UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to _____________
Commission File No. 1-11775
AVIATION SALES COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 65-0665658
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3601 FLAMINGO ROAD
MIRAMAR, FLORIDA 33027
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 538-8900
Indicate by checkmark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 15,015,317 shares of common
stock, $.001 par value per share, were outstanding as of May 17, 2001.
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, March 31,
2000 2001
--------------- ---------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 1,155
Accounts receivable, net 67,558 65,943
Inventories 53,115 58,160
Deferred income taxes -- --
Other current assets 10,784 8,219
--------------- ---------------
Total current assets 131,457 133,477
--------------- ---------------
Equipment on lease, net 5,749 2,300
Fixed assets, net 65,770 63,859
Amounts due from related parties 1,792 --
OTHER ASSETS:
Goodwill, net 41,390 40,803
Deferred financing costs, net 5,928 9,007
Notes receivable from KAV Inventory, LLC 29,400 29,400
Net assets of discontinued operations 3,479 6,401
Other assets 15,646 15,581
--------------- ---------------
Total other assets 95,843 101,192
--------------- ---------------
Total assets $300,611 $300,828
=============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Continued)
December 31, 2000 March 31, 2001
------------------- ------------------
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 30,214 $ 43,282
Accrued expenses 27,725 12,375
Current maturities of notes payable 29 1,717
Current maturities of capital lease obligations 178 178
Revolving loan 35,959 36,100
Customer deposits 7,559 11,093
Other 5,120 6,484
------------------- ------------------
Total current liabilities 106,784 111,229
------------------- ------------------
Senior subordinated notes 164,345 164,368
Notes payable, net of current portion 16,498 24,961
Capital lease obligations, net of current portion 3,852 3,819
Deferred income 36 36
Other long-term liabilities 2,204 2,204
------------------- ------------------
Total long-term liabilities 186,935 195,388
------------------- ------------------
COMMITMENTS AND CONTINGENCIES (Note 5)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
outstanding, 15,000 shares designated Series A Junior
Participating -- --
Common stock, $.001 par value, 30,000,000 shares authorized,
15,015,317 shares issued and outstanding at December 31,
2000 and March 31, 2001 15 15
Additional paid-in capital 150,288 152,824
Retained deficit (143,411) (158,628)
------------------- ------------------
Total stockholders' equity (deficit) 6,892 (5,789)
------------------- ------------------
Total liabilities and stockholders' equity (deficit) $ 300,611 $ 300,828
=================== ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------------------
2000 2001
----------------- -----------------
Operating revenues:
Sales, net $ 99,687 $ 77,701
Other 2,104 3,886
----------------- -----------------
101,791 81,587
Cost of sales 83,453 82,165
----------------- -----------------
Gross profit 18,338 (578)
Operating expenses 11,300 8,412
----------------- -----------------
Income (loss) from operations 7,038 (8,990)
Interest expense and other 5,263 6,486
----------------- -----------------
Income (loss) before income taxes, equity
income of affiliate and discontinued
operations 1,775 (15,476)
Income tax expense 727 37
----------------- -----------------
Income (loss) before equity income of affiliate
and discontinued operations 1,048 (15,513)
Equity income of affiliate 93 --
----------------- -----------------
Income (loss) from continuing operations 1,141 (15,513)
Discontinued operations:
Operations, net of income taxes (2,747) --
Income on disposal, net of income taxes -- 296
----------------- -----------------
Net loss $ (1,606) $(15,217)
----------------- -----------------
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.08 $ (1.03)
Income (loss) from discontinued operations (0.19) 0.02
----------------- -----------------
Net loss $ (0.11) $ (1.01)
----------------- -----------------
Diluted earnings (loss) per share:
Income (loss) from continuing operations $ 0.08 $ (1.03)
Income (loss) from discontinued operations (0.19) 0.02
----------------- -----------------
Net loss $ (0.11) $ (1.01)
----------------- -----------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
For the Three Months Ended
March 31,
----------------- -----------------
2000 2001
----------------- -----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (1,606) $ (15,217)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 3,647 3,846
Proceeds from sale of equipment on lease,
net of gain 876 --
Provision for doubtful accounts 812 492
Equity income of affiliate, net of income taxes (93) --
Deferred income taxes 252 --
(Increase) decrease in accounts receivable (18,950) 1,120
Increase in inventories (18,727) (1,709)
Decrease in other current assets 2,817 2,565
(Increase) decrease in other assets 1,890 (466)
Increase in accounts payable 6,851 13,071
Decrease in accrued expenses (1,688) (10,453)
Decrease in other liabilities (1,044) --
----------------- -----------------
Net cash used in continuing
operating activities (24,963) (6,751)
----------------- -----------------
Net cash provided by (used in) discontinued
operations 6,863 (1,962)
----------------- -----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of fixed assets (4,180) (677)
Sale of note receivable to related party 26 1,793
Investment in joint venture (2,000) --
Proceeds from disposition of affiliate 4,000 --
----------------- -----------------
Net cash provided by (used in) investing
activities (2,154) 1,116
----------------- -----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings of amounts under senior debt facility 98,992 108,141
Repayment of amounts under senior debt facility (100,559) (107,753)
Proceeds of term loan 15,500 10,000
Payments on equipment loans (48) (97)
Payments on notes payable (3,450) --
Payments on capital leases (23) (32)
Payments of deferred financing costs (2,085) (1,507)
----------------- -----------------
Net cash provided by financing
activities 8,327 8,752
----------------- -----------------
Net (decrease) increase in cash and cash equivalents (11,927) 1,155
Cash and cash equivalents, beginning of period 21,431 --
----------------- -----------------
Cash and cash equivalents, end of period $ 9,504 $ 1,155
----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF NON CASH
FINANCING ACTIVITIES:
Value of warrants issued in connection with
origination of term loan recorded as deferred
financing costs $ 1,079 $ 2,536
----------------- -----------------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 12,869 $ 9,845
----------------- -----------------
Income taxes paid $ 253 $ --
----------------- -----------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
AVAIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Aviation Sales Company ("ASC" or the "Company") is a Delaware corporation,
which through its subsidiaries provides aircraft maintenance, repair and
overhaul services to commercial passenger airlines, air cargo carriers, aircraft
leasing companies, maintenance and repair facilities and aircraft parts
redistributors throughout the world. During 2000, the Company sold substantially
all of the assets of its parts redistribution operation, its new parts
distribution operation and its manufacturing operations. The results of
operations for these businesses are included in the accompanying condensed
consolidated statements of operations as discontinued operations. See Note 2 for
further discussion.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such
rules and regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying unaudited
interim condensed consolidated financial statements should be read in
conjunction with the Company's December 31, 2000 financial statements and the
notes thereto included in the Company's Form 10-K (File No. 001-11775).
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements of the Company contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of March 31, 2001 and the results of
its operations and cash flows for the three month periods ended March 31, 2000
and 2001. The results of operations and cash flows for the three month period
ended March 31, 2001 are not necessarily indicative of the results of operations
or cash flows which may be reported for the year ending December 31, 2001.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Principal estimates made by the Company include the estimated losses on disposal
of discontinued operations, the allowance to reduce inventory to the lower of
cost or net realizable value, the estimated profit recognized as aircraft
maintenance, design and construction services are performed, the allowance for
doubtful accounts and notes receivable, medical benefit accruals, the estimated
fair value of the facilities under operating lease, and the allowances for
litigation and environmental costs. A principal assumption made by the Company
is that inventory will be utilized and realized in the normal course of business
and may be held for a number of years.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2000, Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No. 101 regarding revenue recognition was issued. SAB No. 101
clarifies issues relating to revenue recognition in financial statements
including income statement presentation and disclosure. SAB No. 101 became
effective in 2000 and did not have a material effect on the Company's financial
position or the results of operations.
In May 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue No. 00-14, "Accounting for Certain
Sales Incentives", ("EITF Issue No. 00-14") which addresses the recognition,
measurement and income statement classification for sales incentives offered by
vendors to
6
AVAIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
customers. EITF Issue No. 00-14 became effective for the Company during the
quarter ended September 30, 2000. Sales incentives within the scope of this
issue include offers that can be used by a customer to receive a reduction in
the price of a product or service at the point of sale. The consensus states
that the cost of the sales incentive should be recognized at the latter of the
date at which the related revenue is recorded or the date at which the sales
incentive is offered. The consensus also states that when recognized, the
reduction in or refund of the selling price should be classified as a reduction
of revenue, and that if the sales incentive is a free product or service
delivered at the time of sale, the cost should be classified as an expense. The
adoption of EITF Issue No. 00-14 did not have a material effect on the Company's
financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation ("FIN") 44, "Accounting
for Certain Transactions involving Stock Compensation," which clarifies the
application of APB Opinion No. 25 for certain issues. The interpretation was
effective July 1, 2000, except for the provisions that relate to modifications
that directly or indirectly reduce the exercise price of an award and the
definition of an employee, which were effective after December 15, 1998. The
adoption of FIN 44 did not have a material effect on the Company's financial
position or results of operations.
In July 2000, the Emerging Issues Task Force ("EITF") issued 00-10,
"Accounting for Shipping and Handling Fees and Costs." EITF 00-10 became
effective in the fourth quarter of 2000. EITF 00-10 prohibits the netting of
shipping and handling costs against shipping and handling revenues. EITF 00-10
permits companies to adopt a policy of including shipping and handling costs in
cost of sales or other income statement line items. The adoption of EITF 00-10
did not have a material effect on the Company's financial position or results of
operations.
COMPREHENSIVE INCOME
For all periods presented comprehensive income (loss) is equal to net
income (loss).
LIQUIDITY
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 4,
the Company was not in compliance at March 31, 2000 with certain of the
financial covenants contained in the Company's credit agreement with its senior
lenders and certain of the lease agreements to which the Company is a party. On
May 31, 2000, the Company amended and restated its senior credit facility and
amended certain of its lease agreements. These agreements were further amended
on June 25, 2000, September 30, 2000, November 28, 2000, February 14, 2001,
April 17, 2001 and May 21, 2001. As discussed in Note 2, during 2000 the
Company sold substantially all of the assets of its parts redistribution
operation, new parts distribution operation and manufacturing operations.
The proceeds from these sales were used to repay senior indebtedness. In
addition, in February 2000, the Company borrowed $15,500 under a supplemental
term loan with the financial institution that is the agent for the revolving
credit facility and in February 2001, the Company borrowed $10,000 under a term
loan from a second financial institution. The proceeds from these loans were
used to repay senior indebtedness and for working capital. The revolving credit
facility and the $15,500 term loan mature in July 2002 and the $10,000 term loan
matures in August 2002. As a result of the above transactions, the outstanding
balance on the revolving credit facility was reduced from $268,013 as of March
31, 2000 to $36,100 as of March 31, 2001 .
As of May 18, 2001, the Company has $3,658 of availability for borrowing
under its revolving credit facility. The Company has also recently closed (on a
temporary basis) one of its maintenance, repair and overhaul ("MR&O")
facilities, consolidated the operations of one of its component overhaul
businesses from two facilities to one, reduced its headcount at certain of its
other MR&O facilities and implemented salary and benefit reductions that
effected virtually all employees in order to lower its operating expenses. The
Company is also actively considering selling one or more additional operations,
or selling additional securities, in order to
7
AVAIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
repay additional debt and to fund the working capital requirements of its
operations. While the Company expects to be able to meet its working capital
requirements from its available resources, there can be no assurance that the
Company will have sufficient working capital to meet its obligations. The
Company incurred net losses for the years ended December 31, 1999 and 2000 and
for the quarter ended March 31, 2001 and required cash to fund its operating
activities for the years ended December 31, 1999 and 2000 and for the quarter
ended March 31, 2001. As a result of these matters, the Company's auditors have
issued their opinion on the December 31, 2000 consolidated financial statements
with a going concern modification. The accompanying condensed consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. DISCONTINUED OPERATIONS
In September 2000, the Company completed the sale of substantially all of
the assets of its manufacturing operations for $40,299, after post-closing
adjustments and excluding transaction expenses. The cash proceeds of the sale
were used to repay senior indebtedness.
In December 2000, the Company completed the sale to another redistributor
(the "Purchaser") of substantially all of the assets and business of its
redistribution operation in a series of transactions intended to constitute a
single transaction (the "Transaction"). The aggregate purchase price received in
the Transaction was $156,400, approximately $127,000 of which was paid in cash
($122,000 after payment of transaction expenses). The net proceeds of the
Transaction were used to repay senior indebtedness. As part of the Transaction,
the Company acquired a 50% interest in a limited liability company, KAV
Inventory, LLC ("KAV") organized by the Purchaser and the Company. Substantially
all of the aircraft and engine spare parts inventory and the engine inventory of
the Company's redistribution operation, as well as certain rotable parts
inventories from two of the Company's MR&O operations, were sold to KAV for 89%
of the closing date book value of such inventory ($148,600, subject to post-
closing adjustments). Compensation for the sale of inventory was comprised of
cash of approximately $105,000 and two subordinated notes, each in the principal
amount of $13,700, and one subordinated note in the principal amount of $15,700.
The notes bear interest at 14% per annum and are subordinated in all respects to
KAV's institutional financing. In addition, the Company posted an $8,500 letter
of credit to secure, in part, KAV's institutional financing. Further, the
Company and the Purchaser each advanced $2,300 to KAV to allow it to pay fees
and costs relating to its institutional financing. The Company and the Purchaser
will receive reimbursement of these advances after payment of the institutional
financing and prior to repayment of the senior subordinated notes.
KAV's sole business is the liquidation of the inventory it acquired from
the Company. KAV entered into an agreement to consign all of its inventories to
the Purchaser. The Transaction agreement specifies that all of the proceeds from
sales of the inventory, less a consignment commission to the Purchaser of 20%,
will be used to pay interest and principal on KAV's institutional debt. After
the institutional debt is paid in full, proceeds from the sale of inventory will
be used to reimburse the Company and the Purchaser for advances made to KAV to
allow it to pay fees and costs relating to its institutional financing and
thereafter to pay interest and principal on the two $13,700 notes. Interest and
principal on the $15,700 note will be paid from the remaining proceeds from the
sale of inventory, less a 35% consignment commission to the Purchaser. Under the
Transaction agreement, the Company has approval rights relating to the sale
price of certain inventory. After considering a third-party appraisal of the
inventory and projections of cash distributions in accordance with the
Transaction agreement, management believes the total amount of the notes of
$29,400 will be fully realized. Interest income on the notes will be deferred
and recognized as collected following collection of all outstanding principal
amounts. The projections of cash distributions to the Company are highly
dependent upon the timing of the sales and the sale prices obtained by the
Purchaser for KAV's inventory.
The second component of the Transaction consisted of a sale of certain non-
inventory assets of the redistribution operation, including one of the $13,700
subordinated notes described above, net of certain payables assumed by the
Purchaser, for approximately $21,500, all of which was paid in cash. Under the
terms of the Transaction, the Purchaser has the right after one year from the
date of the Transaction to require the Company to
8
AVAIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
repurchase receivables sold in accordance with the Transaction to the extent
they remain uncollected. As of May 10, 2001, $8,768 of receivables sold
pursuant to the Transaction had not been collected by the Purchaser. In
addition, the purchase price for the sale of inventory and non-inventory assets
is subject to post-closing adjustments as set forth in the agreements. The
Purchaser has indicated that post-closing adjustments would result in a
reduction in the aggregate consideration received pursuant to the Transaction of
approximately $4,500. The Company has notified the Purchaser of its intention to
dispute their calculation of post-closing adjustments and the proposed reduction
in consideration. While there can be no assurance, the Company does not believe
that the resolution of this dispute or the amount of receivables which the
Company may ultimately be obligated to repurchase will have a material impact on
the Company's financial position or results of operations.
In addition, as part of the sale of the redistribution operation as
described above, the Purchaser leased a facility and certain furniture, fixtures
and equipment used in the redistribution operations for a one-year period. The
Purchaser has an option to acquire these assets during the term of the lease and
after one year the Company has an option to require the Purchaser to acquire the
assets, which can be extended by the Purchaser for six months under certain
circumstances. The Company also entered into a sublease agreement relating to
the redistribution operation's warehouse and corporate headquarters facility for
a five-year period, with the right to renew for five consecutive five-year
periods at a market rental rate. The Company also entered into a non-competition
agreement whereby the Company is restricted from engaging in the redistribution
business for a period of up to five years. In addition, the Company entered into
a cooperation agreement under which it agreed to provide repair services for the
KAV parts inventory and the Purchaser's parts inventory and the Purchaser agreed
to supply parts to the Company's MR&O operations.
In December 2000, the Company completed the sale of the stock of its
subsidiary, Aviation Sales Bearings Company, which operates the Company's Dixie
Aerospace Bearings new parts distribution operation. In the transaction, the
Company received net aggregate consideration of $17,700 inclusive of debt
assumed by the purchaser. The net cash proceeds from the sale, which
approximated $13,500, was used to reduce outstanding senior indebtedness. Also,
as part of the transaction, the Company retained certain accounts receivable and
inventories. Such retained assets are being sold and collected pursuant to
consignment and collection agreements executed with the purchaser. The Company
anticipates that the liquidation of these assets will provide additional
consideration as these receivables are collected and inventory is sold.
The net income (loss) of these operations prior to their respective
disposal dates net of income taxes is included in the accompanying condensed
consolidated statements of operations under "discontinued operations".
Previously issued financial statements have been changed to reflect those
operations as discontinued operations. Revenues from such operations were
$84,192 for the three months ended March 31, 2000.
9
AVAIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
3. INVESTMENTS IN AFFILIATES
During 1994, Whitehall obtained a 40% ownership interest in a joint venture
involved in the development of aircraft-related technology for an initial
investment of $1. The Company accounts for its investment in the joint venture
under the equity method. In 1994, Whitehall loaned $2,000 to the joint venture,
which is evidenced by a promissory note, which accrues interest at a maximum
rate of 5% per annum. Principal and accrued interest became due on January 5,
1999. During February 2000, management elected to convert the then outstanding
note and accrued interest balance into a capital contribution. During May 2000,
the Company liquidated its investment in the joint venture.
In August 1999, the Company obtained a 50% interest in a limited liability
corporation that designs, manufactures and installs an FAA approved conversion
kit that converts certain Boeing 727 aircraft from passenger configuration to
cargo configuration. The initial investment was $2,500. During 2000, the Company
invested an additional $3,734 in the form of cash advances and services. The
Company accounts for this investment under the equity method.
4. NOTES PAYABLE AND REVOLVING LOAN
Prior to May 31, 2000, the Company had a revolving loan and letter of
credit facility (the "Credit Facility") of $300,000 with a group of financial
institutions. Effective May 31, 2000, the Credit Facility was amended and the
commitment was reduced to $285,000. Following the sales of businesses described
above, the commitment was reduced to $75,000. The Credit Facility expires in
July 2002. The Credit Facility has been amended on several occasions since May
31, 2000, and most recently on May 21, 2001. Interest under the Credit Facility
is, at the option of the Company, (a) prime plus 3.0%, or (b) LIBOR plus 4.5%.
Borrowings under the Credit Facility are secured by a lien on substantially all
of the Company's assets and the borrowing base consists primarily of certain of
the Company's receivables and inventory.
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 incurrence 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 of the
Company or a change in control as defined. A default under the Credit Facility
could potentially result in a default under other agreements to which the
Company is a party, including its lease agreements. In addition, the Credit
Facility requires mandatory repayments and a reduction in the total commitment
under the Credit Facility 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. To the extent the Credit Facility
remains outstanding as of certain dates, the Company is committed to pay
incremental financing fees as follows: June 30, 2001 - $1,000, August 14, 2001 -
2% of outstanding commitment less $1,000, November 14, 2001 - 2% of outstanding
commitment and February 14, 2002 - 2% of outstanding commitment. At May 18,
2001, $3,658 was available for borrowing under the Credit Facility and
outstanding letters of credit aggregated $30,128.
In February 2000, the Company executed a $15,500 term loan with the
financial institution that is the agent under the Credit Facility. The term loan
is senior secured debt; bears interest at 12% per annum, contain financial
covenants, which are consistent with the Credit Facility, and matures in July
2002. Principal payments of $500 per month are due beginning in January 2002
with a final principal payment of $12,000 due in July 2002. Under the term loan
agreement, the Company also granted the lender common stock purchase warrants to
purchase 129
10
AVAIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
shares of the Company's common stock exercisable for nominal consideration at
any time until December 31, 2005. If the term loan is not repaid in full, the
warrants entitle the holder to require the Company to repurchase the warrants or
common shares issued upon prior exercise of the warrants at $8.50 per share. The
lender has not required the Company to repurchase any warrants through March 31,
2001. The Company has recorded the value of these warrants ($1,079) as
additional deferred financing costs and is amortizing this amount to interest
expense over the term of the loan.
In February 2001, the Company obtained a $10,000 term loan from a financial
institution. The term loan is senior secured debt, bears interest at LIBOR plus
2% and matures in August 2002. The proceeds of the term loan were used to pay
the semi-annual interest payment on the senior subordinated notes in February
2001 of $6,704 and for working capital purposes. In connection with the term
loan, the Company issued warrants to purchase 250 shares of its unissued common
stock at an exercise price of $4.00 per share to each of four individuals, two
of whom are officers and/or directors of the Company and one of whom is a
principal stockholder of the Company. Each of these individuals provided credit
support to the financial institution, which advanced the loan proceeds. The
Company has recorded the value of these warrants ($2,536) as additional deferred
financing costs and is amortizing this amount to expense over the term of the
loan.
SENIOR SUBORDINATED NOTES
In February 1998, the Company sold $165,000 of senior subordinated notes
with a coupon rate of 8.125% at a price of 99.395%. The proceeds of the sale
were used to repay all amounts then outstanding under the Credit Facility and to
fund the cash requirements related to certain acquisitions. The senior
subordinated notes mature on February 15, 2008. Interest is payable on February
15 and August 15 of each year. The senior subordinated notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior debt, including indebtedness outstanding under the
Credit Facility and under facilities, which may replace the Credit Facility in
the future. In addition, the 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 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.
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 Company did not meet the
fixed charge coverage ratio for the one-year period ended March 31, 2001.
Accordingly, its ability to incur additional debt is currently limited under its
indenture. 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 the
Company 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 Company
has not presented separate financial statements and other disclosures concerning
each of the subsidiary guarantors because management has determined that such
information is not material to investors.
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
11
AVAIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
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%. Upon the
occurrence of a change in 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 in control or
that such repurchase will then be permitted under the Credit Facility.
Under the indenture, if the Company sells assets (other than inventory in
the ordinary course of business or leases or assets subject to leases in the
ordinary course of business) with a fair market value in excess of $2,000 or for
net proceeds in excess of $2,000, the Company must comply with certain
requirements. Additionally, the Company must use the proceeds from such asset
sales, within 270 days after completion of the sales, to either permanently
repay senior debt or to acquire other businesses or assets (or, if such proceeds
are not used for these purposes, then such proceeds must be used to repurchase
senior subordinated notes). Further, if the value of the assets sold exceeds
$15,000, the Board of Directors must determine that the Company is receiving
fair market value for the assets sold.
The indenture contains certain other covenants that, among other things,
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, 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 the Company's assets.
OTHER LOANS
In connection with the Company's acquisition of Kratz-Wilde Machine Company
in October 1997, a subsidiary of the Company delivered a non-interest-bearing
promissory note (guaranteed by the Company) to the sellers in the original
principal amount of $2,500 (discounted to $2,200). A payment of $1,250 was made
during January 1999 and the final payment of $1,250 was made during January
2000. Interest on this note was imputed at 8%.
In connection with the acquisition of Caribe and AIDI, a subsidiary of the
Company delivered to the sellers a promissory note in the original principal
amount of $5,000, which was guaranteed by the Company. The note was payable over
a two year period with an interest rate of 8% per annum. The first payment of
$2,500 was made during March 1999 and the second payment of $2,500 was made
during March 2000.
12
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
Several lawsuits have been filed against the Company and certain of its
officers and directors, and its auditors, in the United States District Court
for the Southern District of Florida, which have now been consolidated into a
single lawsuit. The consolidated complaint, as amended in March 2000 and in
September 2000, alleges violations of Sections 11 and 15 of the Securities Act
of 1933 and Sections 10(b) and 20(a) of, and Rule 10b-5 under, the Securities
Exchange Act of 1934. Among other matters, the amended consolidated complaint
alleges that the Company's reported financial results were materially misleading
and violated generally accepted accounting principles. The amended consolidated
complaint seeks damages and certification of two classes, one consisting of
purchasers of the Company's common stock in the June 1999 public offering and
one consisting of purchasers of the Company's common stock during the period
between April 30, 1997 and April 14, 2000. The Company has filed a motion to
dismiss the claims in the amended consolidated complaint. The Company believes
that the allegations contained in the amended consolidated complaint are without
merit and intends to vigorously defend these and any related actions.
Nevertheless, unfavorable resolution of these lawsuits could have a material
adverse effect on the Company in one or more future periods.
The U.S. Securities and Exchange Commission is conducting an inquiry into
the Company's accounting for certain transactions. The Company is cooperating
with the SEC in its inquiry.
The Company is also involved in various lawsuits and other contingencies
arising out of its operations in the normal course of business. In the opinion
of management, the ultimate resolution of these claims and lawsuits will not
have a material adverse effect upon the financial position or results of
operations of the Company.
ENVIRONMENTAL MATTERS
The Company is taking remedial action pursuant to Environmental Protection
Agency and Florida Department of Environmental Protection ("FDEP") regulations
at TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact 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
testing, remediation and compliance costs for this facility will be
approximately $1,400. Testing and evaluation for all known sites on TIMCO-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 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 $1,400 standby letter of credit in favor of the
FDEP.
Additionally, there are other areas adjacent to TIMCO-Lake City's facility
that could also require remediation. The Company does not believe that it is
responsible for these areas; however, it may be asserted that the Company 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.
The Company owns a parcel of real estate on which the Company previously
operated an electronics business. The Company is currently assessing
environmental issues with respect to this property. When the Company
13
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
acquired Whitehall, its environmental consultants estimated that remediation
costs relating to this property could be up to $1,000.
Accrued expenses in the accompanying December 31, 2000 and March 31, 2001
condensed consolidated balance sheets includes $1,702 and $1,666, respectively,
related to 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 estimates, given
the inherent uncertainties in evaluating environmental exposures. These
uncertainties include the extent of required remediation based on testing and
evaluation not yet completed and the varying costs and effectiveness of
remediation methods.
OTHER MATTERS
The Company has employment agreements with certain of its officers and key
employees. The employment agreements provide that such officers and key
employees may earn bonuses, based upon a sliding percentage scale of their base
salaries, provided the Company achieves certain financial operating results, as
defined. Further, certain of these employment agreements provide for certain
severance benefits in the event of a change of control.
The Company has a commitment with a vendor to convert one Airbus aircraft
from passenger configuration to cargo configuration. The terms of the agreement
specify that the Company has the right to terminate the agreement; however, the
Company could be subject to a termination fee. The termination fee would be
calculated as the unused costs incurred by the vendor plus a fee equal to 10% of
such unused costs.
On December 17, 1998, the Company entered into an operating lease for its
build-to-suit corporate headquarters and warehouse facility with Wells Fargo, as
successor to 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 the
Company's 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. Management estimates that the current fair value of the
facilities exceeds the Company's purchase option. Accordingly, no accrual for
the obligation has been recorded by the Company.
Lease payments are currently at a rate of LIBOR plus 4.50% and the Company
is responsible for all property taxes, insurance and maintenance of the
property. The Company has subleased a portion of the facility to the purchaser
of the Company's redistribution business (see Note 2). The sublease is for an
initial term of five years with an additional option to renew for five
consecutive five-year terms at market rates. Payments during the initial term
are the lesser of $384 per month or the actual amount paid by the Company
relating to the premises subleased.
The development of the new facility was financed by the trust through a
$43,000 loan facility provided by a financial institution. Pursuant to the
agreements entered into in connection with this financing, the Company was
obligated to develop the new facility on behalf of the trust and was responsible
for the timely completion thereof within an established construction budget. The
Company and substantially all of its subsidiaries have guaranteed the repayment
of $37,840 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 facilities and on the fixtures therein.
14
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
Further, the Company has posted an irrevocable letter of credit in favor of the
trust in the amount of $9,000 to secure both its obligations under the lease and
the trust's obligations under these agreements.
The lease agreement has been amended on several occasions. Under the terms
of the April 19, 2001 amendment, two shareholders of the Company provided a
guarantee in an amount up to $1.0 million. As part of the amendment, the lessor
has agreed to waive non-compliance with financial covenants, if any, through the
period ended December 31, 2001. During the second quarter of 2001, the Company
will assess the accounting impact, if any, including the classification of the
lease, as a result of this amendment.
The Company's lease for its previous corporate headquarters called for
annual lease payments in the amount of $893 and expired on December 2, 2014.
The Company was relieved of its remaining obligations under the lease for its
previous corporate headquarters upon the sale of the building in March 2001.
6. EARNINGS PER SHARE
The computation of weighted average common and common equivalent shares used in
the calculation of basic and diluted earnings per share is as follows:
For the Three Months Ended
March 31,
--------------------------------
2000 2001
-------------- -------------
Weighted average common shares outstanding
used in calculating basic earnings per share 15,015 15,015
Effect of dilutive options -- --
-------------- -------------
Weighted average common and common
equivalent shares outstanding used in
calculating diluted earnings per share 15,015 15,015
============== =============
Options and warrants outstanding which are not
included in the calculation of diluted
earnings per share because their impact
is antidilutive 1,952 2,947
============== =============
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "AVIATION SALES,"
"WE," "OUR" AND "US" IN THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES AVIATION
SALES COMPANY AND ITS SUBSIDIARIES. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS
OR MAY CONTAIN FORWARD-LOOKING STATEMENTS, SUCH AS STATEMENTS REGARDING OUR
STRATEGY AND ANTICIPATED TRENDS IN THE INDUSTRY IN WHICH WE OPERATE. THESE
FORWARD-LOOKING STATEMENTS ARE BASED ON OUR CURRENT EXPECTATIONS AND ARE SUBJECT
TO A NUMBER OF RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATING TO OUR OPERATIONS
AND RESULTS OF OPERATIONS, COMPETITIVE FACTORS, SHIFTS IN MARKET DEMAND, AND
OTHER RISKS AND UNCERTAINTIES, INCLUDING, IN ADDITION TO THOSE DESCRIBED BELOW
AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q, OUR ABILITY TO CONTINUE TO
GENERATE SUFFICIENT WORKING CAPITAL TO MEET OUR OPERATING REQUIREMENTS, OUR
MAINTAINING GOOD WORKING RELATIONSHIPS WITH OUR VENDORS AND CUSTOMERS,
COMPETITIVE PRICING FOR OUR PRODUCTS AND SERVICES, OUR ABILITY TO ACHIEVE GROSS
PROFIT MARGINS AT WHICH WE CAN BE PROFITABLE, INCLUDING MARGINS ON SERVICES WE
PERFORM ON A FIXED PRICE BASIS, COMPETITION IN THE AIRCRAFT MR&O MARKET, OUR
ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL IN OUR BUSINESSES, UTILIZATION
RATES FOR OUR MR&O FACILITIES, OUR ABILITY TO EFFECTIVELY INTEGRATE FUTURE
ACQUISITIONS, OUR ABILITY TO EFFECTIVELY MANAGE OUR BUSINESS, ECONOMIC FACTORS
WHICH AFFECT THE AIRLINE INDUSTRY AND CHANGES IN GOVERNMENT REGULATIONS. SHOULD
ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY
FROM RESULTS EXPRESSED OR IMPLIED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US
IN THIS QUARTERLY REPORT ON FORM 10-Q. WE DO NOT UNDERTAKE ANY OBLIGATION TO
REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS OR
CIRCUMSTANCES.
The following discussion and analysis should be read in conjunction with
the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on
Form 10-K, as amended, for the year ended December 31, 2000 (the "Form 10-K").
RECENT DEVELOPMENTS
We believe that we will meet our working capital requirements during 2001
from funds available under our revolving credit agreement, from our operations
and from sales of one or more of our operations, individual assets or our
securities. However, there can be no assurance of this fact. Because of our
current financial situation, our auditors have included a going concern
modification in their audit report regarding our 2000 financial statements.
In December 2000, we completed the sale of our Dixie Aerospace Bearings new
parts distribution operation and our redistribution operation and in September
2000 we completed the sale of our manufacturing operation and three of the A-300
aircraft which we owned. For the terms of these transactions, see Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Form 10-K.
As a result, in part, of the anticipated reduced volume of services to be
provided to a customer which filed for bankruptcy as referred to above and in an
effort to reduce operating expenses, in March 2001 we temporarily closed our
Oscoda, Michigan heavy airframe maintenance facility and reduced headcount at
certain of our other MR&O facilities. We also consolidated our Aircraft Interior
Design operation into a single facility in Dallas, Texas.
16
In addition, in April 2001, we implemented salary and benefit reductions that
affected virtually all employees. These initiatives, which reduced our total
headcount by approximately 400, are expected to reduce our operating expenses by
approximately $22.0 million to $25.0 million on an annual basis.
RESULTS OF OPERATIONS
Operating revenues consist primarily of service revenues and sales of
materials consumed while providing services, net of allowances for returns. Cost
of sales consists primarily of labor, materials, freight charges and commissions
to outside sales representatives.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future. Many factors affect our operating results,
including:
. decisions made regarding sales of our assets to reduce our debt,
. timing of repair orders and payments from large customers,
. competition from other third party MR&O service providers,
. the number of airline customers seeking repair services at any time,
. the impact of fixed pricing on gross margins and our ability to
accurately project our costs in a dynamic environment,
. our ability to fully utilize our hangar space dedicated to
maintenance and repair services,
. the volume and timing for 727 cargo conversions and the impact
during future periods on airline use of both the 727 fleet type and
JT8D engines (both of which are older models) as a result of
increased fuel costs and interest rates,
. our ability to attract and retain a sufficient number of mechanics
to perform the maintenance, overhaul and repair services requested
by our customers, and
. the timeliness of customer aircraft arriving for scheduled
maintenance.
Large portions of our operating expenses are relatively fixed. Since we
typically do not obtain long-term commitments from our customers, we must
anticipate the future volume of orders based upon the historic patterns of our
customers and upon discussions with our customers as to their future
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers could have a material adverse effect on our business,
financial condition and results of operations.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Operating revenues from continuing operations for the three months ended
March 31, 2001 decreased $20.2 million, or 19.8%, to $81.6 million for the three
months ended March 31, 2001, from $101.8 million for the three months ended
March 31, 2000. This decrease is due primarily to a decrease in revenues from
our heavy airframe maintenance operations. This decrease was generally caused by
a reduction in market opportunities and increased competition that spread
outsourced aircraft maintenance among a larger group of providers. In addition,
revenues decreased due to the temporary closure of our Oscoda, Michigan heavy
aircraft maintenance facility, impacts of fixed pricing and a change in the
timing of revenue recognition in relation to the design and construction of
specialized parts effective December 31, 2000. In addition, revenue for one of
our aircraft component MR&O operations declined $3.4 million due to a reduction
in market opportunities and the effects of reduced working capital availability.
17
Gross profit decreased $18.9 million, or 103.2%, to $(0.6) million for the
three months ended March 31, 2001, compared with $18.3 million for the three
months ended March 31, 2000. The decrease in gross profit is primarily
attributable to the reduction in revenue described above relative to our
primarily fixed cost structure and the impact of fixed pricing on certain of the
heavy airframe maintenance operations. As a result of the reduced revenues and
market opportunities, during the first quarter, we closed and consolidated
certain facilities and reduced headcount at each of our operations resulting in
an aggregate reduction of approximately 400 employees, or approximately 10% of
the workforce. In addition, in April 2000 we implemented salary and benefit
reductions that affected virtually all employees. These initiatives are expected
to reduce our operating expenses by approximately $22.0 million to $25.0 million
on an annual basis. In addition, we incurred losses of $1.3 million during the
beginning of the first quarter of 2001 associated with the start-up of
operations at one of our heavy airframe maintenance facilities for a new program
that began at the end of 2000. Gross profit as a percentage of operating
revenues decreased to (0.7)% for the three months ended March 31, 2001, from
18.0% for the three months ended March 31, 2000.
Operating expenses decreased $2.9 million or 25.6% to $8.4 million for the
three months ended March 31, 2001, compared with $11.3 million for the three
months ended March 31, 2000. Operating expenses as a percentage of operating
revenues were 10.3% for the three months ended March 31, 2001, compared to 11.1%
for the three months ended March 31, 2000. The reduction in operating expenses
is primarily attributable to the decrease in revenues described above and a
reduction in legal and professional expenses incurred from period to period.
Included in operating expenses for the three months ended March 31, 2001 are
charges associated with the temporary closure of the Oscoda, Michigan facility
and the consolidation of operations of Aircraft Interior Design into a single
facility in Dallas, Texas of approximately $1.0 million.
Interest expense and other for the three months ended March 31, 2001
increased by $1.2 million or 23.2% to $6.5 million, from $5.3 million for the
three months ended March 31, 2000. This increase is primarily attributable to an
increase in amortization of deferred financing fees resulting from the
significant bank fees incurred during 2000, an additional $1.5 million in fees
charged in relation to the February 14, 2001 amendment to the Revolving Credit
Facility and $2.5 million in deferred financing fees associated with the term
loan borrowed in February 2001. In addition, interest expense increased
primarily due to the $10.0 million term loan borrowed in February 2001.
As a result of the above factors, income (loss) from continuing operations
before income taxes and equity income of affiliate for the three months ended
March 31, 2001 was a loss of $15.5 million, compared to income of $1.8 million
for the three months ended March 31, 2000.
Income from discontinued operations, which includes the results of
operations of the businesses sold during 2000, was a loss of $2.7 million for
the three months ended March 31, 2000 as compared to income of $0.3 million for
the three months ended March 31, 2001.
Net loss for the three months ended March 31, 2001 was $15.2 million ($1.01
per diluted share), compared to a loss of $1.6 million, or $0.11 per diluted
share, for the three months ended March 31, 2000. Weighted average common and
common equivalent shares outstanding (diluted) were 15.0 million during the
three months ended March 31, 2000 and 2001.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of March 31, 2001, we had outstanding indebtedness of approximately
$231.1 million (excluding letters of credit), of which $61.6 million was senior
debt and $169.5 million was other indebtedness. As of March 31, 2000, we had
$453.1 million of outstanding indebtedness. Our ability to make payments of
principal and interest will depend upon our future operating performance, which
will be subject to economic, financial, competitive and other factors beyond our
control. The level of our indebtedness is also important due to:
. our vulnerability to adverse general economic and industry conditions,
18
. our ability to obtain additional financing for future working capital
expenditures, general corporate and other purposes, and
. the dedication of a substantial portion of our future cash flow from
operations to the payment of principal and interest on indebtedness,
thereby reducing the funds available for operations and future
business opportunities.
In prior years, we relied primarily upon significant borrowings under our
credit facility, and sales of our securities, including our senior subordinated
notes, to satisfy our funding requirements relating to acquisitions of several
businesses and to finance the growth of our business. During 2000 and 2001 to
date, we have relied upon borrowings under our credit facility and the proceeds
of term loans obtained, along with the proceeds from our asset sales, to meet
our working capital requirements. We cannot assure you that financing
alternatives will be available to us in the future to support our existing
operations' working capital requirements. We are actively considering selling
one or more additional operations or additional securities to meet working
capital requirements and to continue to reduce our debt.
CASH
Cash and cash equivalents increased from zero as of December 31, 2000 to
$1.2 million as of March 31, 2001. Net cash used in continuing operating
activities during the three months ended March 31, 2001 and 2000 was $6.8
million and $25.0 million, respectively. The decrease was primarily the result
of a reduction in the growth of our inventory and accounts receivable balances.
Cash provided by (used in) investing activities during the three months ended
March 31, 2001 and 2000 was $1.1 million and $(2.2) million, respectively. The
cash provided by investing activities for the three months ended March 31, 2001
primarily related to the sale of a note receivable to an affiliate coupled with
an initiative to reduce capital expenditures associated with tooling investments
in our MR&O operations and equipment purchases. Cash provided by financing
activities for the three months ended March 31, 2001 and 2000 was $8.8 million
and $8.3 million, respectively. Cash provided by financing activities for the
three months ended March 31, 2001 is primarily comprised of the proceeds of a
$10.0 million term loan executed in February 2001, net of payments of deferred
financing costs.
SENIOR CREDIT FACILITIES
Prior to May 31, 2000, we had a revolving loan and letter of credit
facility (the "Credit Facility") of $300.0 million with a group of financial
institutions. Effective May 31, 2000, the Credit Facility was amended and the
commitment was reduced to $285.0 million. Following the asset sales described
above, the commitment was reduced to $75.0 million. The Credit Facility expires
in July 2002. The Credit Facility has been amended on several occasions since
May 31, 2000, and most recently on May 21, 2001. Interest under the Credit
Facility is, at our option, (a) prime plus 3.0%, or (b) LIBOR plus 4.5%. As of
March 31, 2000 and March 31, 2001, the outstanding balance on the Credit
Facility was $268.0 million and $36.1 million, respectively. Borrowings under
the Credit Facility are secured by a lien on substantially all of our assets and
the borrowing base primarily consists of certain of our receivables and
inventory.
The Credit Facility contains certain financial covenants regarding our
financial performance and certain other covenants, including limitations on the
amount of annual capital expenditures and the incurrence of additional debt, and
provides for the suspension of the Credit Facility and repayment of all debt in
the event of a material adverse change in the business or a change in control.
In addition, the Credit Facility requires mandatory repayments from the proceeds
of a sale of assets or an issuance of equity or debt securities or as a result
of insufficient collateral to meet the borrowing base requirements there under.
To the extent the Credit Facility remains outstanding as of certain dates, we
are committed to pay incremental financing fees as follows: June 30, 2001 - $1.0
million, August 14, 2001 - 2% of outstanding commitment less $1.0 million,
November 14, 2001 - 2% of outstanding commitment and February 14, 2002 - 2% of
outstanding commitment.
19
In February 2000, we obtained a $15.5 million senior term loan with the
financial institution that is agent for the Credit Facility. The proceeds from
the term loan were used to repay debt outstanding under the Credit Facility. The
term loan, as amended, bears interest at 12%, contains financial covenants that
are consistent with the Credit Facility and matures in July 2002. Principal
payments of $0.5 million per month are due beginning in January 2002 with a
final principal payment of $12.0 million due in July 2002. Under the term loan
agreement, we also granted warrants to the lender to purchase 129,000 shares of
our common stock exercisable for nominal consideration at any time until
December 31, 2005. The warrants entitle the holder to require us to repurchase
the warrants or common shares issued upon prior exercise of the warrants at
$8.50 per share.
In February 2001, we obtained a $10.0 million senior term loan from a
financial institution. The term loan bears interest at LIBOR plus 2% and matures
in August 2002. The proceeds of the term loan were used to pay the semi-annual
interest payment on the senior subordinated notes in February 2001 of $6.7
million and for working capital purposes. In connection with the term loan, we
issued warrants to purchase 250,000 shares of our unissued common stock at an
exercise price of $4.00 per share to each of four individuals. Of these
individuals, one of them is one of our officers and directors, a second is one
of our directors and principal stockholders and a third is one of our principal
stockholders. Each of these four individuals provided credit support to the
financial institution which advanced the term loan proceeds.
SENIOR SUBORDINATED NOTES
In February 1998, we sold $165.0 million in senior subordinated notes (the
"Notes") due in 2008 with a coupon rate of 8.125% at a price of 99.395%. The
Notes mature on February 15, 2008. Interest is payable on February 15 and August
15 of each year. The Notes are general unsecured obligations, subordinated in
right of payment to all existing and future senior debt, including indebtedness
outstanding under the Credit Facility and under facilities, which may replace
the Credit Facility in the future. In addition, the Notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including the Credit Facility.
The indenture pursuant to which the Notes have been issued (the
"Indenture") permits us and our subsidiaries to incur substantial additional
indebtedness, including senior debt. Under the Indenture, we may borrow
unlimited additional amounts so long as after incurring such debt we meet a
fixed charge coverage ratio for the most recent four fiscal quarters.
Additionally, the Indenture allows us to borrow and have outstanding additional
amounts of indebtedness (even if we do not meet the required fixed charge
coverage ratios), up to enumerated limits. We did not meet the fixed charge
coverage ratio for the one-year period ended December 31, 2001. Accordingly, our
ability to incur additional debt is currently limited under the Indenture. The
Notes are also effectively subordinated in right of payment to all existing and
future liabilities of any of our subsidiaries that do not guarantee the Notes.
The Notes are unconditionally guaranteed, on a senior subordinated basis,
by substantially all of our existing subsidiaries and each subsidiary that we
organize in the future, unless such subsidiary is designated as an unrestricted
subsidiary (the "Subsidiary Guarantors"). Subsidiary Guarantees are joint and
several, full and unconditional, general unsecured obligations of the Subsidiary
Guarantors. Subsidiary Guarantees are subordinated in right of payment to all
existing and future senior debt of Subsidiary Guarantors, including the Credit
Facility, and are also effectively subordinated to all secured obligations of
Subsidiary Guarantors to the extent of the assets securing such obligations,
including the Credit Facility. Furthermore, the Indenture permits Subsidiary
Guarantors to incur additional indebtedness, including senior debt, subject to
certain limitations.
The Notes are redeemable, at our option, in whole or in part, at any time
after February 15, 2003, at the following redemption prices, plus accrued and
unpaid interest and liquidated damages, if any, to the redemption date: (i)
2003--104.063%; (ii) 2004--102.708%; (iii) 2005--101.354%; and (iv) 2006 and
thereafter--100%.
Upon the occurrence of a change of control, we will be required to make an
offer to repurchase all or any part of holder's Notes at a repurchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
and liquidated damages, if any, thereon to the repurchase date. There can be no
assurance that we will have
20
the financial resources necessary to purchase the Notes upon a change of control
or that such repurchase will be permitted under the Credit Facility.
Under the Indenture, if we sell assets (other than inventory in the
ordinary course of business or leases or assets subject to leases in the
ordinary course of business) with a fair market value in excess of $2.0 million
or for net proceeds in excess of $2.0 million, we must comply with certain
requirements. First, the sales price must be at least equal to the fair market
value of the assets and at least 80% of the sales price must be paid in cash.
Second, we must use the proceeds from such asset sales, within 270 days after
completion of the sales, to either permanently repay senior debt or acquire
other businesses or assets (or, if the proceeds are not used for these purposes,
then such proceeds must be used to repurchase senior subordinated notes).
Proceeds from the asset sales described above have been used to permanently
repay senior debt. Further, if the value of the assets sold exceeds $15 million,
our Board of Directors must determine that we are receiving fair market value
for the assets sold.
The Indenture contains certain other covenants that, among other things,
limits (as described above) our ability and the ability of our subsidiaries to
incur additional indebtedness and issue preferred stock, pay dividends or make
other distributions, make investments, issue capital stock of subsidiaries,
create certain liens securing indebtedness, enter into certain transactions with
affiliates, sell assets or enter into certain mergers and consolidations or sell
all or substantially all of our assets.
OTHER NOTES
In connection with the acquisition of Kratz-Wilde Machine Company, one of
our subsidiaries delivered a non-interest-bearing promissory note (guaranteed by
us) to the sellers in the original principal amount of $2.5 million (discounted
to $2.2 million). A payment of $1.2 million was made during January 1999 and the
remaining principal balance of $1.3 million was paid in January 2000. Interest
on this note has been imputed at 8%.
In connection with the acquisition of Caribe and AIDI, one of our
subsidiaries delivered to the sellers a promissory note in the original
principal amount of $5.0 million, which was guaranteed by us. The note was
payable over a two-year period with an interest rate of 8% per annum. The first
payment of $2.5 million was made during March 1999 and the final payment was
paid in March 2000.
LEASE FOR MIRAMAR FACILITIES
During 1998, we decided to move our redistribution operation and one of our
MR&O operations to new facilities in Miramar, Florida. On December 17, 1998, we
entered into an operating lease for the new facility with Wells Fargo, as
successor to First Security Bank, National Association, as trustee of a newly
created trust, as lessor. The lease has an initial term of five years and is a
triple net lease. The lease contains financial covenants regarding our financial
performance and other affirmative and negative covenants. Substantially all of
our subsidiaries have guaranteed our obligations under the lease. Additionally,
we have an option to acquire the new facility at the end of the lease and, if we
do not purchase the new facility at the end of the lease, we will be obligated
to pay a fee. Management estimates that the current fair value of the facilities
exceeds the Company's purchase option. Accordingly, no fee has been accrued by
the Company. We moved our corporate headquarters and redistribution operations
into one of the new facilities in April 2000 and one of our MR&O operations,
Caribe Aviation, into another building adjacent to the redistribution operations
facility during October 2000. In conjunction with the sale of our redistribution
operations (see "Recent Developments" above), we subleased the corporate
headquarters and redistribution operation facility to Kellstrom Industries, Inc.
for a period of five years with the right to renew for five consecutive five-
year periods at a market rental rate.
The lessor has financed the development of the new facility through a $43.0
million loan from a financial institution. We and substantially all
of our subsidiaries have guaranteed the repayment of $37.8 million of the
lessor's obligations under its loan agreement. The lessor's obligations under
the agreement are secured by a lien on the real property and on the new
facility. Further, we have posted an irrevocable letter of credit in favor of
the lessor in the amount of $9.0 million to secure both our obligations under
the lease and the lessor's obligations under the loan agreement.
21
The lease agreement has been amended on several occasions. Under the terms
of the April 19, 2001 amendment, two shareholders of the Company provided a
guarantee in an amount up to $1.0 million. As part of the amendment, the
lessor has agreed to waive non-compliance with financial covenants, if any,
through the period ended December 31, 2001.
22
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 4 to our Unaudited Condensed Consolidated Financial Statements
included in this filing.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to our shareholders during the first
quarter of 2001.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
(A) EXHIBITS
None.
(B) REPORTS ON FORM 8-K
None.
II-1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AVIATION SALES COMPANY
Dated: May 21, 2001
BY: /S/ MICHAEL C. BRANT
------------------------------------------
Michael C. Brant, Vice President and Chief
Financial Officer (Principal Financial and
Accounting Officer)