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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
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, 1998
Commission File No. 1-11775
AVIATION SALES COMPANY
(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 N.W. 25TH STREET, MIAMI, FLORIDA 33122
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(Address of principal executive offices) (Zip Code)
(305) 592-4055
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
----------------------------- -----------------------------------------
Common Stock, par value $.001 New York Stock Exchange
per share
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 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 March 15, 1999, 12,553,775 shares of Common Stock were outstanding and the
aggregate market value (based on the closing price on the New York Stock
Exchange on March 15, 1999, which was $44.69 per share) of the Common Stock held
by non-affiliates was approximately $378,755,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held in May 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 THE "COMPANY" 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 THE COMPANY'S GROWTH STRATEGY AND
ANTICIPATED TRENDS IN THE INDUSTRY IN WHICH THE COMPANY OPERATES. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON THE COMPANY'S CURRENT EXPECTATIONS AND
ARE SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATING TO THE
COMPANY'S 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, THE
COMPANY'S ABILITY TO ACQUIRE ADEQUATE INVENTORY AND TO OBTAIN FAVORABLE PRICING
FOR SUCH INVENTORY, COMPETITIVE PRICING FOR THE COMPANY'S PRODUCTS AND SERVICES,
INCREASED COMPETITION IN THE AIRCRAFT SPARE PARTS REDISTRIBUTION AND
MAINTENANCE, REPAIR AND OVERHAUL MARKETS, THE ABILITY TO CONSUMMATE SUITABLE
ACQUISITIONS, UTILIZATION RATES FOR THE COMPANY'S MR&O FACILITIES, THE ABILITY
TO EFFECTIVELY INTEGRATE RECENTLY COMPLETED AND FUTURE ACQUISITIONS, 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 THE
COMPANY IN THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY DOES NOT UNDERTAKE ANY
OBLIGATION TO REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS
OR CIRCUMSTANCES.
GENERAL
Aviation Sales Company is a leading provider of fully integrated aviation
inventory and maintenance, repair and overhaul services, and the Company
believes that it is the largest independent provider of heavy maintenance
services for aircraft in North America and the largest redistributor of aircraft
parts in the world. The Company sells aircraft spare parts and provides
inventory management services and maintenance, repair and overhaul ("MR&O")
services to commercial passenger airlines, air cargo carriers, maintenance and
repair facilities and other redistributors throughout the world. Parts sold by
the Company include rotable and expendable airframe and engine components for
commercial airplanes, including Boeing, McDonnell Douglas, Lockheed and Airbus
aircraft and Pratt & Whitney, General Electric and Rolls Royce jet engines. MR&O
services offered by the Company through its six FAA-licensed repair stations
include aircraft heavy maintenance and modification and repair and overhaul on a
wide range of aircraft and aircraft components. Inventory management services
offered by the Company include purchasing services, repair management, warehouse
management, aircraft disassembly services, and consignment and leasing of
inventories of aircraft parts and engines. The Company also manufactures certain
aircraft parts for sale to original equipment manufacturers ("OEMs"), including
precision engine parts.
The Company believes 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. The market
for spare parts and the redistribution market in particular are growing due to
(i) the increasing size and the age of the worldwide airline fleet (the
worldwide fleet of commercial airplanes is expected to more than double from
1997 to 2017) and (ii) increased outsourcing by airlines of inventory management
functions in response to cost control pressures. These pressures have also
contributed to a reduction in the number of approved vendors utilized by
airlines and maintenance and repair facilities, which in turn has led to
consolidation in the redistribution market. The aircraft spare parts
redistribution market is highly fragmented, with a limited number of large,
well-capitalized companies including the Company selling a broad range of
aircraft spare parts, and numerous smaller competitors servicing specialized
niches.
The Company believes that the total worldwide market for MR&O services is
approximately $27.0 billion annually and that $5.3 billion of that amount
represents commercial airframe MR&O services being provided in North America.
Approximately 65% of the North American services are currently being performed
by airlines themselves, with the remaining demand being outsourced to
independent providers such as the Company. Due to the increasing size and age of
the worldwide air fleet, increased outsourcing by airlines and air cargo
carriers seeking to control their costs and reductions in the number of approved
vendors utilized by such airlines and air cargo carriers, the Company believes
that the demand for MR&O services from large, fully integrated independent
providers such as the Company will continue to increase in the future.
The Company's strategy is to be the vendor of choice to its customers, providing
total inventory solutions and total aircraft maintenance solutions to meet their
spare parts and MR&O requirements. The Company believes that future growth in
its business will come from internal growth combined with growth through
additional acquisitions of companies which expand or add to the Company's
existing product and service offerings. Internal growth is expected to be
achieved through continued customer penetration in existing markets, expansion
into new product areas, continued investment in the size and breadth of its
inventory and by continuing to offer customers a broad array of inventory
management and MR&O services. These services allow the Company's customers to
reduce their costs of operations by outsourcing some or all of their inventory
management and MR&O functions and to take advantage of opportunities to maximize
the value of their spare parts inventory. Additionally, the Company's position
as a leading redistributor of aircraft spare parts allows the Company to better
service its MR&O customers, due to the timely availability of the Company's
extensive parts inventory to its MR&O operations. The Company also manufactures
certain aircraft parts which the Company sells to OEM customers. The Company
believes that its manufacturing capabilities allow it to better service its
existing and future customers, providing it with a competitive advantage. The
Company believes that providing a diversified platform of products and services,
combined with the Company's superior management information systems, financial
strength and access to capital markets, will allow the Company to capitalize on
the current industry environment and to take advantage of favorable industry
trends.
INDUSTRY OVERVIEW
GROWTH IN MARKET FOR AIRCRAFT SPARE PARTS AND MR&O SERVICES
According to Boeing's 1998 Current Market Outlook (the "Boeing Report"), the
worldwide fleet of commercial airplanes is expected to double from approximately
12,300 airplanes at the end of 1997 to approximately 26,200 airplanes by 2017.
Further, the Boeing Report projects that cargo jet aircraft will increase from
approximately 1,430 airplanes in 1997 to approximately 2,706 airplanes by 2017.
The majority of the airplanes delivered to cargo operators are expected to be
used aircraft converted from commercial passenger service. Additionally, the
Company believes that the number of planes in service for more than 10 years is
continuing to increase, and that these older planes are the primary market for
redistributors and for independent providers of MR&O services. The Company
believes that all of these factors will increase the demand for aircraft spare
parts from the redistribution market and for MR&O services.
Since the Company's customers consist of airlines, maintenance and repair
facilities that service airlines and other aircraft spare parts redistributors,
as well as original equipment manufacturers, the Company's business is impacted
by the economic factors which affect the airline industry. When such factors
adversely affect the airline industry, they tend to reduce the overall demand
for aircraft spare parts, causing downward pressure on pricing and increasing
the credit risk associated with doing business with airlines. Additionally,
factors such as the price of fuel affect the aircraft spare parts market, since
older aircraft (into which aircraft spare parts are most often placed) become
less viable as the price of fuel increases. There can be no assurance that
economic and other factors which may affect the airline industry will not have
an adverse impact on the Company's business, financial condition or results of
operations.
INCREASED OUTSOURCING OF INVENTORY MANAGEMENT AND MR&O FUNCTIONS
Airlines incur substantial expenditures in connection with fuel, labor and
aircraft ownership. Further, 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 (e.g., the price of fuel), the
Company believes that obtaining replacement parts from the redistribution market
and outsourcing inventory management and MR&O functions are areas in which
airlines can reduce their operating costs. Outsourcing inventory management and
MR&O functions allows these functions to be handled less expensively and more
efficiently by an operator such as the Company that can achieve economies of
scale unavailable to individual airlines.
REDUCTION IN NUMBER OF SELECTION 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 the Company believes there will continue to be a
consolidation in the redistribution and MR&O markets. Further, over the last few
years, several smaller and start-up airlines have chosen to lease inventories of
aircraft spare parts in order to preserve capital while maintaining adequate
spare parts support.
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CONSIGNMENT AND BULK PURCHASES
Certain of the Company's customers adjust inventory levels on a periodic basis
by disposing of excess aircraft parts. Traditionally, larger airlines have used
internal purchasing agents to manage such dispositions. The Company believes
that major airlines and other owners of aircraft spare parts, in order to
concentrate on their core businesses and to more effectively redistribute their
excess parts inventories, are increasingly entering into long-term consignment
agreements with redistributors. By consigning inventories to a redistributor
such as the Company, customers are able to distribute their aircraft spare parts
to a larger number of prospective inventory buyers, allowing customers to
maximize the value of their inventory. Consignment also enables the Company to
offer for sale a significant parts inventory at minimal capital cost to the
Company. Consignment agreements are generally entered into on a long-term basis
for a large group of parts or entire airplanes which are disassembled for sale
of the individual parts. In the Boeing Report, it is noted that approximately
3,732 aircraft will be removed from active commercial service between 1997 and
2017. Many of these aircraft will be disassembled in order to sell their parts.
COMPETITIVE STRENGTHS
The Company believes that its competitive position in the markets which it
serves is based on its diverse product and service offerings, sophisticated
inventory management information systems and a consistent record of meeting
rigorous customer requirements.
DIVERSIFIED PLATFORM OF PRODUCTS AND SERVICES
The Company believes that the breadth of services which it provides to its
customers, including a wide range of parts repair, MR&O and inventory management
services, and specialized manufacturing, allows the Company to be a vendor of
choice to its customers in a highly fragmented industry. The Company has over
1,000 customers, including commercial passenger airlines, air cargo carriers and
maintenance and repair facilities.
LARGE INVENTORY BASE
The Company believes that it has one of the largest inventories of aircraft
spare parts in the world, with over 555,000 line items currently in stock. The
Company's inventory supports the worldwide commercial fleet of over 11,500
aircraft including Airbus A300, A31x, A32x and A340 series aircraft, Boeing 707,
727, 737, 747, 757, 767 and 777 series aircraft, McDonnell Douglas DC-8, DC-9,
DC-10, MD-8x and MD-11 series aircraft, and the Lockheed L-1011 aircraft. In
addition, the Company has parts available for the following engine types:
General Electric CF6, SNECMA CFM-56, Pratt and Whitney JT-3, JT-8, JT-9 and
PW-2000 and the Rolls Royce RB-211.
EMPHASIS ON QUALITY CONTROL
The Company incurs significant expenses to maintain the most stringent quality
control of its products and services and the Company has continually met or
exceeded these requirements. The Company also performs testing and certification
procedures on all of the products that it manufactures, repairs and overhauls,
and maintains detailed records to ensure traceability of the aircraft spare
parts in its inventory and the production of and service on each aircraft
component and airplane. The expense required to institute and maintain the
Company's quality control procedures represents a barrier to entry for other
companies.
PROPRIETARY MANAGEMENT INFORMATION SYSTEMS
The Company's proprietary management information systems comprise an integral
component of the Company's position as a leader in its industry. As industry,
regulatory and public awareness have focused on safety, documentation and
traceability of aircraft parts have become key factors in determining which
companies will be able to effectively compete in the redistribution business.
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 acts as a barrier to new entrants into the
market. The Company's MIS systems collect and report data regarding inventory
turnover, documentation, pricing, market availability and customer demographic
information on more than 35 million line items. Access to such information
enables the Company to be aware of and to capitalize on the changing trends in
the marketplace. The Company utilizes electronic data scanning and document
image storage technology for rapid and accurate retrieval of inventory
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traceability documents. The Company is continuing to invest in technology to
maintain its strength in this area. In that regard, the Company is implementing
new management information systems that management believes will allow the
Company to maintain its competitive advantage, as well as mitigate the Year 2000
issues currently inherent in the Company's existing systems. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Impact of the Year 2000."
WORLDWIDE MARKETING PRESENCE
The Company conducts business in more than 100 countries and utilizes sales
representatives in 23 countries. This international presence allows the Company
to meet the demands of its global customer base and provides for a timely supply
of parts and services. During the years ended December 31, 1996, 1997 and 1998,
29%, 24% and 18 %, respectively, of the Company's operating revenues were
derived from sales to international customers and 71%, 76% and 82%,
respectively, of the Company's operating revenues were derived from sales to
domestic customers. For further information, see Note 9 to Notes to Consolidated
Financial Statements.
SIGNIFICANT FINANCIAL AND OTHER RESOURCES
As a result of the Company's capital position, the Company is able to take
advantage of opportunities which arise in the market from time to time to expand
its products and services, make selected acquisitions and evaluate bulk
purchases of inventory. The Company's market presence, industry experience,
sophisticated MIS systems and capital strength enable the Company to quickly
analyze and complete purchases, giving the Company 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: (a) rotable; (b)
repairable; and (c) expendable. A rotable is a part which is removed
periodically as dictated by an operator's maintenance procedures 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 designated number of allowable flight hours and/or cycles
(one take-off and landing generally 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.
The Company's inventory consists in large part of rotable and repairable parts
which are regularly required by its customers. The Company also maintains an
inventory of expendable parts.
Aircraft spare parts conditions are classified within the industry as (a)
factory new, (b) new surplus, (c) overhauled, (d) serviceable and (e) 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 it
is repaired by a licensed repair facility rather than completely disassembled as
in an overhaul. A part may also be classified serviceable 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, or
overhauled 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.
The Company's inventory consists principally of new, overhauled, serviceable and
repairable aircraft parts that are purchased from many sources. Before parts may
be installed in an aircraft, they must meet certain standards of condition
established by the FAA and/or the equivalent regulatory agencies in other
countries. Specific regulations vary from country to country, although
regulatory requirements in other countries generally coincide with FAA
requirements. Parts must also be traceable to sources deemed acceptable by such
agencies. Parts owned or acquired by the Company may not meet applicable
standards or standards may change in the future, causing parts which are already
contained in the Company's inventory to be scrapped or modified. Aircraft
manufacturers may also develop new parts to be used in lieu of parts already
contained in the Company's inventory. In all such cases, to the extent that the
Company has such parts in its inventory, their value may be reduced.
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OPERATIONS
The Company's core business is the buying and selling of aircraft spare parts
and the providing of MR&O and inventory management services. Additionally, the
Company manufactures aircraft parts for sale to OEM customers.
SALES OF AIRCRAFT SPARE PARTS AND INVENTORY MANAGEMENT SERVICES
The daily operations of the Company encompass inventory sales, brokering and
exchanging aircraft spare parts. The Company advertises its available
inventories held for sale or exchange on the Inventory Locator Service ("ILS")
and the Airline Inventory Redistribution System ("AIRS") electronic databases.
Buyers of aircraft spare parts can access the ILS and AIRS databases and
determine the companies which have the desired inventory available. The Company
estimates that 70% of its daily sales activity results from an ILS or AIRS
inquiry. All major airlines and repair agencies subscribe to one or both of
these databases and, accordingly, the Company maintains continual on-line direct
access with them. The Company also maintains direct Electronic Data Interchanges
("EDI") with significant customers. These programs provide for the electronic
exchange of pricing and availability from the Company to the customer in
response to an electronic request for quotation. ILS and AIRS do not, however,
list price information relating to particular parts. Knowledge of the value of
particular parts is provided by the Company's proprietary database.
The Company currently has over 555,000 line items in stock with market
availability, pricing and historical data available on more than 35 million line
items. The Company sells new, overhauled and serviceable replacement parts from
its inventory. Additionally, the Company will purchase parts on behalf of its
customers against specific orders. The Company also offers a customer exchange
program for rotables. In an exchange transaction, the Company exchanges a new
surplus, overhauled or serviceable part taken from stock with a customer's
as-removed part which has failed. The Company receives 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.
The Company meets the outsourcing requirements of its customers through
providing a number of inventory management services which assist airlines in
streamlining their inventory management operations while utilizing their capital
more efficiently and reducing their costs. Through the offering of various
services, the Company believes it can provide an inventory management program
geared to a customer's particular requirements. These services include
consignment, purchasing services and repair management, aircraft disassembly,
warehouse management and leasing.
By consigning inventories to a redistributor such as the Company, customers are
able to distribute their aircraft spare parts to a larger number of prospective
inventory buyers, allowing the customer to maximize the value of their
inventory. Consignment also enables the Company to offer for sale significant
parts inventory at minimal capital cost to the Company. The Company also
provides repair management services to certain of its customers, whereby the
Company receives a fee for managing a customer's spare parts repair
requirements. The Company provides "teardown" services at its Ardmore, Oklahoma
facility. The Company primarily disassembles airplanes to obtain aircraft spare
parts for its inventory, but also tears down airplanes in connection with
consignment arrangements and for the purpose of returning disassembled aircraft
spare parts directly to a customer. In addition, the Company provides warehouse
management services which allow a customer to avoid the costs associated with
the operation of its own inventory warehouse facility by maintaining inventory
at the Company's warehouse facility. The Company also will manage a customer's
inventory at the customer's own facility.
The Company (through its subsidiary, Aviation Sales Leasing Company) provides
long-term leasing of inventories of aircraft spare parts 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. The Company believes that it has a competitive advantage in
aircraft engines and aircraft spare parts leasing due to its ability to maximize
the residual value of the parts after termination of the lease through sales of
the parts in the ordinary course of its business. As of December 31, 1996, 1997
and 1998, the Company had $18.0 million, $22.8 million and $28.4 million,
respectively, of aircraft parts inventories on long-term lease.
MANUFACTURING SERVICES
The Boeing Report projects that global air travel will increase by an average of
5% per year through the year 2007. In addition, average passenger fleet miles
flown are also expected to increase significantly over the next few years,
requiring
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current operators to increase the size of their fleets. Further, many new
airlines are expected to commence operations in the United States and abroad.
These increases in passenger travel and the number of aircraft in service
increases the demand for manufacture services. Consequently, the Company
foresees the manufacture of aircraft parts as a significant growth opportunity
for it, and as an integral component of the Company's expansion strategy.
The Company currently owns two companies which manufacture aircraft parts for
sale to OEMs:
AVS/Kratz-Wilde Machine Company ("Kratz-Wilde") specializes in the
manufacture of machined components primarily for jet engines, and also
produces 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 three
manufacturing facilities in the greater Cincinnati area. Kratz-Wilde
provides the Company with precision manufacturing capabilities which
the Company believes will allow it to expand its relationship with its
current and future OEM customers.
Apex Manufacturing, Inc. ("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.
MAINTENANCE, REPAIR AND OVERHAUL SERVICES
In 1997, the Company made a strategic decision to expand the services which it
provides to include the MR&O of aircraft. Through Aerocell Structures, Inc.
("Aerocell"), Caribe Aviation, Inc. ("Caribe"), Aircraft Interior Design, Inc.
("Aircraft Interior"), and the Triad International Maintenance Corporation
("TIMCO"), which has facilities in Greensboro, North Carolina, Lake City,
Florida and Macon, Georgia, the Company provides fully integrated MR&O services
for commercial, military and freighter aircraft and for a variety of aircraft
parts.
REPAIR SERVICES
The Company provides repair services at its three FAA licensed repair stations,
Aerocell, Caribe and Aircraft Interior. Aerocell, acquired in September 1997,
specializes in the MR&O of airframe components, including flight controls,
doors, fairing panels, nacelle systems and exhaust systems. Caribe, acquired in
March 1998, is a FAA-licensed repair station specializing 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 manufactures plastic cabin interior replacement
parts under FAA-PMA approval and refurbishes aircraft interior components,
including passengers and crew seats.
AIRCRAFT HEAVY MAINTENANCE
TIMCO, through its Greensboro, Lake City and Macon facilities, performs aircraft
heavy maintenance and modification services. These principally consist of
scheduled "C" and "D" level maintenance checks and the modification of passenger
airplanes 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-certified 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 a thorough cleaning of the aircraft's exterior, testing and lubrication
of its operational systems, filter servicing and limited cleaning and servicing
of the interior. Trained mechanics perform a visual inspection of the external
structure and internal structure through access panels. 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 systems and structural functions. In
the "D" level check, the aircraft is disassembled to the point where the entire
structure can be inspected and evaluated and a more thorough review of the
operational systems of the aircraft can be made. Once the evaluation and repairs
are completed, the aircraft and its systems are reassembled 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 1,000 to 5,000 flight hours and
intervals between "D" level checks can range from 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
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work or repairs not provided for in the original work scope. Project
coordinators and customer support personnel work closely with the customer
service representative of the Company's airline customer 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.
Each aircraft certified by the FAA is constructed under a "Type Certificate."
Anything which is done subsequently to overhaul or modify the aircraft from its
original specifications requires the review, flight-testing and approval of the
FAA, which is evidenced by the issuance of a Supplemental Type Certificate
("STC") for that particular change. Typical modification services include
refurbishing and reconfiguring passenger seating, installing passenger amenities
such as telephones and video screens and converting traditional passenger cabins
into amenity-filled "VIP" quarters.
The process of converting a passenger plane to freighter configuration entails
completely stripping the interior; strengthening the load-bearing capacity of
the flooring; installing a bulkhead or cargo net; cutting into the fuselage for
the installation of a cargo door; reinforcing the surrounding structures for the
new door; replacing windows with metal plugs; and fabricating and installing the
cargo door itself. The aircraft interior may also need to be lined to protect
cabin walls from pallet damage and the air conditioning system may have to be
modified. Conversion contracts also typically require "C" or "D" level
maintenance checks as these converted aircraft have often been out of service
for some time and maintenance is usually required for the aircraft to comply
with current FAA standards. Additional overhaul and modification services
performed include cockpit reconfiguration and the integration of Traffic Control
and Avoidance Systems ("TCAS"), windshear detection systems and navigational
aids.
SALES AND MARKETING; CUSTOMERS
The Company utilizes inside sales and marketing persons, regional field
salespersons, independent contract representatives and overseas sales offices in
its sales and marketing efforts. The Company's outside sales force is
responsible for obtaining new customers and maintaining relationships with
existing customers. The majority of the Company's day-to-day sales are
accomplished through the Company's inside sales force.
The Company staffs its 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. The Company's South Florida
location, with easy access to Miami International Airport and Fort Lauderdale
International Airport, assists the Company in providing reliable and timely
delivery of purchased aircraft parts.
The Company has over 1,000 customers, which include commercial passenger
airlines, air cargo carriers, maintenance and repair facilities and other
aircraft parts redistribution companies. The Company's top ten customers
accounted for approximately 26%, 29% and 38% of operating revenues,
respectively, for the three years ended December 31, 1998. No customer accounted
for more than 10% of operating revenues for the year ended December 31, 1998.
MANAGEMENT INFORMATION SYSTEMS
The Company has developed a proprietary management information system which is
an important component of its business and a significant factor in the Company's
leading position in the redistribution market. The Company's management
information system collects and reports data regarding inventory turnover and
traceability, pricing, market availability, customer demographics and other
important data used by the Company. The Company currently maintains marketing
data on and is able to estimate the value of more than 3.7 million line items.
The Company also maintains databases on recommended upgrades or replacements,
including airworthiness directives. Access to such information gives the Company
the best possible opportunity to avoid purchases of aircraft spare parts which
might be deemed unusable. In addition, the data maintained by the Company allows
it to provide its customers with information with respect to obsolescence and
interchangeability of parts. The Company utilizes electronic data scanning and
document image storage technology for accurate and rapid retrieval of inventory
traceability documents that must accompany all sales. These documents are
required by the Company's customers in order for them to comply with applicable
regulatory guidelines. The Company believes that its continued investment in the
development of information systems is a key factor in maintaining its
competitive advantage.
The Company believes that to maintain its competitive advantages, accommodate
growth and keep pace with the rapid changes in technology, it will be prudent to
continue to acquire state of the art management information systems to ensure
the capability to meet the Company's needs for the foreseeable future. In that
regard, the Company is implementing new management information systems that
management believes will allow the Company to maintain its competitive advantage
- 7 -
and to mitigate the Year 2000 issues currently inherent in the Company's
existing systems. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"--Impact of Year 2000."
COMPETITION
There are numerous suppliers of aircraft parts in the aviation market worldwide
which customers can access through inventory listing services. Suppliers of
aircraft parts 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. The Company's 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 MR&O market the Company's major competitors include B.F. Goodrich, Dee
Howard Company, Mobile Aerospace, Inc. and Dalfort Aviation. The Company's
principal competitors for military contracts include Boeing Military Aircraft,
Lockheed-Martin Aeromod and Raytheon-E Systems.
Several of the Company's competitors have greater financial and other resources
than the Company. There can be no assurance that competitive pressures will not
materially and adversely affect the Company's business, financial condition or
results of operations.
GOVERNMENT REGULATION AND TRACEABILITY
The aviation industry is highly regulated. While the Company's redistribution
activities are not regulated, the aircraft spare parts which it sells to its
customers must be accompanied by documentation which enables the customer to
comply with applicable regulatory requirements. Additionally, the Company must
be certified by the FAA in order to manufacture or repair aircraft components
and to perform MR&O services on aircraft. Although the Company believes that its
manufacturing and MR&O operations are in material compliance with applicable
regulations, there can be no assurance of this fact. Further, there can be no
assurance that new and more stringent government regulations will not be adopted
in the future or that any such new regulations, if enacted, would not have a
material adverse effect on the Company's business, financial condition or
results of operations.
The FAA regulates the manufacture, repair and operation of all aircraft and
aircraft parts 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, the Company utilizes FAA
and/or Joint Aviation Authority certified repair stations (including the
Company's FAA-licensed repair facilities) to repair and certify parts to ensure
worldwide marketability. The operations of the Company may in the future be
subject to new and more stringent regulatory requirements. In that regard, the
Company closely monitors the FAA and industry trade groups in an attempt to
understand how possible future regulations might impact the Company.
An important factor in the aircraft spare parts redistribution market relates to
the documentation or traceability that is supplied with an aircraft spare part.
The Company requires all of its suppliers to provide adequate documentation as
dictated by the appropriate regulatory authority. The Company utilizes
electronic data scanning and storage techniques to maintain complete copies of
all documentation. Documentation required includes, where applicable, (a) a
maintenance release from a certified airline or repair facility signed and dated
by the 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, (b) a "teardown" report detailing the discrepancies and
corrective actions taken during the last shop repair and (c) an invoice or
purchase order from an approved source.
Further, the Company's operations are subject to a variety of worker and
community safety laws. The Occupational Safety and Health Act mandates general
requirements for safe workplaces for all employees. Specific safety standards
have been
- 8 -
promulgated for workplaces engaged in the treatment, disposal or storage of
hazardous waste. The Company believes that its operations are in material
compliance with heath and safety requirements of the Occupational Safety and
Health Act.
PRODUCT LIABILITY
The Company's business exposes it to possible claims for personal injury or
death which may result from the failure of an aircraft spare part sold,
manufactured or repaired by it or from its negligence in the repair or
maintenance of an aircraft or an aircraft part. The Company may also have
exposure to product liability claims in the event that the use of its leased
aircraft, aircraft engines or aircraft spare parts inventory is alleged to have
resulted in bodily injury or property damage. While the Company maintains what
it believes to be adequate liability insurance to protect it from such claims
based on its review of the insurance coverages maintained by similar companies
in its industry, no assurance can be given that claims will not arise in the
future or that such 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 such liability not covered by insurance could have a
material adverse effect on the financial condition of the Company.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 3,800 persons. None
of the Company's employees are covered by collective bargaining agreements. The
Company believes that its relations with its employees are good.
- 9 -
ITEM 2. PROPERTIES.
The Company's executive offices are located in Miami, Florida. The construction
of the Company's new corporate headquarters and warehouse facility recently
commenced. The new facility, which will be a leased facility, will be located on
a 41 acre parcel in the City of Miramar, Florida, will contain approximately
630,000 square feet of space and consist of two buildings. One building, which
will contain approximately 545,000 square feet, will consolidate the operations
of the Company's aircraft spare parts redistribution business as well as serve
as the corporate headquarters of the Company's distributions services,
maintenance, repair and overhaul, leasing and manufacturing operations. The
Company's subsidiary, Caribe, will use the second building which will contain
approximately 85,000 square feet of office and warehouse space.
The following table identifies, as of March 1999, the principal properties
utilized by the Company. See Notes 6 and 8 to Notes to Consolidated Financial
Statements.
APPROXIMATE SQUARE OWNED OR
FACILITY DESCRIPTION LOCATIONS FOOTAGE LEASED
- -------------------- ----------- ------- --------
Corporate Headquarters and Warehouse Miami, FL 166,000 Leased
Office and Repair Facility Hot Springs, AK 260,000 Owned
Aircraft Disassembly and Storage Ardmore, OK 130,000 Leased
Warehouse Pearland, TX 100,000 Owned
Office and Manufacturing Facility Dallas, TX 80,000 Owned
Office and Manufacturing Facility Miami, FL 55,000 Leased
Office and Manufacturing Facility Westchester, OH 47,400 Owned
Warehouse Miami, FL 40,000 Leased
Office and Manufacturing Facility Covington, KY 38,200 Owned
Manufacturing Facility Fairfield, OH 30,500 Owned
Office and Manufacturing Facility Miami, FL 30,000 Leased
Office and Manufacturing Facility Phoenix, AZ 25,000 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
Office and Aircraft Maintenance Facility Lake City, FL 650,000 Leased
Office and Aircraft Maintenance Greensboro, NC 610,000 Leased
Office and Aircraft Maintenance Macon, GA 140,000 Leased
In March 1999, the Company agreed to enter into a lease for a facility in
Winston-Salem, North Carolina containing 250,000 square feet of hangar space.
The Company intends to utilize this space to expand its TIMCO aircraft
maintenance operations.
The Company's ownership interests and leasehold interests in such properties are
pledged as collateral for amounts borrowed. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
- 10 -
ITEM 3. LEGAL PROCEEDINGS.
On January 8, 1999, PaineWebber Incorporated filed in the Supreme Court of the
State of New York a complaint against the Company and its subsidiary, Whitehall
Corporation, alleging breach of contract claims and related claims against the
Company and Whitehall and a tortious interference with a contract claim against
the Company. PaineWebber alleges that it is owed a fee in connection with the
Company's acquisition of TIMCO, based upon a 1997 agreement between Whitehall
and PaineWebber relating to a then proposed acquisition of TIMCO by Whitehall
which did not occur. PaineWebber is seeking damages of approximately $1.0
million, plus costs and an unstated amount of punitive damages. PaineWebber is
also seeking payment of approximately $250,000 relating to Whitehall's failure
to honor an alleged right of first refusal provision contained in the 1997
agreement.
The Company believes that its acquisition of TIMCO was not within the scope of
the 1997 PaineWebber/Whitehall agreement and that claims brought under this
agreement against the Company and Whitehall are without merit. The Company is
vigorously defending these claims. The matter has only recently been filed and
the Company intends to file a motion seeking to dismiss this claim. Although the
Company can give no assurance, based upon the available facts, the Company
believes that the ultimate outcome of this matter will not have a material
adverse effect upon the Company's financial condition.
On June 4, 1998, Kenneth L. Harding filed an action against the Company in the
United States District of Oklahoma. Harding alleges that he had a contract with
AvEng Trading Partners, Inc. (the assets of which were subsequently acquired by
the Company) that he would receive a commission of 20% of the margin on all
aircraft parts sales to American Airlines prior to November 1997, in addition to
a $2,000 monthly retainer which he was paid prior to the termination of his
contract by the Company in November 1997. Harding claims that James Stoecker,
AvEng's principal who subsequently became employed by the Company, confirmed and
ratified Harding's contract when Mr. Stoecker was an employee of the Company.
Mr. Stoecker and the Company severed their relationship in November 1997. The
Company is vigorously defending this action. Although the Company can give no
assurance, based upon the available facts, the Company believes that the
ultimate outcome of this matter will not have a material adverse effect upon the
Company's financial condition.
On June 24, 1998, Zantop International Airlines, Inc. Aero filed an action
against Aero Corp.-Macon, Inc., one of the Company's subsidiaries (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. The Company is vigorously
defending this action. Although the Company can give no assurance, based upon
the available facts, the Company believes that the ultimate outcome of this
matter will not have a material adverse effect upon the Company's financial
condition.
For information regarding certain environmental proceedings, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources -- Environmental."
Except as described above, the Company is not presently involved in any material
legal proceedings outside the ordinary course of business. In the opinion of the
Company's management, the ultimate resolution of these claims and lawsuits will
not have a material adverse effect upon the financial position of the Company.
From time to time, the Company or one or more of its subsidiaries may be named
as a defendant in suits for product defects, breach of warranty, breach of
implied warranty of merchantability or other actions relating to products which
it distributes which are manufactured by others or relating to repair and MR&O
services which of the Company provides on aircraft and aircraft parts. The
Company believes that this exposure is adequately covered by insurance, although
there can be no assurance.
- 11 -
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no vote of security holders during the fourth quarter of 1998.
- 12 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following information relates to the Company's 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 March 16, 1999, there were approximately 318
stockholders of record of the Company's Common Stock. The foregoing number does
not include beneficial holders of the Company's common stock. The high and low
last sales prices of the Common Stock for each quarter during the Company's two
most recent fiscal years, as reported by the New York Stock Exchange, are set
forth below:
HIGH LOW
1997
First Quarter $26.75 $20.50
Second Quarter $25.87 $21.25
Third Quarter $31.25 $20.87
Fourth Quarter $38.93 $30.37
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
The Company did not declare any cash dividends during for the year ended
December 31, 1998. See Note 5 to Notes to Consolidated Financial Statements for
information concerning restrictions contained in the Company's 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.
- 13 -
ITEM 6. SELECTED FINANCIAL DATA.
The following table represents selected consolidated financial information of
the Company. The selected financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and notes thereto and
with Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations which contains a description of the factors which
materially affect the comparability from period to period of the information
presented herein.
Year Ended December 31, (1)
-----------------------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
(In Thousands, Except per Share Data)
STATEMENT OF INCOME DATA:
Operating revenues............................. $ 60,289 $169,771 $231,734 $322,538 $500,816
Cost of sales and services..................... 39,603 119,438 169,787 244,758 372,728
----------- ----------- ----------- ----------- -----------
Gross profit................................... 20,686 50,333 61,947 77,780 128,088
Operating expenses............................. 17,625 28,884 33,958 52,782 66,719
----------- ----------- ----------- ----------- -----------
Income from operations......................... 3,061 21,449 27,989 24,998 61,369
Interest expense .............................. 4,458 8,287 5,411 8,059 21,343
Other (income) expense......................... (1,414) (1,025) (461) 4,696 (196)
----------- ----------- ----------- ----------- -----------
Income before income taxes, equity (income)
losses of affiliate and extraordinary item... 17 14,187 23,039 12,243 40,222
Income tax expense............................. - 914 1,617 7,260 15,486
----------- ----------- ----------- ----------- -----------
Income before equity (income) losses of affiliate
and extraordinary item....................... 17 13,273 21,422 4,983 24,736
Equity (income) losses of affiliate, net of income
taxes........................................ 50 38 (255) 139 (1,356)
----------- ----------- ----------- ----------- -----------
Income before extraordinary item............... (33) 13,235 21,677 4,844 26,092
Extraordinary item, net of income taxes........ - - 1,862 - 599
----------- ----------- ----------- ----------- -----------
Net income (loss) ............................. $ (33) $ 13,235 $ 19,815 $ 4,844 $ 25,493
=========== =========== =========== =========== ===========
Historical diluted net income (loss) per
share(3)(4).................................. $ - $ 1.44 $ 1.84 $ 0.39 $ 2.01
=========== =========== =========== =========== ===========
Pro Forma diluted net income (loss) per
share(2)(3)(4)............................... $ - $ 1.01 $ 1.19
=========== =========== ===========
As of December 31,
-----------------------------------------------------------------------------
BALANCE SHEET DATA: 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- -----------
Accounts receivable............................ $ 23,968 $ 41,173 $ 55,548 $ 82,779 $115,974
Inventories.................................... 59,069 56,094 79,414 145,343 277,131
Working capital................................ 69,610 68,039 88,222 89,988 169,742
Total assets................................... 121,477 134,660 190,118 341,332 599,377
Total debt..................................... 69,152 62,042 42,360 165,802 366,176
Stockholders' equity........................... 34,068 44,298 115,896 121,279 154,298
- ---------------------------------------------
(1) Dixie Bearings, Inc. ("Dixie"), which was acquired in August 1996,
Kratz-Wilde, which was acquired in October 1997, Caribe and Aircraft Interior,
which were acquired in March 1998, and TIMCO, which was acquired in September
1998 are accounted for under the purchase method of accounting and accordingly,
their results of operations have been included in the Company's historical
results of operations from their respective date of acquisition.
The acquisition of AvEng, which was acquired in December 1996, Aerocell, which
was acquired on September 30, 1997, Apex, which was acquired in December 1997,
and Whitehall, which was acquired in July 1998, were accounted for using the
pooling of interest method of accounting. AvEng is included in the Company's
historical financial results for all periods presented subsequent to 1995, and
Aerocell and Apex are included for all periods presented subsequent to 1996.
Historical operating results and financial position for periods presented prior
to 1996 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 acquisition of Aerocell and
Apex, due to the immateriality of the restated amounts. Whitehall is included in
the Company's historical financial results for all periods presented.
- 14 -
(2) Periods presented prior to 1997 include pro forma adjustments to record
income taxes, as the Company conducted its 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 8,698,898 for 1994; 9,161,379 for 1995;
10,769,408 for 1996; 12,450,176 for 1997 and 12,696,394 for 1998.
(4) The pre 1997 share data 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 the Company's initial public offering ("IPO") in
July 1996.
- 15 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Results of Operations
GENERAL
Operating revenues consist primarily of 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 an inventory provision for damaged and obsolete products.
Product costs consist of the acquisition cost of the products and any costs
associated with repairs, overhaul or certification.
Operating revenues and gross profit depend in large measure on the volume and
timing of sales orders received during the period and the mix of aircraft spare
parts contained in the Company's inventory. The Company's operating results are
affected by many factors, including the timing of orders from large customers,
the timing of expenditures to purchase inventory in anticipation of future
sales, the timing of bulk inventory purchases, the mix of available aircraft
parts contained at any time in the Company's inventory, the number of airline
customers seeking repair services and MR&O services at any time, the Company's
ability to fully utilize its available hangar space from period to period and
the timeliness of customer aircraft in arriving for scheduled maintenance. A
large portion of the Company's operating expenses are relatively fixed. Since
the Company typically does not obtain long-term purchase orders or commitments
from its customers, it must anticipate the future volume of orders based upon
the historic purchasing patterns of its customers and upon discussions with its
customers as to their future requirements. Cancellations, reductions or delays
in orders by a customer or group of customers could have a material adverse
effect on the Company's business, financial condition and results of operations.
See Note 2 to Notes to Consolidated Financial Statements for a discussion of the
acquisitions completed by the Company in 1996, 1997 and 1998.
- 16 -
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The following tables set forth certain information relating to the Company's
operations for the periods indicated:
Year Ended December 31,
--------------------------------------------------------------------------
1997 1998
------------------------------- -----------------------------
$ % $ %
------------ ------------ ------------ -----------
(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 (income) expense 4,696 1.5% (196) 0.0%
------------ ------------ ------------ -----------
Income before income taxes, equity (income)
losses 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 (income) losses of affiliate
and extraordinary item 4,983 1.5% 24,736 4.9%
Equity (income) losses of affiliate, net of income
taxes 139 0.0% (1,356) (0.3%)
------------ ------------ ------------ -----------
Income before extraordinary item 4,844 1.5% 26,092 5.2%
Extraordinary item, net of income taxes - 0.0% 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 1997. Operating revenues
from companies acquired in 1997 and 1998 and accounted for under the purchase
method of accounting added $111.4 million to 1998 operating revenues. Operating
revenues also increased due to increased customer penetration, increased sales
from investments made in additional inventories and improved capacity
utilization of the Company's 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
64.7% 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 by improved utilization of the
Company's MR&O facilities, which was partially offset by an increase in the
percentage of the Company's total business derived from its MR&O operations,
which generally operate at lower gross profit margin percentages then the
Company's redistribution operations.
The Company's operating expenses increased $13.9 million to $66.7 million for
the year ended December 31, 1998, compared with $52.8 million for 1997. Included
in the 1998 operating expenses were $1.8 million of merger expenses relating to
the Whitehall merger. 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. 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 inventory acquisitions 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 $727,000 gain on the sale by Whitehall of its electronics business.
- 17 -
As a result of the above factors, net income for the year ended December 31,
1998 was $40.2 million, an increase of 228.5% over 1997.
Equity (income) losses of affiliate, net of income taxes increased from a loss
of $0.14 million to income of $1.4 million in 1998, due to increased volume in
the sales of hushkits.
During the first quarter of 1998, the Company repaid all of its outstanding term
and revolving debt with the proceeds from the sale of its senior subordinated
notes. In connection with the repayment of such debt, the Company 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.
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 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.
- 18 -
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following tables set forth certain information relating to the Company's
operations for the periods indicated:
Year Ended December 31,
-----------------------------------------------------------------------
1996 1997
---------------------------- ----------------------------------
$ % $ %
------------ ----------- ------------ -----------
(Dollars in Thousands)
Operating Revenues:
Sales of products, net $155,857 67.3% $244,340 75.8%
Services and other 75,877 32.7% 78,198 24.2%
------------ ----------- ------------ -----------
231,734 100.0% 322,538 100.0%
Cost of sales and services 169,787 73.3% 244,758 75.9%
------------ ----------- ------------ -----------
Gross profit 61,947 26.7% 77,780 24.1%
Operating expenses 33,958 14.6% 52,782 16.3%
------------ ----------- ------------ -----------
Income from operations 27,989 12.1% 24,998 7.8%
Interest expense 5,411 2.4% 8,059 2.5%
Other (income) expense (461) (0.2%) 4,696 1.5%
------------ ----------- ------------ -----------
Income before income taxes, equity (income)
losses of affiliate and extraordinary item 23,039 9.9% 12,243 3.8%
Income tax expense 1,617 0.7% 7,260 2.3%
------------ ----------- ------------ -----------
Income before equity (income) losses of affiliate
and extraordinary item 21,422 9.2% 4,983 1.5%
Equity (income) losses of affiliate, net of income
taxes (255) (0.1%) 139 0.0%
------------ ----------- ------------ -----------
Income before extraordinary item 21,677 9.3% 4,844 1.5%
Extraordinary item, net of income taxes 1,862 0.7% - 0.0%
------------ ----------- ------------ -----------
Net income $ 19,815 8.6% $ 4,844 1.5%
============ =========== ============ ===========
Operating revenues for the year ended December 31, 1997 increased 39.2% to
$322.5 million from $231.7 million for the year ended December 31, 1996. Of this
amount, approximately $44.8 million was derived from the operations associated
with companies acquired during 1997. Operating revenues for 1997 were adversely
affected by service revenues lost due to a U.S. Air Force C-130 maintenance
contract, described above, that was awarded but subsequently cancelled at the
convenience of the government. Operating revenues also increased due to the
inclusion of a full year of sales from Company's bearings distribution business,
which was acquired in August 1996, increased revenues from leasing activities,
increased customer penetration, increased sales due to the Company's investment
in and availability of increased amounts of inventory and the continued
expansion of inventory management services being offered to and utilized by the
Company's customers.
Gross profit increased 25.6% from $61.9 million to $77.8 million for the years
ended December 31, 1996 and 1997, respectively. Gross profit margin in 1997
decreased to 24.1% from 26.7% in 1996. The decrease in gross profit margin
compared to 1996 was due largely to the impact of the loss of the above
described C-130 contract on 1997 results. In addition to the fixed costs
associated with the idle hangar space, Aero Corp.-Lake City incurred incremental
costs associated with hiring and training personnel in anticipation of providing
services under the C-130 contract. A slight decline in margin on sales of
products reflected a declining contribution from bulk inventories of aircraft
parts acquired prior to 1995 and an increase in revenues from the Company's
lower margin bearings distribution business acquired in August 1996.
The Company's operating expenses increased $18.8 million from $34.0 million for
the year ended December 31, 1996 to $52.8 million for the year ended December
31, 1997. Of this increase, approximately $9.8 million related to accounts
receivable, inventory and environmental reserves recorded by Whitehall. See
"--Liquidity and Capital Resources-- Environmental" below. Of the remaining
increase, approximately $4.9 million was attributable to the operating expenses
of companies acquired in 1997, with the balance attributable to higher sales
levels resulting in higher selling and operating expenses. Excluding the above
described Whitehall reserves, operating expenses as a percentage of operating
revenues decreased from 14.6% in 1996 to 13.3% in 1997.
Interest expense increased $2.6 million, or 48.9%, from 1996 to 1997, primarily
due to the increase in borrowings utilized to fund the Company's continued
growth.
- 19 -
Other income and expense in 1997 included the $4.5 million writedown of
Whitehall's investment in the preferred stock of the purchaser of its ocean
systems business. Other income and expense in 1996 included interest income of
$307,000.
As a result of the above factors, income before income taxes and extraordinary
item decreased $10.8 million, or 46.9%, from 1996 to 1997.
Equity (income) losses of affiliate, net of income taxes decreased from income
of $0.30 million to a loss of $0.13 million in 1996 due to uncollectible
receivables and obsolete inventory being written off during 1997.
Prior to June 26, 1996, the operations of the Company were conducted by a
partnership and, therefore, the results of operations for the period January 1,
1996 through June 26, 1996 do not include a provision for income taxes, as the
income of the partnership passed directly to its partners. Additionally, income
taxes for 1996 were offset by one-time deferred tax benefits of approximately
$4.9 million associated with the organization of the Company. No such tax
benefit was realized in 1997.
In connection with its IPO, the Company repaid all outstanding term and
revolving indebtedness. As a result, during 1996 the Company wrote-off
approximately $3.1 million in deferred financing costs relating to that debt,
which resulted in an extraordinary item, net of taxes, of approximately $1.9
million.
LIQUIDITY AND CAPITAL RESOURCES
CASH
Cash used in operations during 1997 and 1998 was $53.7 million and $71.0
million, respectively. Cash used in investing activities during 1997 and 1998
was $58.4 million and $114.3 million, respectively. The Company continues to
invest in spare parts inventories in order to support increased parts sales and
continues to grow through strategic acquisitions. During 1997 and 1998 the
Company financed its operating and investing activities primarily with its cash
flow from financing activities, amounting to $114.4 million, and $189.5 million,
respectively.
CAPITAL EXPENDITURES
During 1997 and 1998, the Company incurred capital expenditures of approximately
$8.1 million and $16.6 million, respectively, primarily to renovate the
maintenance facility operated by Aero Corp.-Lake City and to make enhancements
to the Company's management information systems, telecommunications systems and
other capital equipment and improvements. The Company anticipates that it will
incur capital expenditures of approximately $25.3 million in 1999, which relate
to expenditures for new equipment for its manufacturing operations, furniture
and fixtures for its new corporate headquarters, new management information
systems and enhancements to the existing management information systems, as well
as ordinary course repair and replacement of existing equipment. Financing for
such expenditures will be provided from operations and from borrowings under the
Credit Facility (as defined below).
As part of its growth strategy, the Company intends to continue to grow through
internal expansion as well as acquisitions of other businesses. Financing for
such activities will be provided from borrowings under the Credit Facility and
potential issuances of additional debt and/or equity securities. The Company
believes that available capital resources under the Credit Facility will be
sufficient to satisfy the Company's anticipated working capital requirements
over the next twelve months.
ENVIRONMENTAL
The Company is taking remedial action pursuant to Environmental Protection
Agency ("EPA") and Florida Department of Environmental Protection ("FDEP")
regulations at Aero Corp.-Lake City. Ongoing testing is being performed and new
information is being gathered to continually assess the impact and magnitude of
the required remediation efforts on the Company. Based upon the most recent cost
estimates provided by environmental consultants, the Company believes that the
total remaining testing, remediation and compliance costs for this facility will
be approximately $2.4 million. Testing and evaluation for all known sites on
Aero Corp.-Lake City's property is substantially complete and the Company has
commenced a remediation program. The Company is currently monitoring the
remediation, which will extend into the future. Subsequently, the Company's
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, the
- 20 -
Company believes that it has established an accrual for a reasonable estimate of
the costs associated with its current remediation strategies. To comply with the
financial assurances required by the FDEP, the Company has issued a $1.7 million
standby letter of credit in favor of the FDEP.
Additionally, there are other areas adjacent to Aero Corp.-Lake City's facility
that could also require remediation. The Company does not believe that it is
responsible for these areas; however, it may be asserted that Whitehall and
other parties are jointly and severally liable and are responsible for the
remediation of those properties. No estimate of any such costs to the Company is
available at this time.
In connection with the sale of Whitehall's electronics business, Whitehall was
required to perform, at its own expense, an environmental site assessment at the
electronics business' facility. Whitehall was also required to remedy all
recognized environmental conditions identified in the assessment to bring such
facility into compliance with all applicable Federal, State, and local
environmental laws. The buyer of this business, subject to the terms and
conditions set forth in the agreement, has the option of requiring Whitehall to
repurchase this property for $300,000.
The Company has accrued $3.4 million towards potential obligations to remediate
the environmental matters described above.
Future information and developments will require the Company to continually
reassess the expected impact of the environmental matters discussed above.
Actual costs to be incurred in future periods may vary from the estimate, given
the inherent uncertainties in evaluating environmental exposures. These
uncertainties included the extent of required remediation based on testing and
evaluation not yet completed and the varying costs and effectiveness of
remediation methods.
SENIOR CREDIT FACILITY
The Company has a credit facility ("Credit Facility") with a syndicate of
financial institutions. The Credit Facility consists of a revolving loan and
letter of credit facility of $250.0 million, up to $30.0 million of which may be
outstanding letters of credit. Borrowings under the Credit Facility are secured
by a lien on substantially all of the Company's assets and the borrowing base
consists of substantially all of the Company's receivables and inventory.
Interest under the Credit Facility is, at the option of the Company, (a) prime
plus a margin, or (b) LIBOR plus a margin, where the respective margin
determination is made upon its 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). At December 31, 1999, the margin was 0.5% for
prime rate loans and 2.0% for LIBOR rate loans.
The Credit Facility contains certain financial covenants regarding the Company's
financial performance and certain other covenants, including limitations on the
amount of annual capital expenditures and the incurrance of additional debt, and
provides for the suspension of borrowing 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. At
December 31, 1998, the Company was not in compliance with one of its
non-monetary financial covenants and the Company has obtained a waiver from the
lender relating to such covenant. At March 30, 1999, $4.9 million was available
for borrowing under the Credit Facility and outstanding letters of credit
aggregated $22.6 million.
SENIOR SUBORDINATED NOTES
In February 1998 the Company sold $165.0 million of its senior subordinated
notes due in 2008 with a coupon rate of 8.125% at a price of 99.395%. The
Company used the proceeds of the sale to repay all amounts outstanding under its
then outstanding term, acquisition and revolving credit facilities and to fund
the cash requirements related to the acquisition of Caribe and Aircraft
Interior. The funds repaid included amounts borrowed during 1997 to repay
assumed indebtedness of Aerocell and Apex in connection with those acquisitions
and borrowings incurred to fund the purchase price in connection with the
acquisition of Kratz.
The senior subordinated notes mature on February 15, 2008. Interest is payable
on February 15 and August 15 of each year, commencing August 15, 1998. The
senior subordinated notes are general unsecured obligations of the Company,
subordinated in right of payment to all of the Company's existing and future
senior debt, including indebtedness outstanding
- 21 -
under the credit facility and under facilities which may replace the credit
facility in the future. In addition, the senior subordinated notes are
effectively subordinated to all secured obligations to the extent of the assets
securing such obligations, including the credit facility.
The indenture pursuant to which the senior subordinated notes have been issued
permits the Company and its subsidiaries to incur substantial additional
indebtedness, including additional senior debt. Under the indenture, the Company
may borrow unlimited additional amounts so long as after incurring such debt it
meets a fixed charge coverage ratio for the most recent four fiscal quarters of
2.0 to 1 until February 15, 2000 and 2.25 to 1 thereafter. At December 31, 1998,
the Company's fixed charge coverage ratio for the last four fiscal quarters was
3.1 to 1. Additionally, the indenture allows the Company to borrow and have
outstanding additional amounts of indebtedness (even if it does not meet the
required fixed charge coverage ratios), up to enumerated limits. The senior
subordinated notes are also effectively subordinated in right of payment to all
existing and future liabilities of any of its subsidiaries which do not
guarantee the senior subordinated notes.
The senior subordinated notes are fully and unconditionally guaranteed, on a
senior subordinated basis, by substantially all of the Company's existing
subsidiaries and each subsidiary that will be organized in the future by it,
unless such subsidiary is designated as an unrestricted subsidiary. 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 their obligations, including the credit facility. Furthermore, the
indenture permits subsidiary guarantors to incur additional indebtedness,
including senior debt, subject to certain limitations.
The senior subordinated notes are redeemable, at the Company's 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, the Company may redeem up to 35% of the aggregate principal amount of the
senior subordinated 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
common stock of the Company; provided, that at least 65% of the aggregate
principal amount of the senior subordinated notes originally issued remains
outstanding immediately after the occurrence of this redemption.
Upon the occurrence of a change of control, the Company will be required to make
an offer to repurchase all or any part of each holder's senior subordinated
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 the Company will have the
financial resources necessary to purchase the senior subordinated notes upon a
change of control or that such repurchase will then be permitted under the
credit facility.
The indenture contains certain covenants that, among other things, will limit
the Company's ability and that of its 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 its assets.
OTHER NOTES
The Company has entered into several term loan agreements to finance equipment
and rotable parts on long-term lease which secure the loans. These term loans,
in the original aggregate principal amount of $17.7 million, bear interest
ranging from 7.40% to 8.21% and are payable monthly through August 2003. These
term loans contain financial and other covenants and mandatory prepayment
events. At December 31, 1998, the Company was in compliance with all covenants
of these term loans.
In connection with its acquisition of Kratz, AVS/Kratz-Wilde Machine Company, a
subsidiary of the Company, delivered to the sellers a non-interest bearing
promissory note in the original principal amount of $2.2 million, which was
guaranteed by the Company. At December 31, 1998, the Company was in compliance
with the terms of this promissory note.
- 22 -
In connection with its acquisition of Caribe and Aircraft Interior, on March 6,
1998 Aviation Sales Manufacturing Company, a subsidiary of the Company,
delivered to the sellers a promissory note in the original principal amount of
$5.0 million, which was guaranteed by the Company. The note is payable over a
two year period with interest at the rate of 8% per annum.
LEASE FOR NEW FACILITY
On December 17, 1998, the Company entered into an operating lease for its
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, with annual rent as
provided in the lease. The lease contains financial covenants regarding the
Company's financial performance and certain other affirmative and negative
covenants which it will be obligated to comply with during the term of the
lease. Substantially all of the Company's subsidiaries have guaranteed its
obligations under the Lease. Additionally, the Company has an option to acquire
the new facility at the end of the lease for an option price as determined in
the lease. Alternatively, if the Company does not purchase the new facility at
the end of the lease, it will be obligated to pay certain amounts as provided in
the lease.
The development of the new facility has been financed by the trust through a
$35.5 million loan obtained from a syndicate of financial institutions. Pursuant
to the agreements which the Company entered into in connection with the lease,
the Company is obligated to develop the new facility on behalf of the trust and
is responsible for the timely completion thereof within an established
construction budget. The Company and substantially all of its subsidiaries have
guaranteed the repayment of $31.2 million of the trust's obligations under the
agreements. The trust's obligations under these agreements are secured by a lien
on the real property and improvements comprising the new facility and on the
fixtures therein. Further, the Company has posted an irrevocable letter of
credit in favor of the trust in the amount of approximately $8.0 million to
secure both the Company's obligations under the lease and the trust's
obligations under these agreements.
IMPACT OF THE YEAR 2000
Over the last year, the Company has been implementing new management information
("MIS") systems in order to both allow the Company's computer systems, which are
an important component of its businesses, to meet the Company's needs into the
foreseeable future and to mitigate the Year 2000 issues which the Company's
management believes could be inherent in the Company's existing MIS systems. The
Company has also grown rapidly over the last year, and particularly over the
last six months, and has expanded its operations beyond the redistribution of
aircraft spare parts into the MR&O of aircraft and aircraft components and into
the manufacturing of aircraft parts for sale to original equipment
manufacturers. Due to its rapid expansion, the Company recently commenced an
assessment of the MIS requirements in all of its businesses.
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. The Company may be affected by
Year 2000 issues in its own 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.
STATE OF READINESS
The Company has substantially completed an assessment of its internal and
external (third-party) IT systems and non-IT systems. At this point in its
assessment, which the Company believes is approximately 78% complete (in the
aggregate), other than as described herein, the Company is not currently aware
of any Year 2000 problems relating to its systems or the systems operated by
third parties which would have a material effect on the Company's business,
results of operations or financial condition, without taking into account the
Company's efforts to avoid such problems, although there can be no assurance
thereof. In addition, the Company believes that it is approximately 27% and 20%
complete (in the aggregate), respectively, with its Year 2000 remediation and
validation.
The Company's IT systems consist of software licensed from third parties and
hardware purchased or leased from third parties. The Company is currently
implementing new MIS systems, which are primarily designed to service the
Company's distribution services and manufacturing businesses, including new
software and hardware, which management believes that, once fully implemented,
will be Year 2000 compliant and will meet the requirements of the Company's
distribution services and manufacturing businesses into the foreseeable future.
The Company anticipates the systems for each of the distribution services
operations and the manufacturing operations will be substantially implemented by
the end of the third quarter of 1999, although there can be no assurance
thereof.
- 23 -
The Company has determined that the MIS system which is currently being used by
its distribution services business is not Year 2000 compliant. If the
implementation of the Company's new MIS system is delayed for any reason beyond
April 1999, the Company may decide to modify its existing MIS system to make it
Year 2000 compliant. The Company believes that such modifications would need to
commence no later than July 1999 for the Company to be in a position to
implement, remediate and validate its existing system, as modified, for Year
2000 compliance prior to January 1, 2000. While the Company has been informed by
its vendors that its existing MIS system can be brought into Year 2000
compliance on a timely basis, there can be no assurance of this fact.
To date, the Company has determined that some of the MIS systems which are
currently being used by its MR&O businesses are not Year 2000 compliant.
Excluding the non-IT systems at its TIMCO Greensboro, Lake City and Macon
facilities, the Company has substantially completed its assessment of the
hardware and software being used by its MR&O operations and believes that such
systems can be made Year 2000 compliant by the end of 1999. The Company is still
in the process of conducting an assessment of the Year 2000 compliance of the
non-IT systems for its TIMCO Greensboro, Lake City and Macon facilities, which
were acquired in 1998. Until such time as the Company substantially completes
such assessment, the Company is unable to determine the scope of remediation and
validation work associated with the non-IT systems at such facilities.
The Company has also determined that its MIS systems which are being used by its
manufacturing business are not Year 2000 compliant. The Company has
substantially completed its assessment of the hardware and software being used
by its manufacturing operations and believes that such systems can be made Year
2000 compliant either through replacement of the MIS systems or remediation of
the existing hardware and software of its various manufacturing operations. It
expects to complete such changes prior to the end of 1999.
Excluding its TIMCO Greensboro, Lake City and Macon facilities, the Company has
further substantially completed an assessment of its non-IT systems which the
Company has identified as containing embedded chip systems for Year 2000 issues.
At this point in its assessment, the Company is not currently aware of any Year
2000 problems relating to these systems which would have a material effect on
the Company's business, results of operations, or financial condition, without
taking into account the Company's efforts to avoid such problems. Additionally,
the Company is reviewing the efforts of its vendors and customers to become Year
2000 compliant. Letters and questionnaires have been or are in the process of
being sent to all critical entities with which the Company does business to
assess their Year 2000 readiness. To date, the Company has received responses
from approximately 40% of such third parties, and approximately 60% of the
companies that have responded have provided assurances to the Company that they
have already addressed, or that they will address on a timely basis, all of
their known significant Year 2000 issues. The Company anticipates that these
activities will be on-going for all of 1999 and will include follow-up telephone
interviews, correspondence and on-site meetings as considered necessary in the
circumstances. Although this review is continuing, the Company is not currently
aware of any vendor or customer circumstances that may have a material adverse
impact on the Company. The Company will seek alternative suppliers if
circumstances warrant. The Company can provide no assurance that Year 2000
compliance plans of its vendors and customers will be completed on a timely
manner.
In that regard, the Company believes that issues relating to the Year 2000
compliance of aircraft spare parts in its inventory, if any, will ultimately be
the responsibility of the manufacturers of such parts, although there can be no
assurance. Further, it is unclear whether the Company's product liability
insurance would ultimately cover a claim based upon a Year 2000 problem in a
part sold by the Company.
The Company's IT systems and other business resources rely on IT systems and
non-IT systems provided by service providers and therefore may be vulnerable to
those service providers' failure to remediate their own Year 2000 issues. Such
service providers include those for the Company's network and e-mail services
and landlords for the Company's currently occupied leased office spaces. The
Company has contacted these principal service providers and has been notified
that the IT and non-IT systems which they provide to the Company are Year 2000
compliant.
COSTS
The Company believes that the cost of the new MIS system (i) for its
distribution services business will be approximately $13.5 million, of which
approximately $4.8 million has been expended to date and approximately $8.7
million of which it believes will be expended during 1999 and (ii) for its
manufacturing business will be approximately $2.1 million of which
- 24 -
approximately $947,000 has been spent to date and approximately $1.15 million
will be expended during 1999. At present, the Company is in the early stages of
assessing the Year 2000 compliance of the non-IT systems at its TIMCO
Greensboro, Lake City and Macon facilities. Until such assessment is
substantially complete, the Company does not believe it will be in a position to
estimate the Year 2000 compliance costs for its MR&O business. The costs of the
Company's new MIS systems are being funded from the Company's existing lines of
credit. The $4.8 million and $947,000, respectively, spent to date has related
substantially to the cost of the new MIS systems and not to bringing the
Company's existing MIS systems into Year 2000 compliance. Such cost estimates
include both hardware and software costs, as well as the anticipated costs of
the use of consultant services, but do not include Company internal costs
associated with such efforts, which are not separately tracked for Year 2000
compliance efforts. Such internal costs principally consist of the payroll costs
for Company employees working on such compliance efforts.
If the Company determines that due to delays in the implementation of its new
MIS system for its distribution services business, it is in the Company's best
interest to update its existing MIS system for such business to make it Year
2000 compliant, so that such system remains available for use in the Company's
business until the new MIS system for business becomes operational, the cost of
such update is expected to be approximately $3.5 million. Such cost, if
incurred, would be in addition to the costs associated with the development and
implementation of the new MIS system for its distribution services business as
described above, and would not be recoverable in connection with the development
and implementation of the new MIS system for such business.
RISKS RELATING TO THE COMPANY'S FAILURE TO BECOME YEAR 2000 COMPLIANT
To the extent that the Company's assessment is finalized without identifying any
additional material non-compliant IT systems operated by the Company or by third
parties, the most reasonably likely worst case Year 2000 scenario is that the
Company will have to bring its existing MIS systems into Year 2000 compliance;
provided, however, that while the Company believes based upon its assessments
that its existing systems can be made Year 2000 compliant prior to December 31,
1999, there can be no assurance of this fact. The Company believes that it will
be able to either bring its new MIS systems substantially into operation or
bring its existing systems into Year 2000 compliance by the end of 1999,
although there can be no assurance.
The Company's failure to bring either its new MIS systems into operation or
bring its existing MIS systems into Year 2000 compliance by the end of 1999
would likely have a material adverse effect on the Company, in that it would
make it very difficult for the Company to operate its business in the ordinary
course and would likely cause the Company to lose revenues, have increased
operating costs and have business interruptions of a material nature (which
would likely not be covered by the Company's existing business interruption
insurance) until such systems were in place. In addition, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.
CONTINGENCY PLANS
As discussed above, the Company is engaged in an ongoing Year 2000 assessment in
order to determine the operational problems and costs (including loss of
revenues) that would be reasonably likely to result from the failure by the
Company and certain third parties to complete efforts necessary to achieve Year
2000 compliance on a timely basis. The Company is currently continuing to
develop its new MIS systems for its distribution services business, and hopes to
be in a position by March 1999 to determine whether such system will be far
enough along in its development so that it can be made operational prior to the
end of 1999. Alternatively, unless by the end of April 1999 the Company has
determined that it is reasonably likely that it will be in a position to bring
its new MIS system for its distribution services business into operation prior
to the end of the year, the Company will likely opt to expend the costs
associated with bringing the Company's existing MIS system for its distribution
services business into Year 2000 compliance.
The Company is currently considering what its contingency plans will be in the
event that the Company is not able to bring its IT and non-IT systems for its
TIMCO Greensboro, Lake City and Macon facilities into Year 2000 compliance by
the end of 1999. The Company currently plans to complete such contingency plans
by the end of April 1999.
- 25 -
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The table below provides information about the Company's market sensitive
financial instruments and constitutes a "forward- looking statement." The
Company's major market risk exposure is changing interest rates in the United
States and fluctuations in the London Interbank Bank Offered Rate. The Company's
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, 1998 interest rates remain constant.
FAIR VALUE
DECEMBER 31,
1999 2000 2001 2002 2003 THEREAFTER TOTAL 1998
---- ---- ---- ---- ---- ------------ ------- -----
(IN THOUSANDS)
Long term debt:
Fixed rate debt......... - - - - - 164,163 164,163 164,163
Average interest rates.. 8.13%
Variable rate debt: 174,007 - - - - - 174,007 174,007
Average interest rates.. 7.66%
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
- 26 -
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 definitive Proxy Statement for the Annual Meeting scheduled to be
held in May 1999, under the caption, "Election of Directors," to be filed by
the Registrant.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference from the
Registrant's definitive Proxy Statement for the Annual Meeting scheduled to be
held in May 1999, under the caption, "Executive Compensation," to be filed by
the Registrant.
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 definitive Proxy Statement for the Annual Meeting scheduled to be
held in May 1999, under the caption, "Security Ownership of Certain Beneficial
Owners and Management," to be filed by the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference from the
Registrant's definitive Proxy Statement for the Annual Meeting scheduled to be
held in May 1999, under the caption "Certain Transactions," to be filed by the
Registrant.
- 27 -
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The consolidated balance sheets as of December 31, 1997 and
December 31, 1998 and the related consolidated statements of income and
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998 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, 1997 and 1998 F-3
Consolidated Statements of Income for the three years ended
December 31, 1998 F-5
Consolidated Statements of Stockholders'
Equity for the three years ended December 31, 1998 F-6
Consolidated Statements of Cash Flows for the three years ended
December 31, 1998 F-7
Notes to Consolidated Financial Statements F-9
(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts for the
three years ended December 31, 1998 F-36
(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 SunTrust Bank Central Florida, National
Association, Trustee(3)
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
*10.4 Lease dated July 22, 1998 by and between Ben Quevedo,
Ltd. and Caribe
*10.5 Form of Employment Agreement, dated January 1, 1999,
by and between Dale S. Baker and the Company
+10.6 Amended Employment Agreement, effective as of
December 2, 1994, by and between Harold Woody and
the Company(4)
*10.7 Form of Employment Agreement, dated January 1, 1999,
by and between James D. Innella and the Company
- 28 -
+10.8 Amended Employment Agreement, effective as of June 1,
1996, by and between Michael A. Saso and the
Company(4)
*10.9 Form of Employment Agreement, dated January 1, 1999,
by and between Benito Quevedo and the Company
+10.10 1996 Director Stock Option Plan(4)
+10.11 1996 Stock Option Plan(4)
+10.12 1997 EBITDA Incentive Compensation Plan(5)
*10.13 Form of Aviation Sales Company 1999 EBITDA Plan
*+10.14 Form of Stock Option Agreement (Non-Plan) by and
between the Company and each of Dale S. Baker,
James D. Innella and Benito Quevedo
10.15 Merger Agreement by and among Aviation Sales Company,
AVS/ASI Merger Corp., Aerocell Structures, Inc. and
the shareholders of Aerocell Structures, Inc., dated
as of September 30, 1997(6)
10.16 Asset Purchase Agreement by and between Aviation
Sales Company and Kratz-Wilde Machine Company, dated
as of September 30, 1997(7)
10.17 Stock for Asset Purchase Agreement by and between
Aviation Sales Company, AVS/AMI Merger Corp., Apex
Manufacturing, Inc. and the shareholders of Apex
Manufacturing, Inc., dated as of December 31, 1997(8)
10.18 Merger Agreement by and among Aviation Sales Company,
AVS/CAI Merger Corp., Caribe Aviation, Inc., Aircraft
Interior Design, Inc. and Benito Quevedo(9)