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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-12380
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AVIALL, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 65-0433083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2075 DIPLOMAT DRIVE
DALLAS, TEXAS 75234-8999
(Address of principal executive offices) (Zip Code)
(972) 406-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, par value, $.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that 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 is not contained herein, and will not be contained herein,
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.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 13, 1998 was approximately $296.1 million.
The number of shares of Common Stock outstanding at March 13, 1998 was
20,001,813.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 22, 1998, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A, are incorporated herein by
reference in Part III.
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AVIALL, INC.
CONTENTS
PAGE
PART I
ITEM 1: BUSINESS.............................................................................3
OVERVIEW.........................................................................3
AIRCRAFT PARTS DISTRIBUTION......................................................3
INVENTORY LOCATOR SERVICE........................................................4
SALES AND MARKETING..............................................................4
COMPETITION......................................................................5
CUSTOMERS........................................................................5
SUPPLIERS........................................................................6
EMPLOYEES........................................................................6
REGULATION.......................................................................6
DISCONTINUED OPERATIONS..........................................................6
BUSINESSES HELD FOR SALE AT DISTRIBUTION DATE....................................6
ARRANGEMENTS BETWEEN RYDER AND AVIALL RELATING TO THE DISTRIBUTION...............6
EXECUTIVE OFFICERS OF AVIALL.....................................................7
ITEM 2: PROPERTIES...........................................................................8
ITEM 3: LEGAL PROCEEDINGS....................................................................8
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................9
PART II
ITEM 5: MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS.........................................................................10
ITEM 6: SELECTED FINANCIAL DATA.............................................................11
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...........................................................13
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................20
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................................20
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................20
ITEM 11: EXECUTIVE COMPENSATION..............................................................20
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................20
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................20
PART IV
ITEM 14: EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K........................................................................21
SIGNATURES ....................................................................................23
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................F-1
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PART I
ITEM 1: BUSINESS
OVERVIEW. Aviall, Inc. ("Aviall" or the "Company") is a leading independent
global distributor of new aviation parts and supplies. Aviall also provides
on-line inventory information services to the aviation and marine industries
through Inventory Locator Service, LP ("ILS"), which is indirectly wholly owned
by Aviall. As used in this report, "Aviall" or the "Company" refers to Aviall
and all of its direct and indirect subsidiaries.
As the largest independent global distributor of new aviation parts, Aviall
provides a link between parts manufacturers, sellers and buyers throughout the
world. Aviall has developed strong relationships with suppliers who seek
advanced inventory management, order processing, forecasting and direct
electronic communications with end users of their products.
In addition, ILS provides the largest independent database of inventory
information in the commercial aviation industry, covering essentially every
aircraft and engine type in commercial service. Aviall management believes that
ILS is generally the first database to be accessed by buyers seeking parts
availability and sellers desiring to list their parts for sale.
Aviall was incorporated in Delaware in August 1993 to own and operate the
aviation services businesses previously conducted by certain subsidiaries of
Ryder System, Inc., a Florida corporation ("Ryder"). Aviall operated as a wholly
owned subsidiary of Ryder until December 7, 1993 (the "Distribution Date"), when
Ryder distributed Aviall's stock to Ryder's shareholders as a tax free dividend
(the "Distribution"). The Distribution established Aviall as a publicly held
corporation separate from Ryder. In conjunction with the Distribution, the
Company announced plans to dispose of its parts redistribution, business
aviation engine overhaul, and aircraft and terminal services businesses. The
sales of these businesses were completed in 1995. See "Businesses Held for Sale
at Distribution Date" in this Item 1.
In January 1996, Aviall announced its intention to exit the commercial
engine services businesses consisting of its airline engine, component and
accessories repair operations ("Commercial Engine Services"). The sales of these
businesses were completed in 1996, and such businesses are reflected in the
Company's Consolidated Financial Statements included in this report as
discontinued operations. See "Discontinued Operations" in this Item 1.
In September 1996, the Company sold its aerospace fastener distribution
business (the "Fastener Business"). See Note 4 to the Consolidated Financial
Statements included in Item 8 of this report.
AIRCRAFT PARTS DISTRIBUTION. Aviall is the largest independent global
distributor of new aviation parts and supplies, serving both the commercial and
general aviation after-markets. Product lines distributed by Aviall include a
variety of airframe spares (e.g., oxygen systems, filters, control cables,
batteries, actuators and motors), undercarriage items (e.g., wheels, brakes and
tires), piston engines and parts, and other supplies. Aviall purchases these new
parts from suppliers for its own account and resells such parts to its
customers, which include commercial airlines, freight carriers, maintenance and
overhaul shops, aircraft original equipment manufacturers ("OEMs"), corporate
aircraft operators, brokers, governmental agencies and other distributors.
Aviall's parts distribution business also maintains a network of battery, wheel
and brake repair, hose assembly and tire retread shops offering a wide range of
product repair services.
Aviall distributes aircraft and engine parts from customer service centers
located throughout the world including North America, Europe and the
Asia-Pacific region. Field sales representatives located in each of these
regions call upon current and potential customers on a regular basis to solicit
orders and provide product and operational information. Each service center is
staffed to receive and process telephone, facsimile and mail orders.
Approximately 62% of the parts distributed by Aviall are located in its Dallas,
Texas warehouse complex, with the remaining parts distributed from its customer
service centers worldwide.
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Aviall is an authorized distributor for manufacturers such as BFGoodrich
(ice protection systems, wheel and brake parts), Scott Aviation (oxygen
systems), Telair International (motors, actuators and cargo handling systems),
Lord Corporation (engine vibration isolators), Champion Aviation Products
(ignition systems) and Textron Lycoming (piston engines, parts and components).
This diversity distinguishes Aviall from most other aviation parts distributors
which carry a narrower range of products. Approximately 94,000 unique part
numbers are sold to approximately 13,000 customers.
Aviall's integrated data system permits its employees to access information
on stock availability, pricing and order status, and to perform order entry on a
real time basis from anywhere in the world. The system facilitates immediate
drop shipment from Dallas, Texas to customers throughout North America and
overnight fulfillment of European customer orders. Advanced electronic data
interchange ("EDI") communications with other networks used by suppliers and
customers is a key factor enhancing customer service that Aviall believes
provides it with a competitive advantage. Aviall's EDI system provides direct
customer access to Aviall's central inventory management and retrieval system.
In addition, the Aviall AIRNET(sm) order entry system is available on the
Internet and enables customers to review parts availability, place orders and
check order status.
INVENTORY LOCATOR SERVICE. ILS provides on-line inventory information for the
aviation and commercial marine industries that brings buyers and sellers
together. Suppliers of parts, equipment and services from around the world list
their inventories and capabilities on the ILS system for access by buyers. Using
a personal computer with modem, buyers can quickly locate the suppliers that
have the items or capabilities they need.
Most clients use ILS-provided software that allows them to enter an
identifying number, such as a part number, on their own personal computer. With
a few keystrokes, the software automatically connects with the computer at ILS
headquarters in Memphis, Tennessee and transmits their request. The database is
searched, a report is transmitted back to the requester's personal computer and
the on-line connection is terminated. The process usually takes less than a
minute. In addition to availability data, the report provides the buyer with the
information necessary to contact the seller directly. As an independent provider
of information, ILS does not hold inventory or take part in any sales
transactions between its clients. ILS charges a subscription fee to access or
list data. In this respect, ILS is the largest independent information source of
its type serving the commercial aviation industry.
ILS client software runs on the Microsoft(R) Windows(R) operating system.
It includes a powerful messaging system, ILS DIRECT(sm), that enables buyers and
sellers to communicate with each other electronically. Information from database
searches can be incorporated directly into messages to save time and reduce
errors. Electronic directories of all ILS users can be updated on-line, and
users can maintain their own directories of nonusers which they can use to
automatically address and send faxes.
In addition to parts and services availability information, ILS maintains
approximately 92 million records of government data. Provided on a supplemental
basis, this information may be used in locating alternate parts and suppliers,
identifying unknown items, finding new applications for parts and establishing
the value of parts.
The ILS system provides information on over 35 million line items of parts
and equipment, and its databases contain over 126 million records. ILS users
access the system approximately 23,000 times each business day.
SALES AND MARKETING. Aviall emphasizes breadth of product offering, competitive
pricing, attention to customer service and value-added functions through
advanced systems and inventory management/logistics applications. Aviall's parts
distribution operations serve the different requirements of the commercial
airline, regional airline, corporate and general aviation after-market sectors.
Aviall's parts distribution operations conduct direct sales and marketing
efforts through a team of regional sales managers, field sales representatives
and third-party sales representatives who meet regularly with Aviall's major
customers. Their function is not only to sell and provide technical support for
existing products but also to work with Aviall's customers and with Aviall's
suppliers in order to identify new market opportunities.
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Aviall locates critical parts inventories in 29 domestic and international
customer service centers to meet customer requirements. The Company's sales
staff works closely with the regional sales managers and the inventory
provisioning group to ensure that inventory availability and customer service
levels are maintained. Frequent meetings are conducted with suppliers to provide
new product introductions as well as marketing and sales training.
Aviall also sponsors parts and maintenance symposiums with participation by
both manufacturers and customers. These symposiums feature new products and
experienced representatives from Aviall suppliers who provide technical
training. In addition, management believes that the Company's parts catalog,
which is published every three years, is the recognized industry standard for
parts and applications in the corporate and general aviation sectors. A
quarterly price subscription service is offered to supplement the catalog.
Aviall also uses institutional advertising, co-op advertising programs with
suppliers and direct mail programs, as well as sending representatives to a
number of industry trade shows around the world, to ensure that its name,
products and services are visible in the market.
ILS services are marketed to both the buyers and suppliers in the aviation
and marine industries. Suppliers use ILS services to open new markets and find
additional customers for their products and services. Buyers use ILS to locate
the parts and services they require. Enhancements to ILS services are driven by
customer needs and its hardware/software capabilities. ILS routinely uses focus
groups, questionnaires, industry meetings and surveys to obtain customer
feedback on current and prospective services.
ILS is represented by area sales managers and independent representatives
strategically located throughout the world. ILS, with headquarters in Memphis,
Tennessee, also maintains regional offices in Atlanta, Georgia; Los Angeles,
California; and Hong Kong as well as independent representatives in London,
England; Sutherland, Australia; and Toronto, Canada. In addition, field service
representatives located in the major customer concentration areas provide
customers with training and technical support.
Each year, ILS demonstrates its services at a number of trade shows around
the world as a means of reaching prospective customers. Advertising in major
aviation and marine industry publications also provides additional exposure and
generates leads for the ILS sales team. Increasingly, the ILS web site on the
Internet is being employed as a marketing tool to provide information to current
and prospective customers. In addition, ILS offers seminars and training
sessions to assist customers in maximizing the value from ILS services.
COMPETITION. Aviall's primary competitors for sales of new aircraft parts and
supplies are other independent distributors and the OEMs. The aviation parts
distribution market is extremely fragmented and no single competitor holds a
dominant position. While Aviall historically competed in the parts distribution
sector on the basis of price and availability of parts, management believes that
a primary basis of competition today is, and a key differentiating factor in the
future will be, the ability to offer value-added services to customers.
With respect to ILS, buyers and sellers of equipment, parts or services,
including ILS clients in the aviation and commercial marine industries, may
maintain their own databases of (or use noncomputerized means to identify)
potential transaction partners and then contact such parties to determine the
availability of or demand for specific equipment, parts or services. ILS clients
can also access databases maintained by other individual buyers or sellers or
use a competing commercial database service. The largest commercial database
service competing with ILS is the Airline Inventory Redistribution System
("AIRS") operated by the Air Transport Association. AIRS is substantially
smaller than ILS, in terms of both the number of its users and the number of
records contained in its database.
CUSTOMERS. In 1997, Aviall's ten largest customers represented, in the
aggregate, approximately 11% of total sales, and the single largest customer
accounted for approximately 2% of sales.
ILS' customers for aviation services include OEMs, distributors, resellers,
repair and overhaul facilities, fixed base operators and most of the world's
major airlines. Marine services customers include manufacturers, repair
facilities, distributors, ship owners and operators. ILS users number
approximately 4,600 and are located in 66 countries.
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SUPPLIERS. Aviall purchases supplies from more than 170 suppliers and operates
under distribution agreements with most of its largest suppliers. Aviall
believes the size and scope of its operations, including its unique
international presence, provide an attractive market advantage for its
suppliers. Although Aviall could be affected by the loss of a major supplier, it
is not dependent on any one supplier.
EMPLOYEES. As of December 31, 1997, Aviall had approximately 700 employees, none
of whom are represented by collective bargaining units. Management believes that
Aviall's market leadership allows it to attract highly skilled and competent
employees. Aviall considers its employee relations to be good.
REGULATION. Aviall is regulated by certain federal, state and local government
agencies within the United States with authority over businesses generally, such
as the United States Environmental Protection Agency ("EPA") and the United
States Occupational Safety and Health Administration, as well as agencies of
foreign governments with similar authority in those foreign jurisdictions where
Aviall does business.
In addition to general regulation by these agencies, certain of Aviall's
operations are regulated by agencies with responsibilities over civil aviation.
Aviall's product repair services facilities are regulated in the United States
by the Federal Aviation Administration ("FAA"). Overseas locations are regulated
by the various countries' civil aviation authorities and the FAA.
DISCONTINUED OPERATIONS. In January 1996, Aviall announced its intention to exit
Commercial Engine Services consisting of its airline engine and component repair
operations and its accessories repair operation. The accessories repair
operation sale was completed in May 1996, and the airline engine and component
repair operations sale was completed in June 1996. See Note 3 to the
Consolidated Financial Statements included in Item 8 of this report.
BUSINESSES HELD FOR SALE AT DISTRIBUTION DATE. In June 1993, Aviall adopted a
restructuring plan and decided to dispose of its business aviation engine
overhaul and repair operations, its aviation parts redistribution unit and its
Dallas Love Field aircraft and terminal services operation. The sales of these
operations and certain other related assets were completed at various times in
1994 and 1995.
ARRANGEMENTS BETWEEN RYDER AND AVIALL RELATING TO THE DISTRIBUTION. For the
purpose of governing certain of the relationships between Ryder and Aviall after
the Distribution, Ryder and Aviall entered into various agreements, including
those described below.
The Distribution and Indemnity Agreement (the "Distribution Agreement")
provides for certain cross-indemnities designed principally to place financial
responsibility for the liabilities of Aviall and its subsidiaries with Aviall
and financial responsibility for the liabilities of Ryder and its other
subsidiaries with Ryder.
Through the Distribution Date, the results of the operations of Ryder's
domestic subsidiaries engaged in the aviation services businesses were included
in Ryder's consolidated U.S. federal income tax returns. A Tax Sharing Agreement
(the "Tax Sharing Agreement") provides, among other things, for the allocation
between the parties of federal, state, local and foreign tax liabilities for all
periods through the Distribution Date. Though valid as between the parties
thereto, the Tax Sharing Agreement is not binding on the Internal Revenue
Service ("IRS") and does not affect the several liability of Aviall, Ryder and
their respective subsidiaries, to the IRS for all federal taxes of the
consolidated group relating to periods prior to the Distribution Date.
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EXECUTIVE OFFICERS OF AVIALL. The following information concerning the executive
officers of Aviall is as of March 16, 1998.
Eric E. Anderson, 49, is the Chairman of the Board, President and Chief
Executive Officer of Aviall. Mr. Anderson was appointed Chairman in December
1997 and Chief Executive Officer in December 1996, having served as President
and Chief Operating Officer since June 1996. Mr. Anderson had served as
Executive Vice President of Aviall with responsibility for parts distribution
services and ILS from February 1996 to June 1996. Previously, Mr. Anderson was
President of ILS from 1993 to 1996, and was Executive Vice President of ILS from
1991 to 1993. Mr. Anderson served as Vice President of Marketing and Sales of
ILS from 1990 to 1991 after having joined ILS in 1988 as Director of Marketing
and Business Development.
Bruce Langsen, 51, is the President of ILS, a position he has held since
June 1996. Previously, Mr. Langsen was Executive Vice President of ILS. Mr.
Langsen joined ILS as Vice President of Marketing and Sales in 1993. Previously,
he was Senior Vice President and General Manager for Express Airlines II.
Charles M. Kienzle, 45, is the Senior Vice President, Operations of Aviall.
Mr. Kienzle served as Senior Vice President, Operations, U.S. Engine Services
from January to June 1996. From 1993 to January 1996, Mr. Kienzle was Senior
Vice President, Human Resources and Administration of Aviall. From 1991 to 1993,
Mr. Kienzle was Vice President, Human Resources of the Ryder Airline Services
division. Prior to 1991, Mr. Kienzle was Director, Human Resources of the Ryder
Airline Services division.
Jeffrey J. Murphy, 51, is the Senior Vice President, Law and Human
Resources, Secretary and General Counsel of Aviall. Mr. Murphy served as Senior
Vice President, Secretary and General Counsel from December 1993 to January
1996. Prior to the Distribution, Mr. Murphy served as Vice President, Secretary
and Assistant General Counsel of Ryder from 1986 until December 1993.
Margaret M. Bouline, 34, is the Vice President of Information Services of
Aviall. From August 1996 to December 1997, Ms. Bouline was Director, Information
Services. Ms. Bouline joined Aviall in October 1995 as Senior Manager of
Business Systems. Prior to joining Aviall, she was Director of Information
Services at Sunbelt Nursery Group since 1992.
Jacqueline K. Collier, 44, is the Vice President and Controller of Aviall.
Ms. Collier served as Controller for the Ryder Airline Services division from
1989 until December 1993. Ms. Collier joined Cooper Airmotive, a predecessor of
Aviall, in 1976 as an accountant and has held various financial positions with
Aviall since that date.
G. Patrick McDonald, 34, is the Vice President, Sales of Aviall. Mr.
McDonald joined Aviall in January 1997 and was appointed an executive officer of
Aviall in March 1997. Mr. McDonald was with Black & Decker, Inc. since 1986,
most recently serving as Vice President of Sales for Black & Decker's North
American Accessories division.
James T. Quinn, 49, is the Vice President of Marketing and Supplier
Services of Aviall, a position he has held since July 1997. Mr. Quinn joined
Aviall as Director, Distribution Services Marketing in 1994. He was with
Champion Aviation Products, a unit of Cooper Industries, since 1981, most
recently serving as Director of Distribution Marketing.
Cornelius Van Den Handel, 42, is the Vice President and Treasurer of
Aviall. From June 1996 to December 1997, he served as Treasurer and Director of
Planning. Mr. Van Den Handel served as the Company's Director of Financial
Planning and Analysis from 1993 to 1996. Prior to 1993, Mr. Van Den Handel was
Manager of Financial Planning and Analysis of the Ryder Airline Services
division. He joined Aviall in 1985 as a customer service representative.
Officers are elected annually by Aviall's Board of Directors and may be
removed at any time by the Board of Directors. There are no family relationships
among the executive officers listed, and there are no arrangements or
understandings pursuant to which any of them were elected as officers.
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ITEM 2: PROPERTIES
Aviall maintains its headquarters in Dallas, Texas and currently occupies
42 facilities worldwide, including administrative, sales and distribution, and
operations/repair facilities. Aviall maintains a central warehouse in Dallas,
Texas from which it operates its parts distribution activities. Substantially
all of Aviall's domestic real property is held under long-term operating leases.
The principal operating facilities maintained by Aviall as of December 31,
1997 are detailed in the following table.
Square Owned/
Location Footage Leased Function
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Dallas, TX 137,600 Leased Parts Distribution
Dallas, TX 185,800 Leased Parts Distribution and
Product Repair Services
Memphis, TN 31,000 Leased Inventory Information Services
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At December 31, 1997, Aviall operated 29 customer service centers worldwide
in support of its parts distribution operations. Aviall believes its facilities,
machinery and equipment are suitable for the purposes for which they are used
and are adequately maintained. Aviall also believes that the capacity of its
distribution and other facilities is adequate for current requirements and
projected normal growth.
ITEM 3: LEGAL PROCEEDINGS
Lockheed Martin Corporation ("Lockheed") and certain other parties entered
into a consent decree with the EPA under which Lockheed agreed to undertake an
extraction and treatment program to remediate the groundwater in the Burbank
Operable Unit (the "Burbank Unit") of the San Fernando Valley Superfund Sites
and to operate such program for a limited period. The Company's Burbank,
California facility, which was sold in December 1995, is located within the
boundaries of the Burbank Unit.
In June 1995, the Company and certain other defendants entered into an
agreement with Lockheed to settle a lawsuit filed in the United States District
Court for the Central District of California in April 1994 against the Company
and more than 100 other parties seeking recovery of or contribution to
Lockheed's response costs to comply with the consent decree and subsequent EPA
requirements. Pursuant to the agreement, in exchange for a $2.2 million cash
payment made in June 1995, the Company will be released from and protected
against certain environmental response costs for the Burbank Unit through the
expiration of the interim remedy period established by the EPA, certain claims
by the EPA for costs of oversight of the Burbank Unit and certain other matters.
The agreement does not cover certain matters, including environmental response
costs for any final remedy which may be established by the EPA, certain EPA
oversight costs and costs of any changes mandated by the EPA to the present
interim remedy for the Burbank Unit. The agreement with Lockheed is subject to
court approval of a new consent decree relating to the interim remedy for the
Burbank Unit. Although the Company presently believes that this condition will
be satisfied, there can be no assurance of this event.
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The Company, together with approximately 50 other parties, are defendants
in eight separate lawsuits alleging personal injury and/or property damage
arising out of the alleged release of toxic substances, including
trichloroethylene, perchloroethylene, trichloroethane and hexavalent chromium,
into the air, soil and/or groundwater in the City of Burbank, California. The
damages for personal injuries claimed are broad and varied, and include cancer,
fear of cancer, fear of injury, birth defects, reproductive harm, injuries to
immune systems, future medical monitoring, emotional distress and loss of
consortium. In addition to Aviall, the named defendants in these suits include
Lockheed and certain other parties who were named potentially responsible
parties with respect to the Burbank Unit. These cases, which were filed in the
Superior Court of California for the County of Los Angeles and involve over
3,000 plaintiffs, have been consolidated for pretrial purposes. The total
damages claimed by the plaintiffs is not known although the jurisdictional
allegations in the lawsuits seek damages in excess of $25,000 per plaintiff. The
Company, which was served with these lawsuits in first quarter 1998, intends to
vigorously defend these suits.
In July 1996, the spouse of a former employee filed suit in Hidalgo County,
Texas against Aviall and certain chemical manufacturers alleging that the
cancer-related death of her husband was the result of his exposure to toxic
chemicals and metals while working for Aviall at facilities used in the
operation of the Company's former Commercial Engine Services businesses. The
plaintiffs are seeking to find Aviall and the other defendants jointly and
severally liable for actual and punitive damages in an amount not less than $50
million. The suit is in the preliminary stages of discovery. The Company intends
to vigorously defend this suit.
Aviall is routinely involved in legal proceedings incidental to its
business. Pending matters include actions involving alleged breaches of
contracts, alleged employment discrimination, alleged liability for certain
environmental matters, tort claims and other matters (including the matters
described above in this Item 3). For further information concerning such
environmental matters, see "Management Discussion and Analysis of Financial
Condition and Results of Operations - Environmental Matters" in Item 7 of this
report. In each instance, Aviall is defending the pending legal or regulatory
action. While any legal proceeding has an element of uncertainty, based on
information presently available, management believes that the ultimate
disposition of all such proceedings and environmental matters will not have a
material adverse effect on Aviall's results of operations, financial condition
or cash flows, although certain matters could be material to cash flows in any
one year.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5: MARKETS FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange, the
Chicago Stock Exchange and the Pacific Stock Exchange with the ticker symbol
AVL. The high and low sales prices for the common stock for each calendar
quarter during 1996 and 1997 are shown below.
Prices
--------------------
Quarters High Low
------------ ---------------------- ----------- ---------
1996 First $ 9.38 $ 5.38
Second 10.38 8.50
Third 9.13 7.88
Fourth 10.50 7.88
------------ ---------------------- ----------- ---------
Year $10.50 $ 5.38
------------ ---------------------- ----------- ---------
1997 First $12.12 $ 9.00
Second 16.00 10.50
Third 16.87 13.25
Fourth 17.19 11.00
------------ ---------------------- ----------- ---------
Year $17.19 $ 9.00
------------ ---------------------- ----------- ---------
No cash dividends were paid by the Company in 1996 or 1997. Under the terms
of its existing credit facilities, the Company may not pay cash dividends in
excess of $1.0 million annually and may only pay cash dividends if certain
financial ratios are met. In any event, the Company does not anticipate paying
cash dividends in the near future.
The approximate number of shareholders of record of the Company's common
stock as of March 13, 1998 was 12,100.
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ITEM 6: SELECTED FINANCIAL DATA
The following table summarizes certain selected financial information with
respect to Aviall that has been derived from the audited Consolidated Financial
Statements of the Company. For periods prior to December 7, 1993, the date of
the Distribution, the Company was operated as a division of Ryder. As of the
date of the Distribution, Aviall became an independent publicly traded company.
During 1994 and 1995 the Company sold certain businesses including parts
redistribution, business aviation engine overhaul, and aircraft and terminal
services (the "Businesses Held for Sale"). (See Note 4 to the Consolidated
Financial Statements in Item 8 of this report). The Company announced in January
1996 its intention to exit Commercial Engine Services consisting of airline
engine, component and accessories repair operations and, accordingly, reported
these businesses as discontinued operations in the 1995 Consolidated Financial
Statements. The sales of these businesses were completed in 1996 (see Note 3 to
the Consolidated Financial Statements in Item 8 of this report). The continuing
operations consists of parts distribution and information services. Financial
information prior to the Distribution reflects the results of operations of the
Company as a division of Ryder and is not necessarily indicative of the results
of operations had the Company operated as a separate, stand-alone entity during
1993. The information set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto included
elsewhere in this report.
(Dollars in Thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------- -------------- ------------- -------------- ------------ -------------
Selected Operating Data:
Net sales $386,060 374,038 346,511 354,938 396,058
Nonrecurring items (a) $ 1,436 (6,613) (28,964) - (215,215)
Earnings (loss) from continuing operations before
cumulative effect of change in accounting and
extraordinary item $ 26,424 (2,946) (28,117) 4,565 (153,976)
Earnings (loss) from discontinued operations $ 2,673 16,946 (212,958) 4,899 13,611
Cumulative effect of change in accounting $ - - - - (4,980)
Extraordinary item (b) $ - (3,421) - - -
- ------------------------------------------------------- -------------- ------------- -------------- ------------ -------------
Net earnings (loss) $ 29,097 10,579 (241,075) 9,464 (145,345)
- ------------------------------------------------------- -------------- ------------- -------------- ------------ -------------
Financial Position:
Total assets $ 259,392 260,877 538,927 847,629 915,799
Long-term debt $ 28,004 48,971 110,439 327,767 322,635
Total debt to total capital 22.30% 36.59% 78.17% 55.31% 57.67%
- ------------------------------------------------------- -------------- ------------- -------------- ------------ -------------
(a) The 1997 nonrecurring gain resulted from the repayment of a discounted
note received in connection with the sale of one of the Businesses Held
for Sale. Nonrecurring charges in 1996 resulted from the effect of final
contract terms and transaction-related expenses in connection with the
1996 sale of the Fastener Business. The 1995 nonrecurring charges
reflected the write-down of the Fastener Business assets (primarily
inventory), the write-off of certain deferred charges and income from the
finalization of the accounting related to the Businesses Held for Sale.
Nonrecurring charges in 1993 reflected the restructuring costs of the
parts distribution business and the losses related to the Businesses Held
for Sale.
(b) The extraordinary item in 1996 resulted from the write-off of unamortized
financing costs associated with the Company's 1993 credit agreement which
was refinanced in 1996.
11
12
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
Basic Per Share Data:
Net earnings (loss) from continuing operations $1.34 (0.15) (1.45) 0.24 n/a
Net earnings (loss) from discontinued operations 0.14 0.87 (10.96) 0.25 n/a
Net loss from extraordinary item - (0.18) - - n/a
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $1.48 0.54 (12.41) 0.49 n/a
============================================================================================================================
Weighted average common shares 19,711,105 9,494,561 19,418,671 19,391,876 n/a
============================================================================================================================
Diluted Per Share Data:
Net earnings (loss) from continuing operations $1.32 (0.15) (1.45) 0.23 n/a
Net earnings (loss) from discontinued operations 0.13 0.87 (10.96) 0.25 n/a
Net loss from extraordinary item - (0.18) - - n/a
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per share $1.45 0.54 (12.41) 0.48 n/a
============================================================================================================================
Weighted average common and dilutive potential
common shares 20,061,205 19,494,561 19,418,671 19,488,598 n/a
============================================================================================================================
Cash dividends per share $ - - 0.04 0.04 n/a
============================================================================================================================
12
13
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW. After the Company implemented fundamental changes during 1996 by
focusing on the core aviation parts distribution and inventory information
business, the 1997 results show dramatic improvements. The net sales and
resulting gross profit improvements stem from both a strong aviation marketplace
and structural changes in the Company's sales force. The expense reduction
reflects the Company's cost control efforts and the 1996 streamlining of
corporate functions.
The following table is provided to show the results of the ongoing business
separate from those of the Fastener Business, excluding nonrecurring items and
interest:
(In Thousands) 1997 1996 (a) 1995
- --------------------------------------------------------------------------------------------------
Net sales
Ongoing business $386,060 350,953 320,931
Fastener business - 23,085 25,580
Gross profit
Ongoing business 97,197 88,140 82,649
Fastener business - 7,001 8,071
- --------------------------------------------------------------------------------------------------
SG&A
Ongoing business 67,912 73,877 72,428
Fastener business - 5,658 8,306
- --------------------------------------------------------------------------------------------------
(a) Fastener Business results are through September 19, 1996, the date of the
sale of this business.
A discussion of the financial condition and results of continuing
operations for the Company follows and should be read in conjunction with the
Consolidated Financial Statements and Notes included elsewhere in this report.
RESULTS OF OPERATIONS - 1997 VERSUS 1996. Net sales for the ongoing business
increased $35.1 million, or 10%, in 1997 compared to 1996. Parts distribution
sales increased $19.4 million in the North America region, $6.6 million in
Europe and $5.9 million in the Asia-Pacific region. Inventory information
services revenue increased $1.8 million.
Gross profit for the ongoing business increased $9.1 million, or 10%, in
1997 compared with 1996 primarily as a result of higher sales volume. Gross
profit as a percentage of sales was slightly higher year over year.
Selling and administrative expenses for the ongoing business decreased $6.0
million in 1997 primarily as a result of nonrecurring professional fees in 1996
relating to amending the Company's former bank agreement and staff reductions
implemented in 1996.
The $1.4 million nonrecurring gain was related to the repayment in January
1997 of a $12.0 million unsecured subordinated note received in connection with
the 1995 sale of the business aviation engine overhaul, and aircraft and
terminal services operations. The Company had carried the note at a discounted
value of $10.5 million. The 1996 nonrecurring charge of $6.6 million reflects
the effect of the final contract terms and related transaction costs in
connection with the disposal of the Fastener Business.
Interest expense decreased $7.1 million in 1997 reflecting lower debt,
lower interest rates and lower debt issuance amortization under the 1996 bank
agreement. Proceeds from the businesses sold in 1996 significantly reduced debt.
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14
RESULTS OF OPERATIONS - 1996 VERSUS 1995. Net sales for the ongoing business
increased $30.0 million, or 9%, in 1996 compared with 1995. Parts distribution
sales increased $10.9 million in the Asia-Pacific region and $6.7 million in
Europe, while sales to North American airlines increased $4.8 million over prior
year. Strong sales growth in the North American general aviation market more
than offset a $10.3 million reduction in sales of turbine engine parts lines no
longer distributed by the Company. Inventory information services revenue
increased $3.3 million. Sales for the Fastener Business declined $2.5 million as
a result of three fewer months of operations in 1996.
Gross profit for the ongoing business increased $5.5 million, or 7%, in
1996 compared with 1995. Gross profit as a percentage of net sales declined to
25.1% in 1996 from 25.8% in 1995 as a result of lower margins on sales of excess
inventory and pricing actions taken to increase sales and gain market share.
Gross profit for the Fastener Business declined $1.1 million primarily as a
result of lower net sales.
Selling and administrative expenses for the ongoing business increased $1.4
million in 1996, primarily the result of professional fees associated with the
March 1996 amendment of the Company's 1993 credit agreement and charges to
reflect the write-down of certain inventory to net realizable value. Fastener
Business selling and administrative expenses declined $2.6 million as a result
of three fewer months of operations in 1996 and lower obsolescence charges.
The 1996 nonrecurring charges of $6.6 million included transaction-related
expenses and asset write-downs to reflect the final contract terms of the
Fastener Business sale. The 1995 nonrecurring charges included $25.5 million for
the write-down of surplus inventory and other assets in the Fastener Business to
expected net realizable value. Also included was a $7.7 million write-off of
certain pension-related deferred charges. Partially offsetting these charges was
a $4.2 million gain from the finalization of reserves related to the sale of the
business aviation engine overhaul and aircraft and terminal services operations.
Interest expense decreased $0.4 million in 1996 compared with 1995. Reduced
interest payments resulting from lower average debt balances were largely offset
by $2.8 million of higher debt issuance cost amortization, which was accelerated
due to the March 1996 amendment of the 1993 credit agreement. The remaining $3.4
million of unamortized debt issuance costs related to the 1993 credit agreement
were written off as an extraordinary item in 1996 when the Company replaced its
senior secured credit facilities.
FOREIGN OPERATIONS. The Company operates parts distribution customer service
centers in Australia, Canada, Hong Kong, the Netherlands, New Zealand and
Singapore. These foreign operations use the U.S. dollar as their functional
currency because the majority of sales and inventory purchases are denominated
in U.S. dollars. There are currently no legal restrictions regarding the
repatriation of cash from the Company's foreign operations to the U.S. Net sales
and earnings before income taxes for the foreign operations were $93.1 million
and $6.2 million, respectively, for 1997, $84.8 million and $6.7 million,
respectively, for 1996, and $63.3 million and $0.7 million, respectively, for
1995. See Note 16 to the Consolidated Financial Statements for further
discussion.
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15
INCOME TAXES. For 1997, the Company's income tax expense was $1.1 million,
primarily related to foreign taxes on foreign operations. The effective rate for
1997 of 3.7% is substantially lower than the U.S. federal statutory rate due to
the utilization of the large U.S. net operating loss ("NOL") not benefited
previously and the corresponding decrease in the valuation allowance on the
deferred tax assets. In 1997, the Company paid $0.4 million of U.S. federal
alternative minimum tax ("AMT") which was recorded as an AMT credit
carryforward. The Company expects to pay AMT on future domestic taxable income
until full utilization of the U.S. federal NOL. The Company's income tax expense
for 1996 was $1.7 million. The effective rate for 1996 of 13.5% was
substantially lower than the U.S. federal statutory rate primarily due to the
decrease in the valuation allowance provided for deferred tax assets, partially
offset by the tax basis difference in the stock of a foreign subsidiary which
was sold as part of the sale of Commercial Engine Services businesses. The
income tax expense for 1995 was $0.5 million and reflected an effective rate of
(0.2)%. The 1995 effective rate was below the U.S. federal statutory rate due to
the amortization and write-off of goodwill and the increase in the valuation
allowance for deferred tax assets primarily related to the NOL.
As of December 31, 1997, the Company had gross deferred income tax assets
of $114.7 million, arising primarily from the losses related to businesses
previously sold. Based on historical earnings levels, the Company believes that
future taxable income may not be sufficient to realize all deferred tax assets.
Accordingly, the deferred tax assets, net of a $60.1 million valuation
allowance, are considered realizable with sufficient certainty. In addition, the
Company had $5.2 million of deferred tax liabilities at year end. The resulting
net deferred income tax asset as of December 31, 1997 was $49.3 million.
For U.S. federal tax purposes as of December 31, 1997, the Company had an
estimated NOL carryforward of approximately $200 million, substantially expiring
in 2009-2011. The majority of the NOL was created by losses on businesses sold
in 1994, 1995 and 1996. If certain substantial changes in the Company's
ownership should occur, there would be an annual limitation on the amount of NOL
carryforward that can be utilized. See Note 10 to the Consolidated Financial
Statements for further discussion.
PENSION BENEFITS. The Company's primary pension plan ("Aviall Plan") became
effective on January 1, 1994 to provide benefits for services subsequent to the
Distribution. Ryder retained the pension fund assets and accumulated benefit
obligation for all Aviall employees who participated in the Ryder System, Inc.
Employee Retirement Plan ("Ryder Salaried Plan"). Aviall employees were given
credit in the Aviall Plan for prior service in the Ryder Salaried Plan. Service
cost for the ongoing business is expected to approximate $1.4 million in 1998.
At the Distribution, Ryder transferred to Aviall amounts primarily related
to unrecognized net loss and prior service cost of the Ryder Salaried Plan and
retained the underlying accumulated benefit obligation and related assets.
Aviall and Ryder disagreed with respect to the appropriate accounting treatment
of these deferred charges. Under the terms of an agreement entered into in
connection with the Distribution, Aviall is pursuing arbitration with respect to
this matter. Based on the sale of businesses (see Notes 3 and 4) and the
Company's assessment, these amounts have been written-off due to the uncertainty
of recoverability in arbitration. See Note 11 to the Consolidated Financial
Statements for further discussion.
FINANCIAL RESOURCES AND LIQUIDITY. The Company's working capital and operating
needs are met through a combination of cash flow from operations and
availability under revolving lines of credit. The improved financial condition
of the Company resulting from the disposal of its nonstrategic business units
enabled it to replace its existing senior secured credit facilities in September
1996. The Company's current senior secured credit facilities (the "1996 Credit
Facilities") consist of a $50.0 million five-year amortizing secured term loan
due through 2001 (the "Term Loan"), and a $50.0 million five-year secured
revolving loan due in 2001 (the "Revolver") with availability determined by
reference to a borrowing base of eligible accounts receivable and inventory of
the Company. The 1996 Credit Facilities provide significantly lower interest
expense when compared with the previous amended senior secured credit facilities
(the "1993 Credit Facilities"). The 1996 Credit Facilities contain various
covenants, including financial covenants, and limitations on debt, dividends and
capital expenditures. See Note 8 to the Consolidated Financial Statements for
further discussion.
15
16
During 1996, the Company repaid the 1993 Credit Facilities with proceeds
received from the sale of businesses and borrowings under the 1996 Credit
Facilities. The 1993 Credit Facilities had been amended in March 1996 to provide
for a maturity date of April 30, 1997, which resulted in accelerated
amortization of debt issuance costs in 1996.
In January 1997, a $12.0 million subordinated note received in connection
with the 1995 asset sale of the business aviation engine repair operation was
repaid. The Company applied the proceeds as a permanent reduction of the Term
Loan. The subordinated note bore interest at 12% per annum payable semiannually,
and accrued interest of $0.3 million was received by the Company at the time of
the note repayment. Because of the uncertainty regarding the collection of the
note when it was received in March 1995, the Company carried the note at a
discounted value of $10.5 million.
The Company believes that its expected cash flow from operations and
availability under its revolving lines of credit are sufficient to meet its
current working capital and operating needs as well as implement the share
repurchase program that was announced in January 1998. Improvements in earnings
will further enhance the Company's access to capital and will enable the Company
to finance future investment opportunities.
CASH FLOWS. Cash flow from operations of the continuing operations excluding
working capital changes (defined as net earnings (loss) from continuing
operations and adding back nonrecurring charges, continuing operations
depreciation and amortization, compensation expense for restricted stock awards
and deferred income taxes) was $30.5 million in 1997 compared with $13.2 million
in 1996. This increase principally results from increased sales and gross
profits in 1997 and reduced SG&A expenses. Continuing operations working capital
increased $20.4 million in 1997 compared with a $27.2 million increase in 1996.
The increase in 1997 was mainly due to the lower liabilities associated with the
payments related to businesses previously sold and an increase in receivables
reflecting higher sales. The 1996 working capital increase reflected a $16.6
million decrease in accounts payable due to the reduction in outstanding checks
and a $13.6 million decrease in accrued expenses as reserves established in
connection with the sale of businesses were repaid. The $30.4 million working
capital increase in 1995 included a $14.5 million payment to Ryder for the
settlement of 1993 federal income taxes made pursuant to the Tax Sharing
Agreement entered into in connection with the Distribution and $11.7 million
higher inventory balances.
Capital spending for the ongoing business, excluding the Fastener Business,
was $4.3 million, $1.2 million and $4.3 million in 1997, 1996 and 1995,
respectively. Major projects in 1997 and 1996 included information
systems-related investments. The projects in 1995 included completion of a new
warehouse management system. Based on the Company's present plans for improving
its information technology capabilities, annual capital expenditures for the
continuing business are expected to be approximately $4.0 million in 1998.
Net cash outflows from financing activities were $14.5 million in 1997,
$254.4 million in 1996 and $105.3 million in 1995. The Company completed the
sales of the Commercial Engine Services businesses and the Fastener Business in
1996. Total cash proceeds were $261.3 million, net of transaction and closing
costs, and were used to repay debt in accordance with the requirements of the
Company's 1993 Credit Facilities. The remaining borrowings under the 1993 Credit
Facilities were repaid in September 1996 from new borrowings under the 1996
Credit Facilities.
ENVIRONMENTAL MATTERS. The Company's parts distribution business, which includes
parts repair operations, requires the use, storage and disposition of certain
chemicals in small quantities which are regulated under various federal and
state environmental protection laws. These laws required the Company to
eliminate or mitigate the impact of these substances on the environment. In
response to these requirements, the Company has upgraded facilities and
implemented programs to detect and minimize contamination. Due to the small
quantities of chemicals used and the current programs in place, the Company does
not anticipate any material environmental liabilities or significant capital
expenditures will be incurred in the future related to these operations to
comply or remain in compliance with existing environmental regulations.
16
17
Certain of the Company's previously owned businesses (see Notes 3 and 4 to
the Consolidated Financial Statements) required the use of certain chemicals
classified by various state and federal agencies as hazardous substances. The
Company retains environmental liabilities related to these businesses for the
period during which they were operated by the Company. The Company is involved
in various stages of investigation and cleanup to comply with state and federal
regulations at these locations. The primary locations are Burbank, California,
Dallas (Forest Park), Texas and Commercial Engine Services properties ("CES
Properties") which include three locations in Texas (Love Field, Carter Field
and McAllen) and one location in Prestwick, Scotland.
The Company has been named a potentially responsible party ("PRP") under
the Comprehensive Environmental Response, Compensation and Liability Act and the
Superfund Amendments and Reauthorization Act at five third-party disposal sites
to which wastes were allegedly sent by the previous owner of assets used in the
Company's former engine services operations. The Company did not use these
identified disposal sites. Accordingly, the previous owner has retained, and has
been discharging, all liability associated with the cleanup of these sites
pursuant to the sales agreement. Although the Company could be potentially
liable in the event of nonperformance by the previous owner, it does not
anticipate nonperformance. Based on this information, the Company has not
accrued any costs associated with third-party sites. The Company has also
received notices or inquiries from certain state agencies and other private
parties with respect to certain other environmental matters. One property owner
adjacent to the previously owned Forest Park location has filed suit against the
Company related to environmental contamination. These matters are in the
preliminary stage of investigation, and the ultimate cost cannot presently be
estimated.
In addition, the Company's former Burbank, California engine overhaul
facility is located within the boundaries of the Burbank Unit of the San
Fernando Valley Superfund Sites. The EPA has selected an interim remedial action
for the Burbank Unit, including multiyear operation and maintenance of a ground
water treatment system. Lockheed and certain other parties entered into a
consent decree with the EPA under which Lockheed agreed to implement and finance
a portion of the interim remedial action for a limited period.
In May 1994, the Company was notified by the EPA that it had been named a
PRP with respect to the Burbank Unit. In June 1995, the Company and certain
other defendants entered into an agreement with Lockheed to settle a lawsuit
filed by Lockheed in April 1994 against the Company and more than 100 other
parties seeking recovery of or contribution to Lockheed's response costs to
comply with the consent decree. Pursuant to the agreement, in exchange for a
$2.2 million cash payment made in June 1995, the Company will be released from
and protected against certain environmental response costs for the Burbank Unit
through expiration of the interim remedy period established by the EPA, certain
claims by the EPA for costs of oversight of the Burbank Unit and certain other
matters. The agreement does not cover certain matters including environmental
response costs for any final remedy which may be established by the EPA, certain
EPA oversight costs and costs of any changes mandated by the EPA to the present
interim remedy for the Burbank Unit.
The agreement with Lockheed is subject to court approval of a new consent
decree relating to the interim remedy for the Burbank Unit. Although the Company
presently believes that this condition will be satisfied, there can be no
assurance of this event. The Company presently has determined additional
reserves related to the Burbank Unit are not required due to the uncertainty of
the additional costs, if any, associated with any changes to the interim remedy
or any final remedy.
17
18
The Company, together with approximately 50 other parties, are defendants
in eight separate lawsuits alleging personal injury and/or property damage
arising out of the alleged release of toxic substances into the air, soil and/or
groundwater in the City of Burbank, California. The damages for personal
injuries claimed are broad and varied, and include cancer, fear of cancer, fear
of injury, birth defects, reproductive harm, injuries to immune systems, future
medical monitoring, emotional distress and loss of consortium. In addition to
Aviall, the named defendants in these suits include Lockheed and certain other
parties who were named PRPs with respect to the Burbank Unit. These cases, which
were filed in the Superior Court of California for the County of Los Angeles and
involve over 3,000 plaintiffs, have been consolidated for pretrial purposes. The
total damages claimed by the plaintiffs is not known although the jurisdictional
allegations in the lawsuits seek damages in excess of $25,000 per plaintiff. The
Company, which was served with these lawsuits in first quarter 1998, intends to
vigorously defend these suits. Since the suits are in the preliminary stage of
investigation, no reserves for damages have been established.
The Company is presently implementing a state agency approved cleanup for
its former Forest Park facility. The Company believes existing financial
reserves for the environmental remediation of this location are sufficient.
There are various stages of discussions underway with state agencies regarding
the appropriate remediation for ground water and soil contamination at the CES
Properties located in Texas. The Company has completed the state agency required
remediation on soil and ground water issues for the Carter Field and McAllen
locations. During 1997, investigations were completed at Love Field, Texas and
Prestwick, Scotland. The Company received notification of an approved plan from
the Scotland Environmental Protection Agency on soil and ground water issues for
the Prestwick, Scotland site. Work on determining exposure and corrective
measures is continuing at the Love Field site. Based on current information, the
Company believes existing financial reserves for environmental corrective
measures at the CES Properties are sufficient. In addition, the Company is in
litigation with a previous owner and former insurers of various of these
locations as to their potential shared liability associated with the cleanup of
these sites. Due to the uncertainty of recoverability of the various claims the
Company has made against these third parties and insurers, a receivable has not
been recorded.
At December 31, 1997 and 1996, accrued environmental liabilities amounted
to $20.4 million and $22.8 million, respectively. The Company incurred $14.4
million in 1995 for environmental expense. No environmental expense was recorded
in 1997 or 1996. The ultimate cost of the Company's environmental liabilities
has been estimated, including exit costs related to both Commercial Engine
Services and other previously owned businesses. The Company's estimates will
change in the future as more information becomes available with respect to the
level of contamination, the effectiveness of selected remediation methods, the
stage of management's investigation at the individual sites and the
recoverability of such costs from third parties. The expected cash funding
requirements for 1998 related to environmental liabilities are $4.1 million. The
estimated environmental remediation expense to be recorded with respect to the
ongoing business is not expected to be significant in the foreseeable future
based on the nature of the activities presently conducted. Based on information
presently available and Company programs to detect and minimize contamination,
management believes that the ultimate disposition of environmental matters will
not have a material adverse effect on the Company's results of operations, cash
flows or financial condition although certain environmental matters could be
material to cash flows in any one year (see Note 13 to the Consolidated
Financial Statements).
OUTLOOK. Aviall's focus is on the distribution of aviation parts and providing
inventory information services. The Company completed the sales of nonstrategic
business units and used the net proceeds to pay down debt. Management believes
the Company has made significant progress in streamlining corporate functions to
reduce costs and improve efficiency. The Company intends to seek further
opportunities for cost reductions and efficiency improvements in all areas of
its operation.
In January 1998, the Company's Board of Directors authorized a $30 million
share repurchase program to buyback up to 10% of the Company's outstanding
common stock over the next two years in open market transactions, depending on
market, economic and other factors. The Company intends to use existing cash
balances and future cash flows to fund this program. Management does not expect
the share repurchase program to restrict the Company from pursuing other
opportunities for growth.
18
19
The Company is in the process of replacing its financial and parts
distribution operating software with planned implementation dates of second and
fourth quarter of 1998, respectively. These implementations along with the new
parts distribution warehouse and inventory management systems implemented in
1996 reflect management's commitment to improve the Company's technology
capabilities. These new systems are Year 2000 compliant. Also, ILS' internally
developed software is being updated to be Year 2000 compliant with a scheduled
completion date of the second quarter 1998. The Company has retained a
consultant to conduct a Year 2000 hardware review in the second quarter 1998
with recommendations to be implemented by year end 1998. Based on the planned
implementation and assessment dates, management believes implementation will be
completed in a timely manner and there will be no material effect from Year 2000
on its future financial results.
The Company's financial and parts distribution operating systems are
critical to Aviall's success. Implementation of complex new software systems
carries certain risks which may affect normal operations for a period of time.
Management believes their implementation process and strategy combined with
appropriate training throughout the organization will minimize these risks.
Aviall primarily participates in the global aviation aftermarket through
its core aviation parts distribution and inventory information services
businesses. The Company can be affected by the general economic cycle,
particularly as it influences flight activity in commercial, business and
general aviation. Recent favorable economic conditions have led to a recovery of
the aviation market, and provided the Company with opportunities for growth.
The Company serves a significant number of customers in the Asia-Pacific
and Latin American regions. Recently, countries in these regions have
experienced financial market volatility and the currencies of certain countries
have fallen in value relative to the U.S. dollar. These factors may reduce
demand for air travel in these regions, and as a result may affect customers'
need for aircraft parts and their ability to pay in a timely manner.
The Company's ability to manage its inventory is affected by the relative
efficiency of its suppliers. Also, changes in the Company's portfolio of
products and suppliers can result in periodic noncash charges to revalue
inventory of discontinued products.
Information and communication technology is evolving rapidly, and
developments such as the Internet could threaten proprietary database service
companies such as ILS and traditional distribution companies. Management
believes that the active employment by the Company of these new technologies,
such as the Internet, will enable it to maintain its technological leadership
and minimize the risk of obsolescence.
CERTAIN FORWARD-LOOKING STATEMENTS. This report contains certain forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995) relating to the Company that are based on the beliefs of the
management of the Company, as well as assumptions and estimates made by and
information currently available to the Company's management. When used in this
report, the words "anticipate," "believe," "estimate," "expect," "intend" and
similar expressions, as they relate to the Company or the Company's management,
identify forward-looking statements. Such statements reflect the current views
of the Company with respect to future events and are subject to certain risks,
uncertainties and assumptions relating to the operations and results of
operations of the Company as well as its customers and suppliers, including as a
result of competitive factors and pricing pressures, shifts in market demand,
general economic conditions and other factors including, among others, those
that effect flight activity in commercial, business and general aviation, the
business activities of the Company's customers and suppliers and developments in
information and communication technology. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions or estimates prove
incorrect, actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended.
19
20
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and supplementary data are included
as an annex to this report. See the Index to Consolidated Financial Statements
and Supplementary Data on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the directors of
Aviall is set forth under the caption "Election of Directors" of Aviall's Proxy
Statement for the 1998 Annual Meeting of Stockholders to be held on May 22, 1998
("Proxy Statement"), to be filed with the Commission pursuant to Regulation 14A,
which is incorporated herein by reference.
The information required by this item regarding executive officers is set
forth in Item 1 of Part I of this report, and incorporated herein by reference.
Information required by this item regarding compliance with Section 16 of
the Securities Exchange Act of 1934, as amended, by persons subject to such
section is set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance," of the Proxy Statement to be filed pursuant to Regulation
14A, which information is incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is set forth under the captions
"Compensation of Directors," "Compensation of Executive Officers," "Option/SAR
Grants in 1997," "Aggregated Option/SAR Exercises and December 31, 1997
Option/SAR Values" and "Retirement Benefits" of the Proxy Statement, to be filed
with the Commission pursuant to Regulation 14A, which is incorporated herein by
reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption
"Beneficial Ownership of Common Stock" of the Proxy Statement, to be filed with
the Commission pursuant to Regulation 14A, which is incorporated herein by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Compensation of Executive Officers - Certain Transactions" of the Proxy
Statement, to be filed with the Commission pursuant to Registration 14A, which
is incorporated herein by reference.
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21
PART IV
ITEM 14: EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report:
(1) Consolidated Financial Statements of Aviall, Inc. and its
subsidiaries:
Report of Independent Accountants
Consolidated Statements of Operations
Consolidated Balance Sheets
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedules:
Schedule II - Valuation Accounts
All other schedules have been omitted because they are not
applicable or the required information is shown in the
Consolidated Financial Statements or the Notes to the Consolidated
Financial Statements.
(3) Exhibits:
Exhibit
No. Description
- -------------- -------------------------------------------------------------------------------------------------------
3.1* Restated Certificate of Incorporation of Aviall (Exhibit 3.1 to Aviall's Annual Report on Form 10-K
for the fiscal year ended December 31, 1993 (the "1993 Form 10-K"))
3.2* By-Laws of Aviall (Exhibit 3.2 to the 1993 Form 10-K)
4.1* Form of Common Stock Certificate of Aviall (Exhibit 4 to Aviall's Registration Statement on Form 10,
as amended (Commission File No. 1-12380) (the "Form 10"))
4.2* Aviall, Inc. Preferred Stock Purchase Rights Plan between Aviall and The First National Bank of
Boston dated as of December 7, 1993 (Exhibit 10.7 to the 1993 Form 10-K)
10.1*+ Aviall, Inc. Stock Incentive Plan (Exhibit 10.1 to the 1993 Form 10-K)
10.2*+ Aviall, Inc. Amended and Restated Directors Stock Plan (Exhibit 10.1 to Aviall's Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 1997)
10.3* Distribution and Indemnity Agreement by and between Aviall and Ryder dated November 23, 1993 (Exhibit
10.3 to the 1993 Form 10-K)
10.4* Tax Sharing Agreement by and between Aviall and Ryder dated November 23, 1993 (Exhibit 10.4 to the
1993 Form 10-K)
21
22
Exhibit
No. Description
- -------------- -------------------------------------------------------------------------------------------------------
10.5+ Form of Severance Agreement between Aviall and its executive officers
10.6* Asset Purchase Agreement, dated as of May 31, 1994, by and between Aviall Services, Inc. and Dallas
Airmotive, Inc., as amended (Exhibit 10.3 to Aviall's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1994 (the "June 30, 1994 Form 10-Q") and Exhibits 10.17 through 10.23 to Aviall's
Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (the "1994 Form 10-K"))
10.7* Asset Purchase Agreement, dated as of August 4, 1994 by and between Aviall Services, Inc. and AJT
Capital Partners d/b/a Aerospace International Services, as amended (Exhibit 10.4 to the June 30,
1994 Form 10-Q and Exhibit 10.25 to the 1994 Form 10-K)
10.8*+ Aviall, Inc. Employee Stock Purchase Plan (Exhibit 10.27 to the 1995 Form 10-K)
10.9* Agreement of Purchase and Sale among Aviall, Inc., Aviall Services, Inc., Greenwich Air Services,
Inc. and GASI Engine Services, Inc., dated April 19, 1996 (Exhibit 2.1 to Aviall's Current Report on
Form 8-K dated April 19, 1996)
10.10* Asset Purchase Agreement between Aviall, Inc. and Curtiss-Wright Flight Systems, Inc., dated April 25, 1996
(Exhibit 2.2 to Aviall's Current Report on Form 8-K dated April 19, 1996)
10.11* Asset Purchase Agreement by and among Maple Leaf Aerospace, Inc., Aviall Services, Inc. and Aviall
(Canada) Ltd., dated September 5, 1996 (Exhibit 2.1 to Aviall's Current Report on Form 8-K dated
September 19, 1996)
10.12* Credit Agreement, dated as of September 26, 1996, by and among Aviall, Inc. and the financial
institutions parties thereto (Exhibit 10.1 to Aviall's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1995)
10.13 First Amendment to Credit Agreement, dated January 28, 1998, by and among Aviall, Inc. and the financial
institutions parties thereto
21.1 Subsidiaries of Aviall
23.1 Consent of Price Waterhouse LLP
24.1 Powers of attorney of directors and officers of Aviall
27.1 Financial Data Schedule
- --------------------
* Each document marked with an asterisk is incorporated herein by reference
to the designated document previously filed with the Commission.
+ Each document marked with a dagger constitutes a management contract or
compensatory plan or arrangement.
(b) Reports on Form 8-K.
None.
22
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AVIALL, INC.
March 20, 1998 By /s/ Eric E. Anderson
-----------------------
Eric E. Anderson
Chairman, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE
/s/ ERIC E. ANDERSON Chairman, President and Chief Executive Officer
- ---------------------------- (Principal Executive Officer)
Eric E. Anderson
/s/ JACQUELINE K. COLLIER Vice President and Controller
- ---------------------------- (Principal Accounting Officer)
Jacqueline K. Collier
/s/ CORNELIUS VAN DEN HANDEL Vice President and Treasurer
- ---------------------------- (Principal Financial Officer)
Cornelius Van Den Handel
Robert G. Lambert* Director
- ----------------------------
Robert G. Lambert
Henry A. McKinnell* Director
- ----------------------------
Henry A. McKinnell
Donald R. Muzyka* Director
- ----------------------------
Donald R. Muzyka
Richard J. Schnieders* Director
- ----------------------------
Richard J. Schnieders
Bruce N. Whitman* Director
- ----------------------------
Bruce N. Whitman
* The undersigned, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K pursuant to the Powers of Attorney executed on behalf of
the above-named officers and directors of the Registrant and
contemporaneously filed herewith with the Securities and Exchange
Commission.
March 20, 1998 /s/ Jeffrey J. Murphy
------------------------------
Jeffrey J. Murphy
Attorney-in-Fact
23
24
AVIALL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
ITEM 14(a)(1): CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS..............................................F-2
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS......................................F-3
CONSOLIDATED BALANCE SHEETS................................................F-4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY............................F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS......................................F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................F-7
ITEM 14(a)(2): CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
SCHEDULE II - VALUATION ACCOUNTS..............................................F-27
F-1
25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors January 28, 1998
and Shareholders of Aviall, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 21 present fairly, in all material
respects, the financial position of Aviall, Inc. and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
- ---------------------------
PRICE WATERHOUSE LLP
Dallas, Texas
F-2
26
AVIALL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Years Ended December 31,
-----------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------
Net sales $ 386,060 374,038 346,511
Cost of sales 288,863 278,897 255,791
- -----------------------------------------------------------------------------------------------------
Gross profit 97,197 95,141 90,720
Operating and other expenses:
Selling and administrative expenses 67,912 79,535 80,734
Nonrecurring items (1,436) 6,613 28,964
Interest expense 3,201 10,282 10,713
- -----------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations
before income taxes 27,520 (1,289) (29,691)
Provision (benefit) for income taxes 1,096 1,657 (1,574)
- -----------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations 26,424 (2,946) (28,117)
Discontinued operations:
Loss from operations (net of income tax
expense of $2,714 in 1995) - - (421)
Gain (loss) on disposal (net of income
tax benefit of $605 in 1995) 2,673 16,946 (212,537)
- -----------------------------------------------------------------------------------------------------
Earnings (loss) from discontinued operations 2,673 16,946 (212,958)
- -----------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item 29,097 14,000 (241,075)
Extraordinary item - (3,421) -
- -----------------------------------------------------------------------------------------------------
Net earnings (loss) $ 29,097 10,579 (241,075)
=====================================================================================================
Basic net earnings (loss) per share:
Earnings (loss) from continuing operations $ 1.34 (0.15) (1.45)
Earnings (loss) from discontinued operations 0.14 0.87 (10.96)
Extraordinary item - (0.18) -
- -----------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1.48 0.54 (12.41)
=====================================================================================================
Weighted average common shares 19,711,105 19,494,561 19,418,671
=====================================================================================================
Diluted net earnings (loss) per share:
Earnings (loss) from continuing operations $ 1.32 (0.15) (1.45)
Earnings (loss) from discontinued operations 0.13 0.87 (10.96)
Extraordinary item - (0.18) -
- -----------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1.45 0.54 (12.41)
=====================================================================================================
Weighted average common and dilutive potential
common shares 20,061,205 19,494,561 19,418,671
=====================================================================================================
See accompanying notes to consolidated financial statements.
F-3
27
AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
--------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash $ 7,556 4,191
Receivables 59,119 60,716
Inventories 73,414 73,088
Prepaid expenses and other current assets 1,627 2,649
Deferred income taxes 11,795 12,551
- ------------------------------------------------------------------------------------------------------------------------------
Total current assets 153,511 153,195
- ------------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 9,758 8,727
Intangible assets 55,134 59,560
Deferred income taxes 37,530 36,593
Other assets 3,459 2,802
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 259,392 260,877
==============================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,556 5,237
Accounts payable 27,765 28,478
Accrued expenses 40,309 52,499
- ------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 76,630 86,214
- ------------------------------------------------------------------------------------------------------------------------------
Long-term debt 28,004 48,971
Other liabilities 27,397 31,731
Shareholders' equity (common stock of $.01 par value per share with 80,000,000
shares authorized; 19,900,195 shares and 19,551,688 shares issued and
outstanding at December 31, 1997 and 1996, respectively; preferred stock of
$.01 par value per share with 10,000,000 shares authorized and no shares
issued and outstanding) 127,361 93,961
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 259,392 260,877
==============================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
28
AVIALL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock
-------------------------- Additional Retained
Shares Unearned Paid-In Earnings
Outstanding Amount Compensation Capital (Deficit) Total
- -----------------------------------------------------------------------------------------------------------------------------
At December 31, 1994 19,403,438 $194 - 314,941 8,970 324,105
Net loss - - - - (241,075) (241,075)
Dividends - - - - (776) (776)
Common stock issued 40,274 - - 278 - 278
- -----------------------------------------------------------------------------------------------------------------------------
At December 31, 1995 19,443,712 194 - 315,219 (232,881) 82,532
Net earnings - - - - 10,579 10,579
Common stock issued 107,976 1 - 849 - 850
- -----------------------------------------------------------------------------------------------------------------------------
At December 31, 1996 19,551,688 195 - 316,068 (222,302) 93,961
Net earnings - - - - 29,097 29,097
Restricted stock awards - - (947) 947 - -
Compensation expense - - 294 - - 294
Common stock issued 348,507 4 - 4,005 - 4,009
- -----------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 19,900,195 $199 (653) 321,020 (193,205) 127,361
=============================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
29
AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Years Ended December 31,
--------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 29,097 10,579 (241,075)
(Gain)/loss on disposal of discontinued operations (2,673) (16,946) 212,537
Nonrecurring items (1,436) 6,613 28,964
Extraordinary loss - 3,421 -
Continuing operations depreciation and amortization 5,426 9,469 7,281
Discontinued operations depreciation and amortization - - 22,321
Compensation expense on restricted stock awards 294 - -
Deferred income taxes (181) 43 (3,039)
Changes in:
Receivables (8,090) (290) (1,388)
Inventories (200) 3,471 (11,702)
Accounts payable (724) (16,577) 6,923
Accrued expenses (8,420) (13,616) (29,478)
Other, net (2,982) (148) 5,217
Discontinued operations working capital changes - 5,020 40,759
- -----------------------------------------------------------------------------------------------------------------------------
10,111 (8,961) 37,320
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayment of note receivable 12,000 - -
Capital expenditures (4,348) (1,179) (4,330)
Proceeds from businesses sold - 261,276 80,100
Sales of property, plant and equipment 110 2,198 1,758
Other, net - - (2,083)
Net change in discontinued operations property, plant and equipment - 603 (14,268)
- -----------------------------------------------------------------------------------------------------------------------------
7,762 262,898 61,177
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt repaid (16,339) (169,880) (84,970)
Net change in revolving credit facility (2,178) (132,580) (19,825)
Debt proceeds - 50,000 -
Debt issue costs paid - (2,826) -
Issuance of common stock 4,009 850 278
Dividends paid - - (776)
- -----------------------------------------------------------------------------------------------------------------------------
(14,508) (254,436) (105,293)
- -----------------------------------------------------------------------------------------------------------------------------
Change in cash 3,365 (499) (6,796)
Cash, beginning of year 4,191 4,690 11,486
- -----------------------------------------------------------------------------------------------------------------------------
Cash, end of year $ 7,556 4,191 4,690
=============================================================================================================================
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 3,655 17,178 29,550
Income taxes $ 1,080 1,008 19,129
See accompanying notes to consolidated financial statements.
F-6
30
AVIALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BACKGROUND AND ORGANIZATION
Aviall, Inc. ("Aviall" or the "Company") is a leading distributor of new
aviation parts and provider of related inventory information services.
Aviall operated as a wholly owned subsidiary of Ryder System, Inc.
("Ryder") until December 7, 1993 (the "Distribution Date") when Ryder
distributed Aviall's stock to Ryder's shareholders as a tax free dividend (the
"Distribution"). The Distribution established Aviall as a publicly held
corporation separate from Ryder. In conjunction with the Distribution, the
Company announced plans to dispose of its parts redistribution, business
aviation engine overhaul, and aircraft and terminal services businesses. The
sales of these businesses were completed in 1995 (see Note 4).
In January 1996, Aviall announced its intention to exit the commercial
engine services businesses consisting of its airline engine, component and
accessories repair operations ("Commercial Engine Services") and, accordingly,
reported these businesses as discontinued operations. The sales of these
businesses were completed in 1996 (see Note 3). In September 1996, the Company
sold its aerospace fastener distribution business (the "Fastener Business") (see
Note 4).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of Aviall and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated. Certain
prior year amounts have been reclassified to conform to the current year
presentation.
The process of preparing financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues and expenses. Such
estimates primarily relate to unsettled transactions and events as of the date
of the consolidated financial statements.
Accordingly, upon settlement, actual results may differ from estimated amounts.
REVENUE RECOGNITION. Income from parts sales is recognized upon shipment of the
product to customers. Income from inventory information services is recognized
as services are rendered.
For the discontinued operations, income from engine maintenance services
was recognized at the time of performance test acceptance of engines. Revenue
from long-term fixed-price contracts was recognized under the percentage of
completion method.
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH. The Company considers all
highly-liquid, interest-bearing instruments with an original maturity of three
months or less to be cash equivalents.
INVENTORIES. Inventories, composed of aviation parts, are valued at the lower of
average cost or market. Provision is made for estimated excess and obsolete
inventories.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are carried at cost
and depreciated over the estimated useful lives of the related assets using the
straight-line method. Lives assigned to asset categories are 10 to 20 years for
leasehold improvements and 5 to 12 years for machinery and equipment.
F-7
31
INTANGIBLE ASSETS. Intangible assets, principally goodwill, are reported net of
accumulated amortization of $24.4 million in 1997 and $22.2 million in 1996.
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is amortized using the straight-line method over the
expected life which is forty years.
LONG-LIVED ASSETS. It is the Company's policy to periodically review the net
realizable value of its long-lived assets, including goodwill, through an
assessment of the estimated future cash flows related to such assets. In the
event that assets are found to be carried at amounts which are in excess of
estimated gross future cash flows, then the assets will be adjusted for
impairment to a level commensurate with a discounted cash flow analysis of the
underlying assets. Based upon its most recent analysis, the Company believes no
impairment of long-lived assets exists at December 31, 1997.
ENVIRONMENTAL COSTS. A liability for environmental assessments and/or cleanup is
accrued when it is probable a loss has been incurred and is estimable.
Generally, the timing of these accruals coincides with the identification of an
environmental obligation through the Company's internal procedures or upon
notification from regulatory agencies.
FINANCING COSTS. Fees associated with the incurrence of long-term debt are
reflected as a discount on the associated debt. Issue costs associated with
obtaining debt are recorded as a deferred charge. All fees and issue costs are
included in interest expense and amortized over the term of the related debt
utilizing an effective interest rate method. Amortization of financing costs
amounted to $0.4 million, $6.9 million and $3.0 million in 1997, 1996 and 1995,
respectively.
FOREIGN CURRENCY TRANSLATION. The Company's foreign operations utilize the U.S.
dollar as their functional currency. Translation gains and losses are included
in earnings.
FINANCIAL INSTRUMENTS. The differential to be received or paid on interest rate
swaps is recognized over the terms of the agreements as an adjustment to
interest expense. Premiums paid for purchased interest rate cap agreements are
amortized to interest expense over the terms of such agreements, and any
payments received reduce interest expense. Gains and losses on foreign currency
forward contracts are recognized concurrently with the related transaction gains
and losses. Although the Company is exposed to certain losses in the event of
nonperformance by the financial institutions which are counterparties to
interest and foreign exchange rate agreements, it does not anticipate
nonperformance by the counterparties.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying values of current assets and
liabilities approximate fair value due to the short-term maturities of these
assets and liabilities. At December 31, 1997 and 1996, the carrying value of
debt approximates fair value.
INCOME TAXES. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
plans in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25") and makes the appropriate disclosures
as required by Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123").
REPORTING COMPREHENSIVE INCOME. In June 1997, the Financial Accounting Standards
Board ("FASB") issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS
130") effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of financial statements. The adoption of this
statement in 1998 is not expected to have an affect on the Company's financial
statements.
F-8
32
SEGMENT REPORTING AND RELATED INFORMATION. In June 1997, the FASB issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131") effective for fiscal years beginning after December
31, 1997. SFAS 131 requires companies to disclose certain information about
their operating segments, their products and services, their major customers and
the geographic areas in which they operate. The determination of reportable
segments under SFAS 131 is based on material segments of a company whose
operating results are regularly reviewed by the Company's chief operating
decision maker in determining allocation of resources between the segments and
assessing their performance. The Company is presently evaluating its reporting
requirements under this standard. Based on preliminary assessments, the Company
believes it will report two operating segments. The Company will adopt the
provisions of SFAS 131 effective December 31, 1998.
EARNINGS (LOSS) PER SHARE. The Company computes earnings (loss) per share in
accordance with FASB Statement No. 128, "Earnings Per Share" ("SFAS 128") which
was issued in February 1997 effective for interim and annual periods ending
after December 15, 1997. Prior year earnings (loss) per share have been restated
in accordance with SFAS 128. Basic net earnings (loss) per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during the period. Diluted net earnings (loss) per share is computed
by dividing net earnings by the weighted average number of common and dilutive
potential common shares outstanding during the period. Quarterly and
year-to-date computations of per share amounts are made independently;
therefore, the sum of per share amounts for the quarters may not equal per share
amounts for the year.
NOTE 3 - DISCONTINUED OPERATIONS
In January 1996, the Company announced its intention to exit Commercial
Engine Services consisting of its airline engine, component and accessories
repair operations located in Texas, Florida and Scotland and, accordingly,
reported these businesses as discontinued operations in its 1995 Consolidated
Financial Statements. Prior year amounts were reclassified accordingly. A $212.5
million charge, net of tax, was recorded in 1995 to reflect the estimated fair
market value of the assets and disposal costs associated with the sales.
Operations during the phase-out period were expected to break even.
The accessories repair operation sale was completed in May 1996, and the
airline engine and component repair operations sale was completed in June 1996.
Both sale agreements had purchase prices subject to adjustment based upon
completion of an audited closing date statement of net assets. Final agreements
on the purchase price amounts for the airline engine and component repair
operations sale and the accessories repair operation sale were reached in
September 1996 and January 1997, respectively. Proceeds of $242.9 million from
the sales were used to pay down the Company's debt.
During 1996, the Company recognized a gain on disposal of $16.9 million.
The engine and component repair operations sale agreement provided the buyer the
unilateral option to pay a portion of the purchase price in stock. The estimated
loss on disposal of $212.5 million recorded in December 1995 included a $10.5
million provision for loss on sale of stock. The buyer ultimately paid the
entire purchase price in cash (or assumed liabilities). As a result, the $10.5
million provision for loss on sale of stock was reversed. In addition, the
provision for discontinued operations was reduced by $6.4 million as a result of
changes in estimates for transaction-related expenses and settlement of the
final sale price for the airline engine and component repair operations.
During 1997, the Company recognized a gain on disposal of $2.7 million
related to changes in estimates of certain liabilities as a result of the
expiration of the indemnification periods under the asset sale contracts for
nonenvironmental liabilities.
F-9
33
The sale agreements required the Company to retain certain liabilities,
primarily environmental, product liability insurance and pension. The losses
associated with these liabilities were estimated and included in the 1995
discontinued operations provision. The actual cost of these obligations may not
become known for a number of years and in the case of environmental, factors
included in the original estimate of loss, such as level of remediation
required, could change significantly from the Company's original estimate.
Accordingly, certain adjustments may be required in future periods to reflect
changes in these estimates.
The following table presents unaudited operating results for the
discontinued operations (in thousands):
(Unaudited) 1995
- ------------------------------------------------------------------------------------------------
Net sales $ 525,338
================================================================================================
Earnings from operations before income taxes and loss on disposal 2,293
Provision for income taxes 2,714
- ------------------------------------------------------------------------------------------------
Loss from operations before loss on disposal ( 421)
- ------------------------------------------------------------------------------------------------
Loss on disposal before income taxes (213,142)
Benefit for income taxes (605)
- ------------------------------------------------------------------------------------------------
Loss on disposal, net of taxes (212,537)
- ------------------------------------------------------------------------------------------------
Loss from discontinued operations $ (212,958)
================================================================================================
During 1996, net sales and loss from discontinued operations were $294.5
million and $3.6 million, respectively. Interest expense was allocated to the
discontinued operations based on the ratio of their net assets to the total net
assets of the Company. Domestic tax benefits were not recognized on the loss
from discontinued operations in 1995.
NOTE 4 - NONRECURRING ITEMS
1997 GAIN. During 1997, the Company received payment on a $12.0 million
unsecured, subordinated note received in connection with the 1995 sale of the
business aviation engine overhaul, and aircraft and terminal services
operations. The Company recorded a $1.4 million gain in connection with the
repayment of the note, which had been carried at a discounted value of $10.5
million.
1996 CHARGE. During 1996, the Company sold the Fastener Business. In connection
with the sale, the Company recorded a pretax charge of $6.6 million to reflect
the effect of final contract terms as well as transaction-related expenses.
Proceeds of $18.4 million from the sale were used to pay down debt.
The following table presents unaudited operating results for the Fastener
Business (in thousands):
(Unaudited) 1996 1995
- -------------------------------------------------------------------------
Net sales $23,085 25,580
Cost of sales 16,084 17,509
- -------------------------------------------------------------------------
Gross profit 7,001 8,071
Operating and other expenses:
Selling and administrative expenses 5,658 8,306
Nonrecurring charge 6,613 25,465
Interest expense 1,075 1,616
- -------------------------------------------------------------------------
Loss before income taxes $(6,345) (27,316)
=========================================================================
F-10
34
1995 CHARGE. During 1995, the Company revalued certain assets and recorded a
pretax charge of $33.2 million. The charge consisted of the write-down of the
Fastener Business assets of $25.5 million (primarily inventory) and the
write-off of $7.7 million of pension-related deferred charges (see Note 11).
Partially offsetting this amount was a $4.2 million gain which resulted from the
finalization of a charge recorded in 1993 stemming from the Company's decision
to dispose of its parts redistribution, business aviation engine overhaul, and
aircraft and terminal services operations. These sales were completed in 1995.
The $4.2 gain from finalization of these disposals reflected sales proceeds
greater than originally projected, environmental liabilities settled favorably
and better than expected operating results subsequent to June 1993 (adoption of
disposal plan). Partially offsetting these benefits were expenses related to the
disposition which were higher than anticipated.
NOTE 5 - RECEIVABLES
(In Thousands) 1997 1996
- ------------------------------------------------------------------------------
Trade $59,405 51,909
Notes 612 11,297
Other 3,339 2,051
- ------------------------------------------------------------------------------
63,356 65,257
Allowance for doubtful accounts (4,237) (4,541)
- ------------------------------------------------------------------------------
$59,119 60,716
==============================================================================
Notes receivable at December 31, 1996 was comprised primarily of a $12.0
million unsecured, subordinated note due 2002 with a stated interest rate of
12%, which note was recorded at a discounted value of $10.5 million. The Company
received this note in connection with the 1995 sale of its business aviation
engine overhaul, and aircraft and terminal services operations. The note was
repaid in January 1997 prior to its scheduled maturity and the proceeds were
used to pay down debt.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT
(In Thousands) 1997 1996
- ------------------------------------------------------------------------------
Machinery and equipment $30,878 35,512
Leasehold improvements 3,969 5,005
Capital projects in progress 2,029 -
- ------------------------------------------------------------------------------
36,876 40,517
Accumulated depreciation (27,118) (31,790)
- ------------------------------------------------------------------------------
$ 9,758 8,727
==============================================================================
NOTE 7 - ACCRUED EXPENSES
(In Thousands) 1997 1996
- ------------------------------------------------------------------------------
Salaries, wages and benefits $10,691 20,668
Operating taxes 8,974 6,362
Environmental reserves 4,116 2,973
Self-insurance reserves 2,956 4,067
Other 13,572 18,429
- ------------------------------------------------------------------------------
$40,309 52,499
==============================================================================
F-11
35
NOTE 8 - DEBT
(In Thousands) 1997 1996
- ------------------------------------------------------------------------------
Term Loan $36,000 49,134
Other 560 5,074
- ------------------------------------------------------------------------------
36,560 54,208
Less current portion (8,556) (5,237)
- ------------------------------------------------------------------------------
$28,004 48,971
==============================================================================
The Company's senior secured credit facilities (the "Credit Facilities")
consist of a $50.0 million, five-year amortizing secured term loan due through
2001 (the "Term Loan") and a $50.0 million five-year secured revolving loan due
in 2001 (the "Revolver"), with availability determined by reference to a
borrowing base determined by reference to the Company's eligible accounts
receivable and inventory. There were no borrowings outstanding under the
Revolver at December 31, 1997 and 1996. Borrowings under the Credit Facilities
bear interest, at the option of the Company, based upon either of two floating
rate options: the London Interbank Offering Rate ("LIBOR") plus an applicable
margin ranging from .75% to 2.25%, dependent upon certain of the Company's
financial ratios, or the Alternate Base Rate ("ABR"). The ABR is the higher of
the agent bank's prime rate or the federal funds rate plus .5%, plus an
applicable margin ranging from zero to 1.25%, dependent upon certain of the
Company's ratios. Interest is payable on a quarterly basis. At December 31, 1997
and 1996, the interest rate on the Term Loan was 6.75% and 7.74%, respectively,
and the interest rate on the Revolver was 8.50% and 9.25%, respectively.
The Credit Facilities provide for the issuance of up to $20.0 million of
letters of credit under the Revolver subject to the borrowing base, of which
$5.8 million was utilized at December 31, 1997. Commitment fees ranging from
.25% to .5% are payable on the unused portion of the Revolver. Obligations under
the Credit Facilities are secured by substantially all of the Company's domestic
assets and 65% of the stock of each of the Company's foreign subsidiaries. The
Credit Facilities contain various covenants, including financial covenants and
limitations on debt, dividends and capital expenditures.
The Company repaid its previous senior secured credit facilities (the "1993
Credit Facilities") in 1996. In connection with the early retirement of debt
outstanding under the 1993 Credit Facilities, the Company recorded an
extraordinary loss of $3.4 million resulting from the write-off of the
associated unamortized financing costs. No tax benefit was recorded on the
extraordinary loss due to the Company's net operating loss ("NOL").
Other debt consists of various notes with interest rates ranging from 6.75%
to 7.50% at December 31, 1997 and from 5.24% to 7.83% at December 31, 1996.
Scheduled debt maturities for the five years subsequent to December 31,
1997 are as follows (in thousands):
Year Ending
---------------------------------------------------------
1998 $ 8,556
1999 12,004
2000 13,000
2001 3,000
2002 -
---------------------------------------------------------
$36,560
=========================================================
F-12
36
NOTE 9 - FINANCIAL INSTRUMENTS
The Company uses financial instruments to offset defined market risks
arising from changes in interest rates and foreign exchange rates. The Company
does not use financial instruments for trading or speculative purposes. The fair
values of financial instruments are based on quoted market prices of similar
instruments and represent the amounts the Company would pay or receive to
terminate such agreements.
The Company was a party to an interest rate swap agreement at December 31,
1996 on a notional principal amount of $50.0 million to effectively convert its
floating-rate debt to fixed-rate debt. The agreement expired December 5, 1997.
Under terms of the agreement, the Company paid a fixed interest rate of 5.96%
and received a floating rate based on LIBOR. The estimated fair value of this
agreement at December 31, 1996 was a liability of $0.2 million. The counterparty
to this agreement was a large financial institution. There were no interest rate
swap agreements outstanding at December 31, 1997.
The Company had a foreign currency forward exchange contract outstanding at
December 31, 1997 to purchase Canadian dollars in a notional amount of $2.6
million at a rate of $0.69/C$1. There were no foreign currency forward exchange
contracts outstanding at December 31, 1996.
NOTE 10 - INCOME TAXES
(In Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
Current tax expense (benefit):
Federal $ 385 (48) (145)
State 49 640 540
Foreign 843 1,022 4,466
- -----------------------------------------------------------------------------------------------------------------
1,277 1,614 4,861
- -----------------------------------------------------------------------------------------------------------------
Deferred tax expense (benefit):
Federal (385) -- (1,044)
State -- -- (2,022)
Foreign 204 43 (1,260)
- -----------------------------------------------------------------------------------------------------------------
(181) 43 (4,326)
- -----------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 1,096 1,657 535
=================================================================================================================
Income tax expense is included in the Consolidated Statements of Operations as follows:
(In Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
Continuing operations $1,096 1,657 (1,574)
Earnings from discontinued operations - - 2,714
Loss on disposal of discontinued operations - - (605)
- ------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $1,096 1,657 535
==============================================================================================================================
F-13
37
A reconciliation of the U.S. federal statutory tax rate with the effective
tax rate follows:
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------------------
Provision (benefit) at the statutory rate $ 10,567 35.0 4,283 35.0 (84,189) 35.0
Valuation allowance (10,437) (34.6) (5,925) (48.4) 66,191 (27.5)
Amortization and write-off of goodwill 765 2.5 766 6.2 21,841 (9.1)
State income taxes, net of federal income tax benefit (246) (0.8) 416 3.4 (4,884) 2.0
Basis difference in stock of foreign subsidiary sold -- -- 2,446 20.0 -- --
Miscellaneous items, net 447 1.5 (329) (2.7) 1,576 (0.6)
- -------------------------------------------------------------------------------------------------------------------------
$ 1,096 3.7% 1,657 13.5% 535 (0.2)%
=========================================================================================================================
The significant temporary differences which gave rise to deferred income
taxes as of December 31, 1997 and 1996 were as follows:
(In Thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Deferred income tax assets:
Loss carryforwards and credits
U.S. federal $ 70,321 65,424
U.S. state 13,940 10,837
Foreign 2,979 3,395
Compensation related items 9,100 12,565
Inventory related items 3,369 8,501
Environmental related items 8,722 8,657
Accounts receivable allowances 1,509 1,759
Other items 4,720 6,266
- --------------------------------------------------------------------------------------------------------------------
114,660 117,404
Valuation allowance (60,092) (65,042)
- --------------------------------------------------------------------------------------------------------------------
Deferred income tax assets 54,568 52,362
- --------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Property and equipment basis differences (2,202) (252)
Other items (3,040) (2,966)
- --------------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities (5,242) (3,218)
- --------------------------------------------------------------------------------------------------------------------
Net deferred income tax asset $ 49,326 49,144
====================================================================================================================
The Company has an NOL carryforward for U.S. federal tax purposes of
approximately $200 million substantially expiring in 2009-2011. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of the NOL carryforward that could be utilized.
Based on historical earnings levels, the Company believes that future taxable
income may not be sufficient to realize all deferred tax assets. Accordingly,
the deferred tax assets, net of a $60.1 million valuation allowance, are
considered realizable with sufficient certainty.
F-14
38
Deferred taxes have not been provided on temporary differences related to
investments in foreign subsidiaries that are considered permanent in duration.
These temporary differences consist primarily of undistributed foreign earnings
of $7.8 million and $7.9 million at December 31, 1997 and 1996, respectively.
These earnings could become subject to additional tax if such amounts are
remitted as dividends to the U.S. parent. It is not practicable to estimate the
amount of additional tax that may be payable on the foreign earnings.
In connection with the Distribution, the Company and Ryder entered into a
tax sharing agreement which provided for the payment of taxes and receipt of tax
refunds for periods up through the Distribution Date and provided for various
administrative matters. Ryder's tax returns for 1990 through 1993 remain open
and therefore are subject to this agreement. The Company has decided to carry
forward its domestic tax NOL because of the terms of this agreement.
Pursuant to the tax sharing agreement, the Company paid Ryder $14.5 million in
1995.
NOTE 11 - PENSION PLANS AND POSTRETIREMENT BENEFITS
PENSION PLANS. Substantially all domestic employees are covered by a defined
benefit plan maintained by the Company (the "Aviall Pension Plan"). These
employees of Aviall were given credit under the Aviall Pension Plan for prior
service in the Ryder System, Inc. Retirement Plan (the "Ryder Salaried Plan").
Ryder retained the pension fund assets and accumulated benefit obligation
related to participants in the Ryder Salaried Plan for services rendered through
the Distribution Date.
In addition to the Aviall Pension Plan, the Company maintains two defined
benefit pension plans: a plan covering certain executives and a plan covering
certain former employees. The benefits for these plans are based upon years of
service, and the funding policy is to contribute such amounts as are necessary
on an actuarial basis to provide the plans with sufficient assets to meet the
benefits payable to plan participants. The plans' assets are primarily invested
in equities and interest-bearing accounts. Prior to the sale of Commercial
Engine Services in 1996, the Company maintained a pension plan for employees in
the United Kingdom. As a result of the sale, no further obligations exist with
respect to this plan.
The following tables reflect the components of net pension expense and the
funded status for all Aviall plans (in thousands):
NET PENSION EXPENSE 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 888 2,131 3,276
Interest cost on projected benefit obligation 2,624 2,679 3,878
Actual return on plan assets (6,557) (2,311) (4,190)
Net amortization and deferral 4,466 855 1,442
- --------------------------------------------------------------------------------------------------------------------
Net pension expense $ 1,421 3,354 4,406
====================================================================================================================
The above net pension expense of defined benefit plans included $2.0
million and $3.4 million in 1996 and 1995, respectively, related to the
discontinued operations.
In addition, as a result of the sale of Commercial Engine Services and its
parts redistribution business, and the closing of its Burbank facility, the
Company recognized a net curtailment gain (loss) related to its pension plans of
$0.4 million, $(3.9) million and $(7.0) million in 1997, 1996 and 1995,
respectively, which was recorded in the reserves established for each sale.
F-15
39
FUNDED STATUS 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Plan assets at fair value $ 34,712 28,353
- ------------------------------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits 35,566 30,969
Nonvested benefits 503 608
- ------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation 36,069 31,577
Additional benefits based on projected future salary increases 2,520 3,454
- ------------------------------------------------------------------------------------------------------------------
Projected benefit obligation 38,589 35,031
- ------------------------------------------------------------------------------------------------------------------
Plan assets less than projected benefit obligation (3,877) (6,678)
Unrecognized net losses 380 1,832
Unrecognized prior service cost 526 652
- ------------------------------------------------------------------------------------------------------------------
Accrued pension expense $ (2,971) (4,194)
==================================================================================================================
At the Distribution, Ryder transferred to Aviall amounts primarily related
to unrecognized net loss and prior service cost of the Ryder Salaried Plan and
retained the underlying accumulated benefit obligation and related assets.
Aviall and Ryder disagreed with respect to the appropriate accounting treatment
of these deferred charges. Under the terms of an agreement entered into in
connection with the Distribution, Aviall is pursuing arbitration with respect to
this matter. Based on the sale of businesses (see Notes 3 and 4) and the
Company's assessment, these amounts have been written off due to the uncertainty
of recoverability in arbitration.
The following table sets forth the year end actuarial assumptions used in
the accounting for the plans:
1997 1996 1995
- -------------------------------------------------------------------------------------------
Discount rate for determining projected benefit obligation:
Domestic 7.25% 7.75% 7.00%
Foreign n/a n/a 8.00%
Rate of increase in compensation levels:
Domestic 4.50% 4.50% 4.50%
Foreign n/a n/a 5.50%
Expected long-term rate of return on plan assets:
Domestic 7.75% 7.75% 7.75%
Foreign n/a n/a 9.50%
Actuarial gains and losses and plan amendments are amortized over the
average remaining service lives of participants expected to receive benefits,
and transition amounts are amortized over 13 to 19 years.
POSTRETIREMENT BENEFITS. The Company maintains plans which provide retired
employees with certain health care and life insurance benefits. Medicare
eligible retirees in specific geographic areas are required to participate in a
Medicare Risk Health Maintenance Organization plan ("MRHMO"). Substantially all
domestic employees are eligible for these benefits. Generally, these plans
require retiree contributions and limit Company contributions to $95 per month
for nonunion retired employees. Additionally, a $10,000 lifetime maximum health
benefit is provided for retirees who were subject to collective bargaining
agreements during their employment and are not in a MRHMO area.
F-16
40
The components of net periodic postretirement benefit expense were as
follows:
(In Thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
Present value of benefits earned during the year $ 49 30 73
Interest cost on postretirement benefit obligation 250 286 608
Net amortization and deferral (248) (288) --
- ----------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense $ 51 28 681
================================================================================================================
The portion of the above net periodic postretirement benefit expense
related to the discontinued operations was not material in 1996 and amounted to
$0.4 million in 1995.
As a result of the sale of Commercial Engine Services, the parts
redistribution business and the closing of its Burbank facility, the Company
recognized a net curtailment gain related to the health care and life insurance
plans of $0.7 million in 1996 which was recorded in the reserves established for
each sale.
The Company's postretirement benefit plans are not funded. The following
table sets forth the status of the plans:
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Discount rate 7.25% 7.75% 7.00%
Accumulated postretirement benefit obligation:
Retirees $2,646 2,505 6,211
Fully eligible active plan participants 162 186 1,102
Other active plan participants 636 338 1,169
- -------------------------------------------------------------------------------------------------------------------
3,444 3,029 8,482
Unrecognized net gain (loss) 2,023 2,665 (1,356)
- -------------------------------------------------------------------------------------------------------------------
Accrued unfunded postretirement benefit obligation $5,467 5,694 7,126
===================================================================================================================
The health care cost trend rate for 1998 was assumed to be 6.5%, decreasing
gradually to a rate in 2005 of approximately 5.0%. Increasing the assumed health
care cost trend rates by one percentage point in each future year would increase
the accumulated postretirement benefit obligation as of December 31, 1997 by
$0.3 million and would not have a material effect on the 1997 net periodic
postretirement benefit expense.
NOTE 12 - COMMON STOCK, PREFERRED STOCK AND INCENTIVE PLANS
COMMON AND PREFERRED STOCK. The Company is authorized to issue 80,000,000 shares
of common stock, $.01 par value, and 10,000,000 shares of preferred stock, $.01
par value. Preferred stock is issuable in series, with terms fixed by resolution
of the Board of Directors. No preferred stock had been issued at December 31,
1997. The Board has authorized a $30 million share repurchase program to buyback
up to 10% of the Company's outstanding common stock over the next two years in
open market transactions, depending on market, economic and other factors.
PREFERRED SHARE PURCHASE RIGHTS. The Company has adopted a Preferred Share
Rights Plan under which each share of common stock is accompanied by one
preferred share purchase right (a "Right"). Each Right entitles the holder to
purchase 1/100th of a share of Series A Junior Participating Preferred Stock
(the "Series A Preferred Shares") of the Company (800,000 shares authorized) at
a price (the "Purchase Price") of $52.50 per 1/100th of a Series A Preferred
Share (subject to adjustment).
F-17
41
In general, the Rights will not become exercisable or transferable apart
from the shares of common stock with which they were issued unless a person or
group of affiliated or associated persons becomes the beneficial owner of, or
commences a tender offer that would result in beneficial ownership of, 10% or
more of the outstanding shares of common stock (any such person or group of
persons being referred to as an "Acquiring Person"). Thereafter, under certain
circumstances, each Right (other than any Rights that are or were beneficially
owned by an Acquiring Person, which Rights will be void) could become
exercisable to purchase at the Purchase Price a number of shares of common stock
having a market value equal to two times the Purchase Price. The Rights will
expire on December 7, 2003, unless earlier redeemed by the Company at a
redemption price of $.01 per Right (subject to adjustment).
STOCK INCENTIVE PLAN. The Aviall, Inc. Stock Incentive Plan (the "Incentive
Plan") provides for grants of qualified and nonqualified stock options to key
employees at a price not less than the fair market value of shares underlying
such options at the date of grant. Options are for terms not exceeding 10 years
and may be granted in tandem with limited stock appreciation rights. Options
granted under the Incentive Plan vest over periods up to five years. The
Incentive Plan also provides for grants of restricted stock, stock appreciation
rights and performance units.
The following table summarizes the status of the Incentive Plan:
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- --------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,998,461 $12.07 1,661,744 $ 12.81 1,863,056 $12.84
Granted:
Exercise price equals market price 428,000 $11.10 307,500 $ 8.92 -- --
Exercise price exceeds market price -- -- 225,000 $ 12.58 -- --
Exercised (335,570) $11.48 (29,444) $ 7.92 (2,055) $ 7.19
Expired or cancelled (146,631) $13.61 (166,339) $ 15.06 (199,257) $13.16
---------- --------- ---------
Outstanding at end of year 1,944,260 $11.84 1,998,461 $ 12.07 1,661,744 $12.81
========== ========= =========
Exercisable at end of year 1,103,764 1,251,191 986,906
========== ========= =========
Available for grant at end of year 511,016 792,385 1,158,546
========== ========= =========
The following table summarizes information about options outstanding under
the Incentive Plan at December 31, 1997:
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices at 12/31/97 Life (Years) Price at 12/31/97 Price
- ---------------------------------------------------------------------------------------------------------------------------
$ 7.19 to $10.10 563,061 6.81 $ 8.80 357,286 $ 8.67
$10.94 to $16.00 1,381,199 6.39 $13.08 746,478 $13.93
--------- ---------
$ 7.19 to $16.00 1,944,260 6.54 $11.84 1,103,764 $12.22
========= =========
F-18
42
The Company applies APB 25 in accounting for the Incentive Plan and,
accordingly, recognizes no compensation cost in net earnings from the grant of
options. There were no options granted during 1995. Had compensation cost been
determined consistent with SFAS 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts below:
1997 1996
- --------------------------------------------------------------------------------------------------------
(In Thousands, Except Per Share Data) Basic Diluted Basic Diluted
- --------------------------------------------------------------------------------------------------------
Net earnings:
As reported $ 29,097 29,097 10,579 10,579
Pro forma $ 27,732 27,732 9,796 9,796
Net earnings per share:
As reported $ 1.47 1.45 0.54 0.54
Pro forma $ 1.40 1.39 0.50 0.50
Options were granted at exercise prices equal to the market price of the
Company's stock on the date of grant during 1997 and 1996. The weighted average
fair value of options granted was $5.59 per option in 1997 and $4.98 per option
in 1996 for options whose exercise price equaled the market price of the
Company's stock on date of grant. During 1996, options were also granted at
exercise prices greater than the market price of the Company's stock on the date
of grant. The weighted average fair value of options granted in 1996 was $4.37
per option for options whose exercise price exceeded the market price of the
Company's stock on date of grant. In accordance with SFAS 123, the fair value of
options at date of grant was estimated using the Black-Scholes option-pricing
model with the following weighted average assumptions:
1997 1996
--------------------------------------------
Risk-free interest rate 6.55% 6.29%
Expected life (years) 7.0 9.2
Expected volatility 34.53% 32.61%
Expected dividend yield 0.00% 0.00%
During 1997, 73,434 shares of restricted stock were awarded under the
Incentive Plan. The restricted stock vests three years from the date of
issuance. All restricted stock carries full dividend and voting rights. Unearned
compensation is charged to shareholders' equity based on the market value of the
Company's stock at the date of the award. Compensation expense of $0.3 million
was recognized in 1997 related to restricted stock awards.
PURCHASE PLAN. The Company maintains an employee stock purchase plan covering
substantially all U.S. employees, excluding Incentive Plan participants (the
"Employee Stock Purchase Plan"). The Employee Stock Purchase Plan was suspended
effective January 1, 1997. The Employee Stock Purchase Plan permitted quarterly
offerings to subscribe for shares of common stock at 85% of the fair market
value on either the date of offering or the last day of the purchase period,
whichever is less. Shares were purchased at the end of each ninety-day purchase
period.
F-19
43
The following table summarizes the status of the Employee Stock Purchase
Plan:
Number of Shares Price Per Share
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1994 -- --
Subscribed 45,291 $5.58 to $7.33
Purchased (31,108) $5.58 to $7.17
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 14,183 $7.33
Subscribed 33,190 $6.96 to $7.44
Purchased (41,867) $6.96 to $7.44
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 5,506 $6.96
Purchased (5,506) $6.96
- ------------------------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 -- --
========================================================================================================================
Reserved for future subscriptions 171,519
========================================================================================================================
Prior to the sale of the Commercial Engine Services businesses, the Company
maintained a stock purchase plan for employees in the United Kingdom (the
"Employee Stock Purchase Scheme"). The Employee Stock Purchase Scheme was
terminated as a result of the sale. All assets of the plan were distributed to
participants in 1996, including 30,000 shares of the Company's common stock.
DIRECTORS STOCK PLAN. The Company has reserved 87,500 shares of common stock for
issuance under its Directors Stock Plan of which 26,730 shares had been issued
at December 31, 1997. Under the terms of this plan, each nonemployee director
may make an election to receive shares of common stock in lieu of the annual
cash retainer for services as a director.
NOTE 13 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and
diluted earnings per share ("EPS") calculations for income from continuing
operations follows:
Basic EPS Effect of Dilutive Securities Diluted EPS
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands, Earnings (Loss) from Stock Restricted Earnings (Loss) from
Except Share Data) Continuing Operations Options Stock Continuing Operations
- -------------------------------------------------------------------------------------------------------------------------------
For year ended 1997:
Income (Numerator) $ 26,424 $ 26,424
Shares (Denominator) 19,711,105 331,760 18,340 20,061,205
Per share amount $ 1.34 $ 1.32
For year ended 1996:
Income (Numerator) $ (2,946) $ (2,946)
Shares (Denominator) 19,494,561 -- -- 19,494,561
Per share amount $ (0.15) $ (0.15)
For year ended 1995:
Income (Numerator) $ (28,117) $ (28,117)
Shares (Denominator) 19,418,671 -- -- 19,418,671
Per share amount $ (1.45) $ (1.45)
F-20
44
Options to purchase 632,767 shares of common stock at exercise prices
ranging from $14.50 to $16.00 were outstanding at December 31, 1997 but were not
included in the computation of diluted EPS, because the options' exercise price
was greater than the average market price of the common shares. Options to
purchase 1,998,461 and 1,661,744 shares of common stock during 1996 and 1995,
respectively, were excluded from the computation of diluted EPS in 1996 and
1995, respectively, because their inclusion would result in an antidilutive
effect on EPS.
NOTE 14 - ENVIRONMENTAL MATTERS
OVERVIEW. The Company's parts distribution services business, which includes
certain parts repair operations, uses certain chemicals in small quantities
which have been classified by various state and federal agencies as hazardous
material. The Company is not currently involved in any cleanup related to these
facilities to comply with state and federal regulations. Due to the small
quantities of chemicals used, it is not expected that any material environmental
liabilities will be incurred related to these operations.
Certain of the Company's previously owned businesses (see Notes 3 and 4)
used certain chemicals classified by various state and federal agencies as
hazardous substances. The Company retains environmental liabilities related to
these businesses for the period during which they were operated by the Company.
The Company is involved in various stages of investigation and cleanup to comply
with state and federal regulations at certain of these locations. The primary
locations are Burbank, California, Dallas (Forest Park), Texas and the
Commercial Engine Services properties ("CES Properties") which include three
locations in Texas (Love Field, Carter Field and McAllen) and one location in
Prestwick, Scotland.
BURBANK. The Company's former Burbank, California facility is located within the
boundaries of the Burbank Operable Unit (the "Burbank Unit") of the San Fernando
Valley Superfund Sites. The United States Environmental Protection Agency
("EPA") selected an interim remedial action for the Burbank Unit, including
multiyear operation and maintenance of a ground water treatment system. Lockheed
Martin Corporation ("Lockheed") and certain other parties entered into a consent
decree with the EPA under which the City of Burbank and Lockheed have agreed to
implement and/or finance a portion of the interim remedial action for a limited
period.
In May 1994, the Company was notified by the EPA that it had been named a
potentially responsible party ("PRP") with respect to the Burbank Unit. In June
1995, the Company and certain other defendants entered into an agreement with
Lockheed to settle a lawsuit filed by Lockheed in April 1994 against the Company
and more than 100 other parties seeking recovery of or contribution to
Lockheed's response costs to comply with the consent decree and subsequent EPA
requirements. Pursuant to the agreement, in exchange for a $2.2 million cash
payment made in June 1995, the Company will be released from and protected
against certain environmental response costs for the Burbank Unit through the
expiration of the interim remedy period established by the EPA, certain claims
by the EPA for costs of oversight of the Burbank Unit and certain other matters.
The agreement does not cover certain matters, including environmental response
costs for any final remedy which may be established by the EPA, certain EPA
oversight costs and costs of any changes mandated by the EPA to the present
interim remedy for the Burbank Unit.
The agreement with Lockheed is subject to court approval of a new consent
decree relating to the interim remedy for the Burbank Unit. Although the Company
presently believes this condition will be met, there can be no assurance of this
event. The Company has presently determined additional reserves related to the
Burbank Unit are not required due to the uncertainty of the additional costs, if
any, associated with any changes to the interim remedy or any final remedy.
F-21
45
The Company, together with approximately 50 other parties, are defendants
in eight separate lawsuits alleging personal injury and/or property damage
arising out of the alleged release of toxic substances into the air, soil and/or
groundwater in the City of Burbank, California. The damages for personal
injuries claimed are broad and varied, and include cancer, fear of cancer, fear
of injury, birth defects, reproductive harm, injuries to immune systems, future
medical monitoring, emotional distress and loss of consortium. In addition to
Aviall, the named defendants in these suits include Lockheed and certain other
parties who were named PRPs with respect to the Burbank Unit. These cases, which
were filed in the Superior Court of California for the County of Los Angeles and
involve over 3,000 plaintiffs, have been consolidated for pretrial purposes. The
total damages claimed by the plaintiffs is not known although the jurisdictional
allegations in the lawsuits seek damages in excess of $25,000 per plaintiff. The
Company, which was served with these lawsuits in first quarter 1998, intends to
vigorously defend these suits. Since the suits are in the preliminary stage of
investigation, no reserves for damages have been established.
PREVIOUSLY OWNED PROPERTIES. The Company is presently implementing state agency
approved corrective measures for its former Forest Park facility. The Company
presently believes existing financial reserves for this location to be
sufficient. There are various stages of discussions underway with the state
agencies to determine the appropriate cleanup levels for ground water and soil
contamination at the CES Properties located in Texas. The Company has completed
state agency required remediation on soil and ground water issues for the Carter
Field and McAllen locations. During 1997, the Company completed investigations
at Love Field, Texas and Prestwick, Scotland. The Company received notification
of an approved plan from the Scotland Environmental Protection Agency on soil
and ground water issues for the Prestwick, Scotland site. Work on determining
exposure and corrective measures is continuing at the Love Field site. Based on
current information, the Company believes existing financial reserves for the
CES Properties are sufficient. In addition, the Company is in litigation with a
previous owner and former insurers of various of these locations as to their
potential shared liability associated with the cleanup of these sites. Due to
the uncertainty of recoverability of the various claims the Company has made
against these third parties and insurers, a receivable has not been recorded.
THIRD-PARTY SITES AND OTHER MATTERS. The Company has been named a PRP under the
Comprehensive Environmental Response, Compensation and Liability Act and the
Superfund Amendments and Reauthorization Act at five third-party disposal sites
to which wastes were allegedly sent by the previous owner of assets used in the
Company's discontinued engine services operations. The Company did not use the
identified disposal sites. Accordingly, the previous owner has retained, and has
been discharging, all liability associated with the cleanup of these sites
pursuant to the sales agreement. Although the Company could be potentially
liable in the event of nonperformance by the previous owner, it does not
anticipate nonperformance. Based on this information, the Company has not
accrued for any costs associated with third-party sites. The Company has also
received notices or inquiries from certain state agencies and other private
parties with respect to certain environmental matters. One property owner
adjacent to the previously owned Forest Park location has filed suit against the
Company related to environmental contamination. These matters are under
investigation and the ultimate cost cannot presently be estimated.
ACCOUNTING AND REPORTING. At December 31, 1997 and 1996, accrued environmental
liabilities were $20.4 million and $22.8 million, respectively. The Company
recorded $14.4 million in 1995 for environmental expense. No environmental
expense was recorded in 1997 or 1996. The Company's probable environmental loss
estimates are based on information obtained from independent environmental
engineers and/or from Company experts regarding the nature and extent of
environmental contamination, remedial alternatives available and the cleanup
criteria required by relevant governmental agencies. The estimated costs include
anticipated site testing, consulting, remediation, disposal, post-remediation
monitoring and related legal fees based on available information and represent
the undiscounted costs to resolve the environmental matters in accordance with
prevailing federal, state and local requirements.
F-22
46
The Company's reserves for environmental liabilities are estimates. These
estimates may change in the future as more information becomes available with
respect to the level of contamination, the effectiveness of selected remediation
methods, the stage of management's investigation at the individual sites, the
recoverability of such costs from third parties and changes in federal and state
statutes and regulations or their interpretation . Based on information
presently available and Company programs to detect and minimize contamination,
management believes that the ultimate disposition of these matters will not have
a material adverse effect on the Company's results of operations, cash flows or
financial condition, although certain environmental matters could be material to
cash flows in any one year.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Under leases, primarily for parts distribution facilities, rent expense
included in earnings from continuing operations was $6.3 million, $6.8 million
and $7.0 million in 1997, 1996 and 1995, respectively, and was offset by
sublease income of $0.1 million, $0.5 million and $0.1 million, respectively.
Future minimum payments under noncancellable operating leases with initial
or remaining terms of one year or more at the end of 1997 are as follows (in
thousands):
Year Ending
-------------------------------------------------------------------------
1998 $ 4,735
1999 3,624
2000 1,897
2001 998
2002 893
Thereafter 1,142
-------------------------------------------------------------------------
13,289
Less amounts representing sublease income (1,208)
-------------------------------------------------------------------------
Total minimum lease payments $ 12,081
=========================================================================
In July 1996, the spouse of a former employee filed suit in Hidalgo County,
Texas against Aviall and certain chemical manufacturers alleging that the
cancer-related death of her husband was the result of his exposure to toxic
chemicals and metals while working for Aviall at facilities used in the
operation of the Company's former Commercial Engine Services businesses. The
plaintiffs are seeking to find Aviall and the other defendants jointly and
severally liable for actual and punitive damages in an amount not less than
$50.0 million. The suit is in the preliminary stages of discovery. The Company
intends to vigorously defend this suit. Due to the preliminary status of this
lawsuit, the Company is not able to reasonably estimate the extent, if any, of
the liability to which it could be exposed.
In addition to the environmental related matters discussed in Note 14 and
the legal matter discussed above, the Company is a party to various other
claims, legal actions and complaints arising in the ordinary course of business.
Based on information presently available, management believes that the ultimate
disposition of these other matters will not have a material adverse effect on
the Company's results of operations, cash flows or financial condition, although
certain matters could be material to cash flows in any one year.
The Company, through its participation in the global aviation aftermarket,
can be affected by the general economic cycle, particularly as it influences
flight activity in commercial, business and general aviation. The services
provided by ILS can be influenced by the rapidly evolving information and
communication industry.
F-23
47
NOTE 16 - OTHER INFORMATION
The Company operates in the aviation industry and reports its activities as
one business segment. For the years ended December 31, 1997, 1996 and 1995, the
Company did not derive more than 10% of its total net sales from any individual
customer, government or export sales.
The Company maintains international parts distribution customer service
centers in Australia, Canada, Hong Kong, the Netherlands, New Zealand and
Singapore. As the Company's foreign operations have similar aviation business
environments, all foreign operations have been grouped together below.
(In Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Net sales:
United States $ 292,989 289,255 283,200
Foreign 93,071 84,783 63,311
- -----------------------------------------------------------------------------------------------------------------------------------
$ 386,060 374,038 346,511
===================================================================================================================================
Earnings (loss) from continuing operations before income taxes and extraordinary
item*:
United States $ 21,292 (8,015) (30,375)
Foreign 6,228 6,726 684
- -----------------------------------------------------------------------------------------------------------------------------------
$ 27,520 (1,289) (29,691)
===================================================================================================================================
Identifiable assets:
United States $ 230,072 232,595 510,732
Foreign 29,320 28,282 28,195
- -----------------------------------------------------------------------------------------------------------------------------------
$ 259,392 260,877 538,927
===================================================================================================================================
* Includes nonrecurring items of $(1.4) million, $6.6 million and $29.0 million
in 1997, 1996 and 1995, respectively, for the United States.
F-24
48
NOTE 17 - QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the unaudited quarterly results of
operations for 1997 and 1996 (in thousands, except share data):
First Second Third Fourth
1997 (Unaudited) Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------
Net sales $91,682 96,063 100,267 98,048
Cost of sales 68,638 71,830 75,339 73,056
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 23,044 24,233 24,928 24,992
Operating and other expenses:
Selling and administrative expenses 16,191 16,827 17,017 17,877
Nonrecurring items (1,436) -- -- --
Interest expense 734 991 752 724
- ------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes 7,555 6,415 7,159 6,391
Provision for income taxes 612 288 123 73
- ------------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 6,943 6,127 7,036 6,318
Earnings from discontinued operations -- -- -- 2,673
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 6,943 6,127 7,036 8,991
========================================================================================================================
Basic net earnings per share:
Earnings from continuing operations $ 0.35 0.31 0.36 0.32
Earnings from discontinued operations -- -- - - 0.13
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.35 0.31 0.36 0.45
========================================================================================================================
Weighted average common shares 19,576,555 19,629,361 19,742,977 19,891,712
========================================================================================================================
Diluted net earnings per share:
Earnings from continuing operations $ 0.35 0.31 0.35 0.31
Earnings from discontinued operations -- -- -- 0.13
- ------------------------------------------------------------------------------------------------------------------------
Net earnings $ 0.35 0.31 0.35 0.44
========================================================================================================================
Weighted average common and dilutive potential
common shares 19,714,638 19,955,833 20,249,746 20,320,788
========================================================================================================================
Common stock price range per share $ 9.00 to 12.12 10.50 to 16.00 13.25 to 16.87 11.00 to 17.19
========================================================================================================================
Common stock trading volume, number of shares 5,357,000 7,531,900 4,127,500 6,418,500
========================================================================================================================
F-25
49
First Second Third Fourth
1996 (Unaudited) Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------
Net sales $92,168 93,594 98,637 89,639
Cost of sales 67,572 69,823 74,210 67,292
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 24,596 23,771 24,427 22,347
Operating and other expenses:
Selling and administrative expenses 21,474 20,199 19,378 18,484
Nonrecurring items 3,850 -- 2,763 --
Interest expense 2,763 3,390 3,503 626
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before
Income taxes (3,491) 182 (1,217) 3,237
Provision for income taxes 236 211 1,210 --
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations (3,727) (29) (2,427) 3,237
Earnings from discontinued operations -- 10,500 6,446 --
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before extraordinary item (3,727) 10,471 4,019 3,237
Extraordinary item -- -- (3,421) --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $(3,727) 10,471 598 3,237
=====================================================================================================================
Basic net earnings (loss) per share:
Earnings (loss) from continuing operations $ (0.19) (0.00) (0.13) 0.17
Earnings from discontinued operations -- 0.54 0.33 --
Extraordinary item -- -- (0.17) --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (0.19) 0.54 0.03 0.17
=====================================================================================================================
Weighted average common shares 19,457,739 19,469,172 19,511,509 19,539,143
=====================================================================================================================
Diluted net earnings (loss) per share:
Earnings (loss) from continuing operations $ (0.19) (0.00) (0.13) 0.17
Earnings from discontinued operations -- 0.54 0.33 --
Extraordinary item -- -- (0.17) --
- ---------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (0.19) 0.54 0.03 0.17
=====================================================================================================================
Weighted average common and dilutive potential
common shares 19,457,739 19,469,172 19,511,509 19,603,466
=====================================================================================================================
Common stock price range per share $5.38 to 9.38 8.50 to 10.38 7.88 to 9.13 7.88 to 10.50
=====================================================================================================================
Common stock trading volume, number of shares 12,432,400 5,799,400 2,114,900 4,366,300
=====================================================================================================================
F-26
50
AVIALL, INC. SCHEDULE II
VALUATION ACCOUNTS
(DOLLARS IN THOUSANDS)
Balance at Charged Balance
Beginning to Costs at End
of Year and Expense Other Deductions of Year
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Accounts receivable allowance $ 4,541 1,430 (323)(1) (1,410)(3) 4,238
Reserves for excess and obsolete inventories $ 4,007 721 -- (239)(4) 4,489
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1996:
Accounts receivable allowance $ 1,799 1,108 2,914(2) (1,280)(3) 4,541
Reserves for excess and obsolete inventories $ 7,208 3,088 -- (6,289)(4) 4,007
Reserve for aerospace inventory $22,385 3,362 -- (25,747) --
- ----------------------------------------------------------------------------------------------------------------------------
Year ended December 31, 1995:
Accounts receivable allowance $ 1,559 1,310 33(1) (1,103)(3) 1,799
Reserves for excess and obsolete inventories $ 7,295 3,481 -- (3,568)(4) 7,208
Reserve for aerospace inventory $ -- 22,385 -- -- 22,385
============================================================================================================================
(1) Collection of accounts previously charged off.
(2) Accounts receivable allowance related to accounts receivable retained by
the Company from the sale of Commercial Engine Services.
(3) Write-off of doubtful accounts and concessions granted.
(4) Write-off of excess and obsolete inventories.
F-27
51
INDEX TO EXHIBITS
Exhibit
No. Description
- ------- ------------------------------------------------------------------------------------------
3.1* Restated Certificate of Incorporation of Aviall (Exhibit 3.1 to Aviall's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 (the "1993 Form 10-K"))
3.2* By-Laws of Aviall (Exhibit 3.2 to the 1993 Form 10-K)
4.1* Form of Common Stock Certificate of Aviall (Exhibit 4 to Aviall's Registration Statement
on Form 10, as amended (Commission File No. 1-12380) (the "Form 10"))
4.2* Aviall, Inc. Preferred Stock Purchase Rights Plan between Aviall and The First National
Bank of Boston dated as of December 7, 1993 (Exhibit 10.7 to the 1993 Form 10-K)
10.1*+ Aviall, Inc. Stock Incentive Plan (Exhibit 10.1 to the 1993 Form 10-K)
10.2*+ Aviall, Inc. Amended and Restated Directors Stock Plan (Exhibit 10.1 to Aviall's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1997)
10.3* Distribution and Indemnity Agreement by and between Aviall and Ryder dated November 23,
1993 (Exhibit 10.3 to the 1993 Form 10-K)
10.4* Tax Sharing Agreement by and between Aviall and Ryder dated November 23, 1993 (Exhibit
10.4 to the 1993 Form 10-K)
10.5+ Form of Severance Agreement between Aviall and its executive officers
10.6* Asset Purchase Agreement, dated as of May 31, 1994, by and between Aviall Services, Inc.
and Dallas Airmotive, Inc., as amended (Exhibit 10.3 to Aviall's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1994 (the "June 30, 1994 Form 10-Q") and
Exhibits 10.17 through 10.23 to Aviall's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 (the "1994 Form 10-K"))
10.7* Asset Purchase Agreement, dated as of August 4, 1994 by and between Aviall Services, Inc.
and AJT Capital Partners d/b/a Aerospace International Services, as amended (Exhibit 10.4
to the June 30, 1994 Form 10-Q and Exhibit 10.25 to the 1994 Form 10-K)
10.8*+ Aviall, Inc. Employee Stock Purchase Plan (Exhibit 10.27 to the 1995 Form 10-K)
10.9* Agreement of Purchase and Sale among Aviall, Inc., Aviall Services, Inc., Greenwich Air
Services, Inc. and GASI Engine Services, Inc., dated April 19, 1996 (Exhibit 2.1 to
Aviall's Current Report on Form 8-K dated April 19, 1996)
10.10* Asset Purchase Agreement between Aviall, Inc. and Curtiss-Wright Flight Systems, Inc.,
dated April 25, 1996 (Exhibit 2.2 to Aviall's Current Report on Form 8-K dated April 19,
1996)
10.11* Asset Purchase Agreement by and among Maple Leaf Aerospace, Inc., Aviall Services, Inc.
and Aviall (Canada) Ltd., dated September 5, 1996 (Exhibit 2.1 to Aviall's Current Report
on Form 8-K dated September 19, 1996)
10.12* Credit Agreement, dated as of September 26, 1996, by and among Aviall, Inc. and the
financial institutions parties thereto (Exhibit 10.1 to Aviall's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995)
10.13 First Amendment to Credit Agreement, dated January 28, 1998, by and among Aviall, Inc. and
the financial institutions parties thereto
52
Exhibit
No. Description
- ------- ------------------------------------------------------------------------------------------
21.1 Subsidiaries of Aviall
23.1 Consent of Price Waterhouse LLP
24.1 Powers of attorney of directors and officers of Aviall
27.1 Financial Data Schedule
- --------------------
* Each document marked with an asterisk is incorporated herein by reference
to the designated document previously filed with the Commission.
+ Each document marked with a dagger constitutes a management contract or
compensatory plan or arrangement.