in the future or that our insurance coverage will be
adequate. Additionally, there can be no assurance that insurance coverages can
be maintained in the future at an acceptable cost. Any liability of this type
not covered by insurance could materially adversely affect our financial
condition.
EMPLOYEES
As of December 31, 1999, we employed approximately 4,300 persons. None
of our employees are covered by collective bargaining agreements. We believe
that our relations with our employees are good.
10
ITEM 2. PROPERTIES.
Our executive offices are located in Miami, Florida. We intend to move
in April 2000 into our new corporate headquarters and warehouse facility. Our
new facility is located on a 41 acre parcel in the City of Miramar, Florida. We
have two buildings on this property. One contains approximately 545,000 square
feet and will allow us to consolidate our redistribution operations, as well as
serve as the corporate headquarters. The second, which will contain
approximately 85,000 square feet of office and warehouse space, will be used by
one of our maintenance and repair operations.
The following table identifies, as of December 31, 1999, our principal
properties. See Notes 7 and 10 to Consolidated Financial Statements.
SQUARE OWNED OR
FACILITY DESCRIPTION LOCATIONS FOOTAGE LEASED
- ------------------------------------------------------------------------------ --------------- ---------------
REDISTRIBUTION OPERATIONS
Warehouse and corporate headquarters Miami, FL 166,000 Leased
Aircraft Disassembly and Storage Ardmore, OK 130,000 Leased
Warehouse Pearland, TX 100,000 Owned
Warehouse Miami, FL 40,000 Leased
Warehouse Miami, FL 11,200 Leased
Warehouse Miami, FL 10,000 Leased
Regional Purchasing Office Van Nuys, CA 6,300 Leased
Office and Warehouse College Park, GA 6,000 Leased
Warehouse Claremore, OK 1,000 Leased
MAINTENANCE, REPAIR AND OVERHAUL
Office and Aircraft Maintenance Greensboro, NC 910,000 Leased
Office and Aircraft Maintenance Lake City, FL 650,000 Leased
Office and Aircraft Maintenance Oscoda, MI 396,000 Leased
Office and Repair Hot Springs, AK 260,000 Owned
Office and Aircraft Maintenance Winston-Salem, NC 250,000 Leased
Office and Aircraft Maintenance Macon, GA 140,000 Leased
Office and Maintenance Dallas, TX 80,000 Owned
Office and Maintenance Miami, FL 55,000 Leased
Office and maintenance Minneapolis, MN 34,000 Leased
Office and Maintenance Miami, FL 30,000 Leased
MANUFACTURING OPERATIONS
Office and Manufacturing West Chester, OH 95,000 Owned
Office and Manufacturing Facility Phoenix, AZ 48,000 Leased
Office and Manufacturing Facility Covington, KY 38,200 Owned
Manufacturing Facility Juarez, Mexico 16,000 Leased
Manufacturing Facility (sold February 2000) Fairfield, OH 30,500 Owned
Our ownership interests and leasehold interests in such properties are
pledged as collateral for amounts borrowed.
11
ITEM 3. LEGAL PROCEEDINGS.
PENDING LAWSUITS AND INVESTIGATIONS
Several lawsuits have been filed against us and certain of our officers
and directors, and our auditors, in the United States District Court for the
Southern District of Florida. These suits have now been consolidated into a
single lawsuit. The amended consolidated complaint, which was filed in March
2000, alleges violations of Sections 11 and 15 of the Securities Act of 1933 in
connection with our June 1999 public offering, and alleges violations of
Sections 10(b) and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act
of 1934. Among other matters, the amended complaint alleges that our reported
financial results were materially misleading and violated generally accepted
accounting principles. The amended complaint seeks damages and certification of
two classes, one consisting of purchasers of our common stock in the June 1999
public offering and one consisting of purchasers of our common stock during the
period between March 26, 1998 and January 28, 2000.
We intend to file a motion to dismiss these claims in the consolidated
lawsuit. We believe that the allegations contained in the complaint are without
merit and we intend to vigorously defend this and any related actions.
Nevertheless, unfavorable resolution of this lawsuit could have a material
adverse effect on us in one or more future periods.
The U.S. Securities and Exchange Commission is conducting an informal
inquiry into our accounting for certain transactions. We intend to cooperate
with the SEC in its inquiry.
On January 8, 1999, Paine Webber Incorporated filed in the Supreme
Court of the State of New York a complaint against us and our subsidiary,
Whitehall Corporation, alleging breach of contract claims and related claims
against us and Whitehall and a tortious interference with a contract claim
against us. Paine Webber alleges that it is due a fee in connection with our
acquisition of TIMCO, based upon a 1997 agreement between Whitehall and Paine
Webber relating to a then proposed acquisition of TIMCO by Whitehall which did
not occur. Paine Webber is seeking approximately $1.0 million, plus costs and an
unstated amount of punitive damages. Paine Webber is also seeking approximately
$0.3 million allegedly due relating to the failure of Whitehall to honor an
alleged right of first refusal provision in the 1997 agreement. We believe that
our acquisition of TIMCO was not within the scope of the 1997 Paine
Webber/Whitehall agreement and that claims brought under this agreement against
us and Whitehall are without merit. We are vigorously defending these claims.
Although we can give no assurance, based upon the available facts, we believe
that the ultimate outcome of this matter will not have a material adverse effect
upon our financial condition.
On June 24, 1998, Zantop International Airlines, Inc. filed an action
against Aero Corp.-Macon, Inc. (which is now part of TIMCO) in the Superior
Court of Bibb County, Georgia. The suit seeks an unspecified amount of damages
and certain equitable relief arising out of the July 1997 sale to Aero
Corp.-Macon, Inc. (then a subsidiary of Whitehall) of certain assets used in
connection with the operation of Aero Corp.-Macon, Inc. The nature of the action
involves a contractual dispute relative to certain purchase price adjustments
and inventory purchases. We are vigorously defending this action. Although we
can give no assurance, based upon the available facts, we believe that the
ultimate outcome of this matter will not have a material adverse effect upon our
financial condition.
We are also involved in various lawsuits and other contingencies
arising out of operations in the normal course of business. In the opinion of
management, the ultimate resolution of these claims and lawsuits will not have a
material adverse effect upon our financial position.
ENVIRONMENTAL MATTERS
We are taking remedial action pursuant to Environmental Protection
Agency and Florida Department of Environmental Protection ("FDEP") regulations
at TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact upon us and the magnitude of
required remediation efforts. Based upon the most recent cost estimates provided
by environmental consultants, we believe that the total remaining testing,
remediation and compliance costs for this facility will be approximately $1.4
million. Testing and evaluation for all known sites on TIMCO-Lake City's
property is substantially complete and we have commenced a remediation program.
We are currently monitoring the remediation, which will extend into the future.
Subsequently, our accruals were increased because of this monitoring, which
indicated a need for new equipment and additional monitoring. Based on current
testing, technology, environmental law and clean-up experience to date, we
believe that we have established an accrual for our best
12
estimate of the probable liabilities associated with our current remediation
strategies. To comply with the financial assurances required by the FDEP, we
have issued a $1.7 million standby letter of credit in favor of the FDEP.
Additionally, there are other areas adjacent to TIMCO-Lake City's
facility that could also require remediation. We do not believe that we are
responsible for these areas; however, it may be asserted that TIMCO and other
parties are jointly and severally liable and are responsible for the remediation
of these properties. No estimate of any such costs is available at this time.
We own a parcel of real estate on which Whitehall previously operated
an electronics business. We are currently assessing environmental issues with
respect to this property. When we acquired Whitehall, our environmental
consultants estimated that remediation costs relating to this property could be
up to $1.0 million.
Accrued expenses in our financial statements at December 31, 1999
include $2.0 million relating to obligations to remediate the environmental
matters described above.
Future information and developments will require us to continually
reassess the expected impact of the environmental matters discussed above.
Actual costs to be incurred in future periods may vary from the estimates, given
the inherent uncertainties in evaluating environmental exposures. These
uncertainties include the extent of required remediation based on future testing
and evaluation and the varying costs and effectiveness of remediation methods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
We held our 1999 Annual Meeting of Stockholders on November 19, 1999.
At the meeting, our stockholders took the following actions:
1. Our stockholders approved an amendment to our 1996 Stock
Option Plan to increase the number of shares of common stock
for which options may be granted under our plan from the
greater of 650,000 shares of common stock, or 8% of the number
of common shares then outstanding, to the greater of 2,250,000
shares of common stock or 15% of the number of shares of
common stock then outstanding. The vote on this amendment was:
6,855,915 in favor, 2,753,725 opposed and 48,013 abstained.
2. Our stockholders elected three directors to serve on our Board
of Directors. Dale S. Baker was elected to serve until the
2002 Annual Meeting of Stockholders, or until his successor is
elected and qualified, Philip B. Schwartz was elected to serve
until the 2001 Annual Meeting of Stockholders, or until his
successor is elected and qualified, and Harold M. Woody was
elected to serve until the 2000 Annual Meeting of
Stockholders, or until his successor is elected and qualified.
The votes cast for and against each of these directors were as
follows:
VOTES CAST
------------------------
NOMINEE FOR AGAINST
-------------------------- ------------------------
Dale S. Baker............. 12,812,429 345,736
Philip B. Schwartz........ 12,816,589 341,576
Harold M. Woody........... 12,816,054 342,111
The terms of directors Robert Alpert and Sam Humphreys
continued after the meeting.
3. Our stockholders ratified the decision of our Board of
Directors selecting Arthur Andersen LLP as our independent
auditors for the 1999 fiscal year. The vote on this selection
was: 13,098,403 in favor, 25,545 opposed, and 34,217
abstained.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following information relates to our common stock, par value $.001
per share (the "Common Stock"), which currently is listed on the New York Stock
Exchange under the symbol "AVS." At April 13, 2000, there were approximately 600
stockholders of record of our Common Stock. The foregoing number does not
include beneficial holders of our common stock. The high and low last sales
prices of our Common Stock for each quarter during our two most recent fiscal
years and the current fiscal year through a recent date, as reported by the New
York Stock Exchange, are set forth below:
HIGH LOW
------ ------
1998
First Quarter $44.75 $33.12
Second Quarter 41.00 34.87
Third Quarter 41.37 24.00
Fourth Quarter 40.62 26.25
1999
First Quarter 47.31 37.00
Second Quarter 46.13 35.94
Third Quarter 43.94 18.25
Fourth Quarter 18.56 13.69
2000
First Quarter 19.38 6.31
Second Quarter (to 4/13/00) 6.88 6.18
We did not declare any cash dividends during the year ended December
31, 1999. See Note 6 to Consolidated Financial Statements for information
concerning restrictions contained in our credit agreements regarding the payment
of dividends and Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES.
On November 2, 1999 we adopted a Stockholders' Rights Plan and declared
a dividend distribution of one preferred share purchase right on each
outstanding share of our Common Stock. Each preferred share purchase right will
entitle stockholders to buy one one-thousandth of a share of our newly created
Series A Junior Participating Preferred Stock at an initial exercise price of
$90.00. In general, the preferred share purchase rights become exercisable if a
person or group hereafter acquires 15% or more of our Common Stock or announces
a tender offer for 15% or more of our Common Stock. Our Board of Directors will
in general be entitled to redeem the preferred share purchase rights at one cent
per preferred share purchase right at any time before any such person hereafter
acquires 15% or more of our outstanding Common Stock.
In March 2000 we entered into an agreement with LJH Corporation, which
is wholly owned by Lacy Harber, and with Mr. Harber, that limits for a period of
five years the number of shares of the Company's common stock that Mr. Harber
and LJH (together) are authorized to acquire. The agreement permits Mr. Harber
and LJH (together) to acquire beneficial ownership of up to 25% of our
outstanding shares. The agreement also permits Mr. Harber and LJH (together) to
nominate one candidate for election to our Board of Directors for so long as Mr.
Harber and LJH (together) own at least 8% of our outstanding shares. Mr. Harber
and LJH also agreed not to engage in certain activities without approval of a
majority of the disinterested members of our Board of Directors. Simultaneous
with entering into the agreement, we amended the Stockholders' Rights Plan so
that it is consistent with our agreement with Mr. Harber and LJH.
14
ITEM 6. SELECTED FINANCIAL DATA.
The following table represents our selected consolidated financial
information. The selected financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and notes thereto and
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS which contains a description of the factors that materially affect
the comparability from period to period of the information presented herein.
Year Ended December 31, (1)
---------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
(In thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Operating revenues $ 169,771 $ 231,734 $ 322,538 $ 500,816 $ 671,514
Cost of sales and services 119,438 169,787 244,758 372,728 561,484
--------- --------- --------- --------- ---------
Gross profit 50,333 61,947 77,780 128,088 110,030
Operating expenses 28,884 33,958 52,782 66,719 105,466
--------- --------- --------- --------- ---------
Income from operations 21,449 27,989 24,998 61,369 4,564
Interest expense 8,287 5,411 8,059 21,343 35,112
Other expense (income) (1,025) (461) 4,696 (196) 6,342
--------- --------- --------- --------- ---------
Income (loss) before taxes, equity income
(loss) of affiliate and extraordinary item 14,187 23,039 12,243 40,222 (36,890)
Income tax expense (benefit) (2) 5,002 8,648 7,260 15,486 (13,878)
--------- --------- --------- --------- ---------
Income (loss) before equity income (loss)
of affiliate and extraordinary item 9,185 14,391 4,983 24,736 (23,012)
Equity income (loss) of affiliate 38 255 (139) 1,356 1,289
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item 9,223 14,646 4,844 26,092 (21,723)
Extraordinary item, net of income taxes -- 1,862 -- 599 --
--------- --------- --------- --------- ---------
Net income (loss) (2) $ 9,223 $ 12,784 $ 4,844 $ 25,493 $(21,723)
========= ========= ========= ========= =========
EARNINGS PER SHARE DATA:
Income (loss) before extraordinary item
per share (2) $ 1.01 $ 1.36 $ 0.39 $ 2.06 $ (1.56)
Extraordinary item per share -- 0.17 -- 0.05 --
--------- --------- --------- --------- ---------
Diluted net income (loss) per share (2)(3) $ 1.01 $ 1.19 $ 0.39 $ 2.01 $ (1.56)
========= ========= ========= ========= =========
As of December 31,
---------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Accounts receivable, net $ 41,173 $ 55,548 $ 82,779 $ 115,974 $ 163,318
Inventories 56,094 79,414 145,343 277,131 350,610
Working capital 68,039 88,222 89,988 169,742 194,923
Total assets 134,660 190,118 341,332 599,377 778,792
Total debt 62,042 34,651 161,544 361,959 438,787
Stockholders' equity 44,298 115,896 121,280 154,298 218,522
- ------------
(1) Dixie Bearings, which was acquired in August 1996, Kratz-Wilde, which was
acquired in October 1997, Caribe and Aircraft Interior Design, which were
acquired in March 1998, TIMCO, which was acquired in September 1998, and
TIMCO Oscoda, which was acquired in August 1999, were accounted for
under the purchase method of accounting and accordingly, their results
of operations have been included in our historical results of operations
from their respective dates of acquisition.
AvEng, which was acquired in December 1996, Aerocell, which was acquired
in September 1997, Apex, which was acquired in December 1997, and
Whitehall, which was acquired in July 1998, were accounted for under the
pooling of interests method of accounting. AvEng is included in our
historical results of operations and financial position for all periods
presented subsequent to 1995. Aerocell and Apex are included for all
periods presented subsequent to 1996. Historical results of operations
and financial position for 1995 have not been restated to give
retroactive effect to the acquisition of AvEng and historical operating
results for periods presented prior to 1997 have not been restated to
give retroactive effect to the acquisitions of Aerocell and Apex, due to
the immateriality of the effects of a potential restatement. Whitehall is
included in our historical results of operations and financial position
for all periods presented.
(2) Periods presented prior to 1997 include pro forma adjustments to record
income taxes, as we conducted our business as a partnership prior to June
26, 1996.
(3) Weighted average common and common equivalent shares used in calculating
diluted earnings per share are 9,161,379 for 1995; 10,769,408 for 1996;
12,450,176 for 1997; 12,696,394 for 1998 and 13,905,538 for 1999. Per
share data for periods before 1997 assumes that the 4,425,000 shares of
common stock issued to the partners and the 575,000 shares of common
stock, the net proceeds in respect of which were paid to J/T Aviation
Partners, were outstanding for periods prior to the closing of our
initial public offering in July 1996.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RECENT DEVELOPMENTS
We have determined to record pre-tax charges during the fourth quarter
of 1999 of $67.0 million, approximately $60.9 million of which are non-recurring
charges. Significantly all of these charges are non-cash items. Certain items,
which make up a significant portion of these charges, are as follows:
o a reduction in the carrying value of our inventory at December
31, 1999 of $28.9 million ($23.4 million of which is
non-recurring), primarily relating to inventory held for sale
by our redistribution operation,
o a $9.8 million write-down in the carrying value of the four
A-300 aircraft which we own,
o a $7.7 million write-down of capitalized costs previously
expended relating to the development of a new software system
which has not been implemented and will not be completed,
o a $7.7 million addition to the allowance for doubtful accounts
receivable, and
o a $4.8 million accrual of expenses to be incurred during 2000
relating to the runoff of one of our health insurance plans.
Additionally, during the fourth quarter of 1999, we wrote-off
previously capitalized financing fees relating to a new credit facility which
did not close and miscellaneous deposits and other assets which have been
determined not to be collectible. The above-described reduction in the carrying
value of our inventory is recorded in cost of sales. All other charges are
included in operating expenses except the write-down of capitalized costs
relating to the development of the new software system which charge is included
in other expense.
In connection with the preparation of our financial statements for the
year ended December 31, 1999, we identified several transactions which, after
review, should not have been recorded as revenues in our books and records.
Based upon these findings, in early February 2000, our Board of Directors
organized a special committee to review certain matters relating to our
accounting and sales practices. The committee retained outside professionals to
conduct an in-depth review and investigation of these matters, which has now
been concluded. As a result of this process, we have taken certain actions,
including the implementation of revised policies and procedures, designed to
ensure that the matters do not reoccur in the future.
We have concluded that seven 1999 transactions and one 1998 transaction
arising in our redistribution operation should have been accounted for as
exchange transactions rather than as sales. We have also concluded that seven
additional 1999 transactions arising in our redistribution operation should not
have been recorded as sales due to certain contingencies associated with the
transactions that had not been resolved at the date of the sales. In the
aggregate, these 1999 transactions represented $32.7 million of revenues and
$7.3 million of gross margin, representing approximately 4.8% of our revenues
and 6.5% of our gross margin for the 1999 fiscal year, respectively. The 1998
transaction represented an aggregate of $12.8 million of revenue and $3.1
million of gross margin, or approximately 2.6% and 2.5% of our fiscal 1998
revenue and gross margin, respectively. We have determined that this transaction
was not material to our previously reported 1998 financial results. We are
currently evaluating whether to restate our previously filed 1999 quarterly
financial statements as a result of these 1999 transactions. See Note 16 to
Consolidated Financial Statements for further discussion.
As a result of the recording of the charges discussed above, we were
not in compliance at December 31, 1999 or March 31, 2000 with certain of the
financial covenants contained in our credit agreements with our senior lenders.
Our lenders have agreed to forbear in regards to these covenant violations and
other matters until May 31, 2000. During this period, we intend to pursue a new
credit facility with our lenders. There can be no assurance that we will
successfully execute a new credit facility during this period and failure of
this to occur
16
would likely have a material adverse effect upon us.
We are currently taking actions designed to reduce our debt through the
possible sales of our assets, including the potential sale of our manufacturing
operations and/or other assets. We are also continuing our efforts to sell or
lease the four A-300 aircraft that we own and reduce our debt through that
process. There can be no assurance that we will successfully reduce our debt
through this process or as to the occurrence or timing of any such asset sales.
Our auditors have stated in their report on our 1999 consolidated financial
statements that there exists a substantial doubt as to our ability to continue
our business as a going concern.
RESULTS OF OPERATIONS
GENERAL
Operating revenues consist primarily of gross sales of products and
service revenues, net of allowances for returns. Cost of sales and services
consists primarily of product costs, labor, freight charges, commissions to
outside sales representatives and changes in the provision for slow moving
inventory. Product costs consist of the acquisition cost of the products and any
costs associated with repairs, overhaul or certification.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future. Many factors affect our operating results,
including:
o the timing of orders and payments from large customers,
o the timing of expenditures to purchase inventory in
anticipation of future sales,
o the timing of bulk inventory purchases,
o the number of airline customers seeking repair services at any
time,
o our ability to fully utilize from period to period our hangar
space dedicated to maintenance and repair services,
o our ability to attract and retain a sufficient number of
mechanics to perform the maintenance, overhaul and repair
services requested by our customers,
o the timeliness of customer aircraft arriving for scheduled
maintenance, and
o the mix of available aircraft spare parts contained, at any
time, in our inventory.
Large portions of our operating expenses are relatively fixed. Since we
typically do not obtain long-term purchase orders or commitments from our
customers, we must anticipate the future volume of orders based upon the
historic purchasing patterns of our customers and upon discussions with our
customers as to their future requirements. Cancellations, reductions or delays
in orders by a customer or group of customers could have a material adverse
effect on our business, financial condition and results of operations.
See Note 2 to Consolidated Financial Statements for a discussion of the
acquisitions that we completed during the three years ended December 31, 1999.
17
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1999
The following tables set forth certain information relating to our operations
for the periods indicated:
1998 1999
----------------------------------- ------------------------------------
Percent of Percent of
Amount Revenues Amount Revenues
--------------- ---------------- ---------------- ---------------
(Dollars in thousands)
Operating revenues:
Sales of products, net $359,245 71.7% $346,422 51.6%
Services and other 141,571 28.3% 325,092 48.4%
--------------- ---------------- ---------------- ---------------
500,816 100.0% 671,514 100.0%
Cost of sales and services 372,728 74.4% 561,484 83.6%
--------------- ---------------- ---------------- ---------------
Gross profit 128,088 25.6% 110,030 16.4%
Operating expenses 66,719 13.3% 105,466 15.7%
--------------- ---------------- ---------------- ---------------
Income from operations 61,369 12.3% 4,564 0.7%
Interest expense 21,343 4.3% 35,112 5.2%
Other expense (income) (196) - 6,342 0.9%
--------------- ---------------- ---------------- ---------------
Income (loss) before income taxes, equity
income of affiliate and extraordinary item 40,222 8.0% (36,890) (5.4%)
Income tax expense (benefit) 15,486 3.1% (13,878) (2.0%)
--------------- ---------------- ---------------- ---------------
Income (loss) before equity income of affiliate
and extraordinary item 24,736 4.9% (23,012) (3.4%)
Equity income of affiliate 1,356 0.3% 1,289 0.2%
--------------- ---------------- ---------------- ---------------
Income (loss) before extraordinary item 26,092 5.2% (21,723) (3.2%)
Extraordinary item, net of income taxes 599 0.1% - -
--------------- ---------------- ---------------- ---------------
Net income (loss) $25,493 5.1% ($21,723) (3.2%)
=============== ================ ================ ===============
Revenues for the year ended December 31, 1999 increased $170.7 million
or 34.1% to $671.5 million, from $500.8 million for the year ended December 31,
1998.
Revenues from our MR&O operations, which includes TIMCO, Caribe,
Aerocell, Aircraft Interior Design and TIMCO's engine repair operation,
increased $187.0 million to $369.3 million in 1999, from $182.3 million in 1998.
This increase was due, in part, to a full year contribution from TIMCO, which
was acquired at the end of the third quarter of 1998. Also contributing to the
1999 increase in revenues was a substantial increase in revenues at TIMCO (which
for all of 1999 combines the aircraft maintenance operations historically
operated by TIMCO with the aircraft maintenance operations previously operated
by Whitehall Corporation). This increase included revenues generated at new MR&O
facilities opened during 1999, as well as revenues generated at the maintenance
facilities acquired in August 1999 from Kitty Hawk, Inc.
Revenues from our distribution operations, which includes our
redistribution company, Dixie Bearings and our leasing company, increased $15.4
million to $289.8 million for 1999, from $274.4 million in 1998. Total revenues
from distribution operations for 1999 were impacted by the above-described
determination that 14 transactions reported as revenues during 1999 should not
have been treated as such. The Company believes that revenues from distribution
activities will decline during 2000 as the Company seeks to repay debt through
the reduction of inventory levels in our distribution operations.
Revenues from our manufacturing operations decreased $5.9 million, from
$50.0 million in 1998 to $44.1 million in 1999. Revenues in 1999 were adversely
impacted by third and fourth quarter slowdowns in purchases by a large customer
and by management challenges that occurred at this business. During the third
quarter of 1999, we made significant changes in the management of this business
and we anticipate a better performance from this operation during future
periods.
Gross profit decreased $18.1 million or 14.1%, from $128.1 million for
the year ended December 31, 1998 to $110.0 million for the year ended December
31, 1999. Gross profit margin for the year ended December 31, 1999 was 16.4%, a
decrease of 9.2 percentage points from a gross profit margin of 25.6% for the
year ended December 31, 1998. We reported a negative gross profit for the three
months ended December 31, 1999 of $16.1 million. The reductions in gross margin
arose for the reasons set forth below.
18
During the fourth quarter of 1999, we recorded a one-time,
non-recurring reduction in the carrying value of our inventory at December 31,
1999 of $38.7 million, primarily relating to inventory held for sale by our
redistribution operation and the carrying value of the four A-300 aircraft which
we own. These charges resulted in the gross profit margin in our distribution
operations decreasing from 28.2% to 12.9% from 1998 to 1999. Excluding one-time,
non-recurring charges, the gross profit margin in our distribution businesses
for 1999 would have been 23.2%.
Gross profit margin in our MR&O operations decreased by 2.8 percentage
points from 19.4% in 1998 to 16.6% in 1999. Gross profit margin for the MR&O
operations decreased due to an increase in labor expenses coupled with increased
competition and pressure to maintain level pricing for services. Gross profit
margins in our MR&O businesses are expected to decline slightly during 2000 due
to increased competition. For the reasons stated above, gross profit margin for
our manufacturing operations decreased 5.9 percentage points from period to
period.
Operating expenses increased $38.8 million to $105.5 million for
the year ended December 31, 1999, compared with $66.7 million for the year ended
December 31, 1998. Operating expenses as a percentage of operating revenues were
15.7% for the 1999 fiscal year, compared to 13.3% for 1998.
The largest factor causing the increase in operating expenses during
1999 compared to 1998 was the above-described non-recurring, primarily non-cash,
fourth quarter 1999 charges, $20.0 million of which were recorded as operating
expenses. Excluding these charges, operating expenses for the year ended
December 31, 1999 would have been $85.5 million, or 12.7% of revenues. The
increase in operating expenses relates primarily to the growth of operations.
Additionally, professional fees aggregating approximately $2.0 million relating
to several large transactions that were not completed adversely impacted results
for fiscal 1999. Results were also impacted by the fact that a higher percentage
of our revenues were derived during 1999 from our MR&O operations, which
generally operate at lower operating expense ratios than our other operations.
Operating expenses as a percentage of revenue were 6.5% in our MR&O
operations, compared to 7.8% during 1998. This is primarily due to economies of
scale. Operating expenses at our manufacturing and distribution operations
increased substantially during 1999. In our manufacturing operations, operating
expenses increased 12.9%, as we incurred costs related to a facility in Ohio
which was significantly expanded and to the opening of a new plant in Juarez,
Mexico. Operating expenses in our MR&O operations were adversely impacted during
1999 by start up costs associated with the opening of five new facilities during
the fiscal year. Operating expenses at our distribution operations and corporate
operating expenses were primarily impacted by the non-recurring, one-time
charges described above.
As a result of all of these factors, income from operations was $4.6
million for 1999, compared to $61.4 million for 1998.
Interest expense for the year ended December 31, 1999 increased $13.8
million compared to interest expense for 1998. The increase in interest expense
was due to increased interest rates on variable rate debt, coupled with
increased net borrowings during 1999 to finance the growth in inventory in our
distribution operations, the acquisition of the assets of Kitty Hawk, Inc.'s
maintenance operations and additional substantial investments in facilities,
equipment and computer systems to support the Company's operations. During 1999,
we opened four new MR&O facilities and two manufacturing facilities, in addition
to the MR&O facilities that we acquired from Kitty Hawk, Inc. We also installed
new computer systems in our MR&O and manufacturing operations, and expended
funds to remediate the computer system in our distribution operations. All of
these factors caused net borrowings to increase substantially during 1999,
despite our June 1999 public offering in which we raised net proceeds of $79.9
million.
As set forth above, we have recently entered into an agreement with our
senior lenders under which our lenders have agreed to forbear in regard to
certain covenant violations and other matters until May 31, 2000. As a result of
these matters, our lenders have increased by 2% the interest rate at which we
are borrowing funds. They have also charged us substantial fees for extensions
of their forbearance. All of these charges will adversely impact our 2000
results.
Other expense (income) includes a $7.7 million charge in 1999 relating
to the write-down of capitalized costs previously expended in relation to the
development of a new software system which has not been implemented and will not
be completed. It also includes a gain on a sale of real estate of approximately
$1.4 million.
19
In connection with the repayment of the term and acquisition portions
of the Credit Facility utilizing the proceeds of our Senior Subordinated Notes
due 2008, we wrote off, during the first quarter of 1998, $1.0 million of
deferred financing costs resulting in an extraordinary item, net of income
taxes, of $0.6 million ($.05 per diluted share).
The net loss for the year ended December 31, 1999 was $21.7 million
($1.56 per diluted share), compared to net income of $25.5 million ($2.01 per
diluted share) for the year ended December 31, 1998. Weighted average common and
common equivalent shares outstanding (diluted) were 13.9 million for the year
ended December 31, 1999, compared to 12.7 million for the year ended December
31, 1998. This increase is primarily the result of the public offering of
additional common shares that we completed in June 1999 and which resulted in
the issuance of 2.3 million additional shares of our common stock. As a result
of the fourth quarter charges described above, the net loss for the three months
ended December 31, 1999 was $46.5 million, compared to net income of $8.2
million for the three months ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following tables set forth certain information relating to our operations
for the periods indicated:
1997 1998
----------------------------------- ------------------------------------
Percent of Percent of
Amount Revenues Amount Revenues
--------------- ---------------- ---------------- ---------------
(Dollars in thousands)
Operating revenues:
Sales of products, net $244,340 75.8% $359,245 71.7%
Services and other 78,198 24.2% 141,571 28.3%
--------------- ---------------- ---------------- ---------------
322,538 100.0% 500,816 100.0%
Cost of sales and services 244,758 75.9% 372,728 74.4%
--------------- ---------------- ---------------- ---------------
Gross profit 77,780 24.1% 128,088 25.6%
Operating expenses 52,782 16.3% 66,719 13.3%
--------------- ---------------- ---------------- ---------------
Income from operations 24,998 7.8% 61,369 12.3%
Interest expense 8,059 2.5% 21,343 4.3%
Other expense (income) 4,696 1.5% (196) -
--------------- ---------------- ---------------- ---------------
Income before income taxes, equity (loss) income of
affiliate and extraordinary item 12,243 3.8% 40,222 8.0%
Income tax expense 7,260 2.3% 15,486 3.1%
--------------- ---------------- ---------------- ---------------
Income before equity (loss) income of affiliate
and extraordinary item 4,983 1.5% 24,736 4.9%
Equity (loss) income of affiliate (139) - 1,356 0.3%
--------------- ---------------- ---------------- ---------------
Income before extraordinary item 4,844 1.5% 26,092 5.2%
Extraordinary item, net of income taxes - - 599 0.1%
--------------- ---------------- ---------------- ---------------
Net Income $4,844 1.5% $25,493 5.1%
=============== ================ ================ ===============
Operating revenues for the year ended December 31, 1998 increased
$178.3 million or 55.3% to $500.8 million, from $322.5 million for the year
ended December 31, 1997. Operating revenues from companies acquired in 1997 and
1998 and accounted for under the purchase method of accounting increased 1998
operating revenues by $111.4 million. Operating revenues also increased due to
increased customer penetration, increased sales from investments made in
additional inventories and improved capacity utilization of our airframe
maintenance facilities. Service revenues for 1997 were adversely impacted as a
result of the unanticipated cancellation of a U.S. Air Force C-130 maintenance
contract awarded in April 1997 and cancelled at the convenience of the
government in June 1997.
Gross profit for the year ended December 31, 1998 increased $50.3
million or 65.0% to $128.1 million, compared with $77.8 million for the year
ended December 31, 1997. Gross profit margin for the year ended December 31,
1998 increased to 25.6% from 24.1% for the year ended December 31, 1997. Margins
were negatively impacted in 1997 as a result of the C-130 contract previously
discussed. Gross profit margin was favorably impacted during 1998 due
20
to improved utilization of our MR&O facilities, which was partially offset by an
increase in the percentage of our total business derived from our MR&O
operations, which generally operate at lower gross margin percentages than our
distribution operations.
Our operating expenses increased $13.9 million to $66.7 million for the
year ended December 31, 1998, compared to $52.8 million for the year ended
December 31, 1997. Included in the 1998 operating expenses were $1.8 million of
merger expenses relating to our July 1998 merger with Whitehall Corporation.
Operating expenses as a percentage of operating revenues for 1998 were 13.3%
(13.0% after adjustment for Whitehall merger expenses), compared to 16.4% for
1997. The reduction in operating expenses as a percentage of operating revenues
is due primarily to improved operating efficiencies and economies of scale.
Interest expense for the year ended December 31, 1998 increased due to
substantial borrowings utilized to finance the acquisitions of Kratz-Wilde,
Caribe and TIMCO, and to finance additional acquisitions of inventory and
equipment on lease.
Other expense in 1997 includes a $4.5 million writedown of Whitehall's
investment in the preferred stock of the purchaser of its ocean systems business
and a $0.7 million gain on the sale by Whitehall of its electronics business.
Income before income taxes, equity income of affiliate and
extraordinary item for the year ended December 31, 1998 was $40.2 million, an
increase of 228.5% over the year ended December 31, 1997.
During the first quarter of 1998, we repaid all of our outstanding term
and revolving debt with the proceeds from the sale of our senior subordinated
notes. In connection with the repayment of this debt, we wrote off $1.0 million
of deferred financing costs, resulting in an extraordinary item, net of income
taxes, of $0.6 million.
Net income for the year ended December 31, 1998 was $25.5 million
($2.01 per diluted share), compared to net income of $4.8 million ($0.39 per
diluted share) for the year ended December 31, 1997. Weighted average common and
common equivalent shares outstanding (diluted) were 12.7 million for the year
ended December 31, 1998, compared with 12.5 million for the year ended December
31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
CASH
Net cash used in operating activities during the years ended December
31, 1999, 1998 and 1997 was $102.7 million, $71.0 million and $53.7 million,
respectively. This increase is primarily the result of the growth in our
operations, which resulted in increased accounts receivable, net of accounts
payable, additional investments in inventory by our distribution operations and
costs associated with the conversion from passenger to cargo configuration of
the A-300 aircraft that we own.
Net cash used in investing activities during the years ended December
31, 1999, 1998 and 1997 was $61.2 million, $114.3 million and $58.4 million,
respectively. Cash used in investing activities during 1999 was primarily
comprised of capital expenditures of $32.0 million relating to additional
investments in the facilities, equipment and management information systems used
to support future growth in our business and $18.1 million relating to the
acquisition of the assets of Kitty Hawk, Inc.'s maintenance operations. Capital
expenditures during 2000 are expected to be approximately $17.0 million. Cash
used in investing activities during 1998 was primarily comprised of the cost
associated with acquisitions of businesses and other assets relating to the
growth of operations during this period.
Net cash provided from financing activities during the years ended
December 31, 1999, 1998 and 1997 was $174.8 million, $189.6 million and $114.4
million, respectively. Net cash provided during 1999 was primarily comprised of
net borrowings under the Credit Facility of $95.6 million and the proceeds of
our public stock offering completed in June 1999 of $79.9 million. Net cash
provided from financing activities during 1998 was primarily comprised of the
proceeds from the issuance of senior subordinated notes of $164.0 million and
net borrowings under the Credit Facility of $21.7 million.
21
SUBSTANTIAL LEVERAGE
As of March 31, 2000 we had outstanding indebtedness of approximately
$475.0 million (including capitalized leases), of which $308.8 million was
senior debt and $166.2 million was other indebtedness. As of March 31, 2000, we
had approximately $6.8 million available for future borrowing under our Credit
Facility. Our ability to make payments of principal and interest on, or to
refinance our debt, will depend upon our future operating performance, which
will be subject to economic, financial, competitive and other factors beyond our
control. The level of our indebtedness is also important due to:
o our vulnerability to adverse general economic and industry
conditions,
o our ability to obtain additional financing for future working
capital expenditures, general corporate and other purposes,
and
o the dedication of a substantial portion of our future cash
flow from operations to the payment of principal and interest
on indebtedness, thereby reducing the funds available for
operations and future business opportunities.
During 1997, 1998 and 1999, we relied primarily upon significant
borrowings under our credit facility, and sales of our securities, including our
previously issued senior subordinated notes, to satisfy our funding requirements
relating to our acquisitions of several businesses and to finance the growth of
our business. We cannot assure you that financing alternatives will be available
to us in the future to support our continued growth.
CREDIT FACILITY
On September 18, 1998, we entered into a four year Senior Secured
Revolving Credit Facility (the "Credit Facility") which provided us with a
$200.0 million revolving line of credit, including a $30.0 million letter of
credit sublimit, with the imposition of certain borrowing criteria based on the
satisfaction of certain debt ratios. The eligible borrowing base includes
certain receivables and inventories. The interest rate on the Credit Facility
is, at our option, (a) prime plus a margin, or (b) LIBOR plus a margin, where
the respective margin determination is made upon our financial performance over
a 12 month period (ranging from 0.0% to 1.0% in the event prime is utilized, or
1.125% to 2.5% in the event LIBOR is utilized).
In November 1998 and May 1999, the Credit Facility was amended to
increase the revolving loan and letter of credit facility to $250.0 and $300.0
million, respectively. During 1999 and 1998, the interest rate on the Credit
Facility ranged from 6.9% to 9.25% and 6.9% to 8.75%, respectively. As of
December 31, 1999 and 1998, the outstanding balance under the Credit Facility
was $269.6 million and $174.0 million, respectively.
The Credit Facility contains certain financial covenants regarding our
financial performance and certain other covenants, including limitations on the
amount of annual capital expenditures and the incurrence of additional debt, and
provides for the suspension of the Credit Facility and repayment of all debt in
the event of a material adverse change in the business or a change in control.
In addition, the Credit Facility requires mandatory repayments from the proceeds
of a sale of assets or an issuance of equity or debt securities or as a result
of insufficient collateral to meet the borrowing base requirements thereunder.
Substantially all of our assets are pledged as collateral for amounts borrowed.
We were not in compliance at December 31, 1999 or March 31, 2000 with
certain of the financial covenants contained in the Credit Facility. Our lenders
have agreed to forbear in regards to these covenant violations and other matters
until May 31, 2000 and they have increased the interest rate which we are paying
on our senior borrowings by 2% during this period. We are currently pursuing a
new credit facility with our senior lenders. There can be no assurance that we
will successfully execute a new credit facility during this period and failure
of this to occur would likely have a material adverse effect upon us.
In February 2000, we executed a $15.5 million term loan with the
financial institution which is the agent to the Credit Facility. The term loan
matures in February 2001, bears interest at 12% and contains financial covenants
which are consistent with the Credit Facility.
SENIOR SUBORDINATED NOTES
In February 1998, we sold $165.0 million in senior subordinated notes
(the "Notes") due in 2008 with a coupon rate of 8.125% at a price of 99.395%.
The Notes mature on February 15, 2008. Interest is payable on February 15 and
August 15 of each year. The Notes are general unsecured obligations,
subordinated in right of payment to all of our existing and future senior debt,
including indebtedness outstanding under the Credit Facility and under
facilities which may replace the Credit Facility in the future. In addition, the
Notes are effectively subordinated to all secured obligations to the extent of
the assets securing such obligations, including the Credit Facility.
22
The indenture pursuant to which the Notes have been issued (the
"Indenture") permits us and our subsidiaries to incur substantial additional
indebtedness, including senior debt. Under the Indenture, we may borrow
unlimited additional amounts so long as after incurring such debt we meet a
fixed charge coverage ratio for the most recent four fiscal quarters.
Additionally, the Indenture allows us to borrow and have outstanding additional
amounts of indebtedness (even if we do not meet the required fixed charge
coverage ratios), up to enumerated limits. The Notes are also effectively
subordinated in right of payment to all existing and future liabilities of any
of our subsidiaries that do not guarantee the Notes.
The Notes are unconditionally guaranteed, on a senior subordinated
basis, by substantially all of our existing subsidiaries and each subsidiary
that we organize in the future, unless such subsidiary is designated as an
unrestricted subsidiary (the "Subsidiary Guarantors"). Subsidiary Guarantees are
joint and several, full and unconditional, general unsecured obligations of the
Subsidiary Guarantors. Subsidiary Guarantees are subordinated in right of
payment to all existing and future senior debt of Subsidiary Guarantors,
including the Credit Facility, and are also effectively subordinated to all
secured obligations of Subsidiary Guarantors to the extent of the assets
securing such obligations, including the Credit Facility. Furthermore, the
Indenture permits Subsidiary Guarantors to incur additional indebtedness,
including senior debt, subject to certain limitations.
The Notes are redeemable, at our option, in whole or in part, at any
time after February 15, 2003, at the following redemption prices, plus accrued
and unpaid interest and liquidated damages, if any, to the redemption date: (i)
2003--104.063%; (ii) 2004--102.708%; (iii) 2005--101.354%; and (iv) 2006 and
thereafter--100%. In addition, on or prior to February 15, 2001, we may redeem
up to 35% of the aggregate principal amount of the Notes at a redemption price
of 108.125% of the principal amount thereof, plus accrued and unpaid interest
and liquidated damages, if any, thereon to the redemption date with the net
proceeds of a public offering of our common stock; provided, that at least 65%
of the aggregate principal amount of the Notes originally issued remains
outstanding immediately after the occurrence of such redemption.
Upon the occurrence of a change of control, we will be required to make
an offer to repurchase all or any part of holder's Notes at a repurchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
and liquidated damages, if any, thereon to the repurchase date. There can be no
assurance that we will have the financial resources necessary to purchase the
Notes upon a change of control or that such repurchase will be permitted under
the Credit Facility.
The Indenture contains certain covenants that, among other things, will
limit (as described above) our ability and the ability of our subsidiaries to
incur additional indebtedness and issue preferred stock, pay dividends or make
other distributions, make investments, dispose of assets, issue capital stock of
subsidiaries, create certain liens securing indebtedness, enter into certain
transactions with affiliates, sell assets or enter into certain mergers and
consolidations or sell all or substantially all of our assets.
LEASE FOR NEW FACILITY
In 1998, we decided to move to a new corporate headquarters and
warehouse facility. On December 17, 1998, we entered into an operating lease for
a new corporate headquarters and warehouse facility with First Security Bank,
National Association, as trustee of a newly created trust, as lessor. The lease
has an initial term of five years and is a triple net lease. The lease contains
financial covenants regarding our financial performance and other affirmative
and negative covenants. Substantially all of our subsidiaries have guaranteed
our obligations under the lease. Additionally, we have an option to acquire the
new facility at the end of the lease and if we do not purchase the new facility
at the end of the lease, we will be obligated to pay a fee. We expect to move
into our new headquarters and warehouse facility in April 2000.
The lessor has financed the development of the new facility through a
$43.0 million loan from a financial institution. We are obligated to develop the
new facility on behalf of the lessor and are responsible for the timely
completion of the facility within an established construction budget. We and
substantially all of our subsidiaries have guaranteed the repayment of $37.8
million of the lessor's obligations under its loan agreement. The lessor's
obligations under the agreement are secured by a lien on the real property and
on the new facility. Further, we have posted an irrevocable letter of credit in
favor of the lessor in the amount of approximately $12.0 million to secure both
our obligations under the lease and the lessor's obligations under the loan
agreement.
23
We were not in compliance at December 31, 1999 or March 31, 2000 with
certain of the financial covenants contained in the lease agreement. The lessor
and its lenders have agreed to forbear in regards to these covenant violations
and other matters until May 31, 2000. During this period, we intend to
pursue a replacement of the Credit Facility with our senior lenders, including
the lender which has financed construction of our new corporate headquarters and
warehouse facility. Upon execution of a new Credit Facility, the covenants and
other terms of the lease agreement will likely be amended consistent with the
new Credit Facility. There can be no assurance that these defaults will be
resolved to the satisfaction of the lessor and the lenders. The failure to
resolve these issues would likely have a material adverse effect upon us.
LIQUIDITY
We are currently taking actions designed to reduce our debt through
sales of our assets, including the potential sale of our manufacturing
operations or other assets, including reducing inventory levels in our
redistribution operations and using a portion of the funds generated through
that process to repay debt. We are also continuing our efforts to sell or lease
the four A-300 aircraft that we own and reduce our debt through that process.
There can be no assurance that we will successfully execute these transactions
or as to the timing of any potential transactions. We believe that our available
capital resources, assuming that we are able to successfully execute a new
credit facility with our senior lenders, will be sufficient to satisfy our
working capital requirements for our existing businesses over the next 12
months. However, there can be no assurance that we will successfully execute a
new credit facility during this period and failure of this to occur would likely
have a material adverse effect upon us.
We may also consider selling additional equity and/or debt securities
in the future to meet working capital requirements of our current business and
to continue the further development of our business.
COMPUTER SYSTEMS AND IMPACT OF THE YEAR 2000
Since the fourth quarter of 1997, we have been implementing new
management information systems ("MIS") in order to both meet our needs into the
foreseeable future and to mitigate the Year 2000 issues inherent in our existing
systems. The Year 2000 issue is the potential for system and processing failures
of date-related data and the result of computer-controlled systems using two
digits rather than four to define the applicable year. We may be affected by
Year 2000 issues in our non-compliant information technology ("IT") systems or
non-IT systems, as well as by Year 2000 issues related to non-compliant IT and
non-IT systems operated by third parties.
Prior to December 31, 1999, we completed an assessment of internal and
external IT systems and non-IT systems. We also substantially completed the
implementation of new MIS systems in our MR&O and manufacturing operations. We
had been in the process of implementing a new MIS system in our distribution
operations. However, that system was not expected to be fully implemented until
sometime in 2000. In order to continue our operations, during the third and
fourth quarters of 1999, we remediated the MIS system used in our distribution
operations, and such system was Year 2000 compliant prior to December 31, 1999.
Total costs associated with Year 2000 remediation incurred during the year ended
December 31, 1999 were approximately $2.0 million. As discussed below, we have
decided to not complete the implementation of the new MIS system for our
distribution operations, and we are seeking at this time to acquire a new MIS
system for our distribution operations.
As a result of the procedures performed in regards to the Year 2000
issue as described above, we did not incur any significant affect from the Year
2000 issue. In addition, although there can be no assurance, we are not
currently aware of any Year 2000 problems relating to systems or the systems
operated by third parties which would materially adversely affect our business,
results of operations or financial condition.
As noted above, since 1998, we had been implementing a new MIS system
in our distribution operations. As of December 31, 1999, we had expended
approximately $8.7 million in relation to development and implementation of this
new system. Of that amount, approximately $1.0 million related to the finance
component of the system that was successfully implemented and is currently being
depreciated. The remaining $7.7 million is related to the components of the
system intended to support all other areas of the distribution operations,
excluding finance. Management has made the decision to discontinue
implementation of this portion of the system and has begun to review
alternatives to the finance component for which the licensing agreement expires
in September 2000. Based upon the decision to not complete the implementation,
we have recognized a charge of $7.7 million as of December 31, 1999 to write-off
those costs incurred relating to the development and implementation of the
components of the MIS system that will not be completed.
24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The table below provides information about our market sensitive
financial instruments and constitutes a "forward- looking statement." Our major
market risk exposure is changing interest rates in the United States and
fluctuations in the London Interbank Offered Rate. Our policy is to manage
interest rates through use of a combination of fixed and floating rate debt. All
items described are non-trading. The table below assumes the December 31, 1999
interest rates remain constant (dollars in thousands).
Fair Value
December 31,
2000 2001 2002 2003 2004 Thereafter Total 1999
------- ---- ---- ---- ---- ---------- ------- ------------
Long term debt:
Fixed rate debt..... $164,254 $164,254 $164,254
Average interest rate -- -- -- -- -- 8.13%
Variable rate debt:. $269,580 -- -- -- -- -- 269,580 269,580
Average interest rates 8.50%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is included elsewhere in
this report (see Part IV, Item 14).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 is hereby incorporated by reference
from the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders, which Proxy Statement will be filed within 120 days after the end
of the fiscal year ended December 31, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is hereby incorporated by reference
from the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders, which Proxy Statement will be filed within 120 days after the end
of the fiscal year ended December 31, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is hereby incorporated by reference
from the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders, which Proxy Statement will be filed within 120 days after the end
of the fiscal year ended December 31, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is hereby incorporated by reference
from the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders, which Proxy Statement will be filed within 120 days after the end
of the fiscal year ended December 31, 1999.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) The consolidated balance sheets as of December 31, 1998 and
December 31, 1999 and the related consolidated statements of operations and
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999 are filed as part of this report:
(1) FINANCIAL STATEMENTS PAGE
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets at December 31, 1998 and 1999 F-3
Consolidated Statements of Operations
for the three years ended December 31, 1999 F-4
Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 1999 F-5
Consolidated Statements of Cash Flows
for the three years ended December 31, 1999 F-6
Notes to Consolidated Financial Statements F-7
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
for the three years ended December 31, 1999 F-31
(3) EXHIBITS
3.1 Certificate of Incorporation of the Company and amendment thereto(1)
3.2 Second Amendment to Certificate of Incorporation(4)
3.3 Bylaws of the Company(1)
4.1 Indenture, dated as of February 17, 1998, among Aviation Sales
Company, certain of its subsidiaries, and Sun trust Bank Central
Florida, National Association, Trustee(3)
4.2 Common Stock Purchase Warrant Certificate issued on February 18, 2000 to Citicorp USA, Inc. (18)
10.1 Third Amended and Restated Credit Agreement, dated as of October 17, 1997, by and among the
Company, certain of its subsidiaries and Citicorp USA, Inc., as agent(2)
10.2 Lease, dated as of December 2, 1994, by and between Aviation Properties and the Partnership(1)
10.3 Memorandum of Purchase and Sale effective as of March 31, 1998
by and between Aviation Properties of Texas and Aviation Sales
Operating Company for Pearland facility (14)
10.4 Lease dated July 22, 1998 by and between Ben Quevedo, Ltd. and Caribe (14)
+ 10.5 Form of Employment Agreement, dated January 1, 1999, by and between Dale S. Baker and the
Company (14)
+ 10.6 Amended Employment Agreement, effective as of December 2, 1994, by and between Harold Woody
and the Company(4)
10.7 Intentionally omitted
+ 10.8 Amended Employment Agreement, effective as of June 1, 1996, by and between Michael A. Saso and
the Company(4)
27
+ 10.9 Form of Employment Agreement, dated January 1, 1999, by and between Benito Quevedo and the
Company (14)
+ 10.10 1996 Director Stock Option Plan(4)
+ 10.11 1996 Stock Option Plan(4)
+