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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission File No. 1-11775
TIMCO AVIATION SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0665658
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
623 Radar Road 27410
Greensboro, North Carolina (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (336) 668-4410 (x3061)
Indicate by checkmark whether the registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 30,390,994 shares of common
stock, $.001 par value per share, were outstanding as of August 13, 2002.
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
(Unaudited)
December 31, June 30,
2001 2002
------------ ---------
ASSETS
Current Assets:
Cash and cash equivalents ......................... $ -- $ 7,509
Accounts receivable, net .......................... 26,936 21,536
Inventories ....................................... 42,926 34,310
Income tax receivable ............................. 6,236 --
Other current assets .............................. 4,002 3,046
--------- ---------
Total current assets .............................. 80,100 66,401
Equipment on lease, net ........................... 360 314
Fixed assets, net
Capitalized lease asset previously held for sale .. -- 24,897
Property and equipment, net ....................... 38,471 37,137
--------- ---------
Total fixed assets, net ........................... 38,471 62,034
Other Assets:
Goodwill, net ..................................... 26,124 26,124
Capitalized lease asset held for sale ............. 25,240 --
Assets of discontinued operations held for sale ... 1,618 1,500
Deferred financing costs, net ..................... 6,637 658
Other ............................................. 4,242 1,495
--------- ---------
Total other assets ................................ 63,861 29,777
--------- ---------
Total assets ...................................... $ 182,792 $ 158,526
========= =========
LIABILITIES & STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable .................................. $ 25,969 $ 12,035
Accrued expenses .................................. 26,357 21,935
Customer deposits ................................. 14,820 12,341
Current maturities of notes payable ............... 22,000 9,500
Accrued class action settlement ................... -- 6,125
Liabilities of discontinued operations ............ 7,013 6,249
Revolving loan .................................... 12,074 1,171
Current maturities of capital lease obligations ... 25,450 693
Accrued interest .................................. 12,113 727
--------- ---------
Total current liabilities ......................... 145,796 70,776
Senior subordinated notes, net:
Old notes due 2008 ............................... 164,437 16,224
New notes due 2006 ............................... -- 115,800
Capital lease obligations, net of current portion . 3,890 28,500
Long-term notes payable ........................... -- 12,500
Other long-term liabilities ....................... 36 36
--------- ---------
Total long-term liabilities ....................... 168,363 173,060
Commitments and Contingencies (see footnotes)
Stockholders' Deficit:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding, 15,000 shares
designated Series A Junior Participating ......... -- --
Common stock, $.001 par value, 500,000,000 shares
authorized, 30,390,994 and 1,501,532 shares issued
and outstanding at June 30, 2002 and December 31,
2001, respectively ............................... 2 30
Additional paid-in capital ........................ 153,277 178,220
Accumulated deficit ............................... (284,646) (263,560)
--------- ---------
Total stockholders' deficit ....................... (131,367) (85,310)
--------- ---------
Total liabilities and stockholders' deficit ....... $ 182,792 $ 158,526
========= =========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)
For the Six Months
Ended June 30,
---------------------------------
2001 2002
------------ ------------
Operating revenue:
Sales, net ............................................. $ 150,625 $ 105,728
Other .................................................. 1,837 106
------------ ------------
152,462 105,834
Cost of sales ............................................ 152,542 94,482
------------ ------------
Gross (loss) profit ...................................... (80) 11,352
Operating expenses ....................................... 29,217 8,123
------------ ------------
(Loss) income from operations .......................... (29,297) 3,229
Interest expense ......................................... 13,116 9,705
Charge for settlement of class action litigation ......... -- 6,125
Charge to reserve notes receivable from KAV Inventory, LLC 29,400 --
Other income - net ....................................... (6,918) (1,685)
------------ ------------
Loss before income taxes, discontinued
operations and extraordinary gain ..................... (64,895) (10,916)
Income tax expense (benefit) ............................. 48 (3,800)
------------ ------------
Loss from continuing operations before
discontinued operations and extraordinary gain ........ (64,943) (7,116)
(Loss) income from discontinued operations, net of income
taxes .................................................. (4,342) 923
------------ ------------
Loss before extraordinary gain ......................... (69,285) (6,193)
Extraordinary gain resulting from debt restructuring,
net of income taxes of $0 .............................. -- 27,279
------------ ------------
Net (loss) income ...................................... $ (69,285) $ 21,086
============ ============
Basic and diluted (loss) income per share:
Loss from continuing operations ........................ $ (43.25) $ (0.34)
(Loss) income from discontinued operations ............. (2.89) 0.04
Extraordinary gain ..................................... -- 1.31
------------ ------------
Net (loss) income ...................................... $ (46.14) $ 1.01
============ ============
Weighted average shares outstanding:
Basic and diluted ....................................... 1,501,532 20,862,494
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share Data)
(Unaudited)
For the Three Months
Ended June 30,
-----------------------------------
2001 2002
------------- -------------
Operating revenue:
Sales, net ............................................. $ 69,146 $ 48,247
Other .................................................. 1,729 53
------------- -------------
70,875 48,300
Cost of sales ............................................ 70,377 43,194
------------- -------------
Gross profit ............................................. 498 5,106
Operating expenses ....................................... 20,805 4,573
------------- -------------
(Loss) income from operations .......................... (20,307) 533
Interest expense ......................................... 6,625 3,874
Gain on revaluation of charge for settlement of class
action litigation ...................................... -- (1,875)
Charge to reserve notes receivable from KAV Inventory, LLC 29,400 --
Other income - net ....................................... (6,913) (1,010)
------------- -------------
Loss before income taxes and discontinued
operations ............................................ (49,419) (456)
Income tax expense ....................................... 11 --
------------- -------------
Loss from continuing operations before
discontinued operations ............................... (49,430) (456)
(Loss) income from discontinued operations, net of income
taxes ................................................. (4,638) 691
------------- -------------
Net (loss) income ...................................... $ (54,068) $ 235
============= =============
Basic and diluted (loss) income per share:
Loss from continuing operations ........................ $ (32.92) $ (0.01)
(Loss) income from discontinued operations ............. (3.09) 0.02
------------- -------------
Net (loss) income ...................................... $ (36.01) $ 0.01
============= =============
Weighted average shares outstanding:
Basic and diluted ....................................... 1,501,532 30,291,994
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(In Thousands, Except Share Data)
(Unaudited)
Common Stock Additional Total
---------------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
---------- ---------- ---------- ------------ -------------
Balance as of
December 31, 2001 ........ 1,501,532 $ 2 $ 153,277 $ (284,646) $ (131,367)
Net income .............. -- -- -- 21,086 21,086
Net proceeds from
issuance of common
stock to stockholders
in connection with
rights offering ........ 24,024,507 24 19,782 -- 19,806
Common stock issued to
senior subordinated
noteholders in
connection with note
exchange offer ......... 4,504,595 4 3,745 -- 3,749
Warrants issued to
senior subordinated
noteholders in
connection with note
exchange offer ......... -- -- 785 -- 785
Common stock issued to
third party for services 360,360 -- 631 -- 631
---------- ---------- ---------- ---------- ----------
Balance as of
June 30, 2002 ............ 30,390,994 $ 30 $ 178,220 $ (263,560) $ (85,310)
========== ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the Six
Months Ended
June 30,
---------------------------
2001 2002
--------- ---------
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income ..................................... $ (69,285) $ 21,086
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Extraordinary gain on restructuring of debt ........... -- (27,279)
Charge for class action settlement .................... -- 6,125
Depreciation and amortization ......................... 5,566 2,653
Amortization of deferred financing costs .............. 2,775 4,287
Loss (income) from discontinued operations ............ 4,342 (923)
Provision for (recovery of) doubtful accounts ......... 3,684 (481)
Charge to reserve notes from KAV Inventory, LLC ....... 29,400 --
Write down of long lived assets ....................... 9,886 --
Gain on sale of subsidiary ............................ (5,664) --
Proceeds from sale of equipment on lease, net of gain . 3,282 --
Income on non-refundable lease deposit ................ (2,204) --
Expense from warrants issued to third parties ......... 402 --
Decrease in accounts receivable ....................... 22,492 5,881
Decrease in inventories ............................... 1,042 8,616
Decrease in other assets .............................. 4,544 9,939
Decrease in accounts payable .......................... (6,639) (13,934)
Increase (decrease) in other liabilities .............. 1,423 (5,462)
--------- ---------
Net cash provided by operating activities ............ 5,046 10,508
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of fixed assets ............................. (1,350) (884)
Payments from related parties ......................... 1,792 --
Proceeds from sale of subsidiary ...................... 21,290 --
--------- ---------
Net cash provided by (used in) investing activities .. 21,732 (884)
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowings under senior debt facilities ............... 184,383 109,702
Payments under senior debt facilities ................. (215,430) (120,605)
Issuance of common stock in rights offering ........... -- 19,806
Payment for old notes in note exchange offer .......... -- (5,081)
Payment of expenses related to exchange offer ......... -- (5,031)
Payments of deferred financing costs .................. (1,540) (1,036)
Payments on equipment loans and capital leases ........ (1,064) (147)
Proceeds of term loan ................................. 12,000 --
Payments on notes payable ............................. (5,500) --
--------- ---------
Net cash used in financing activities ................. (27,151) (2,392)
--------- ---------
Net cash provided by discontinued operations .......... 373 277
--------- ---------
Net increase in cash and cash equivalents .............. -- 7,509
Cash and cash equivalents, beginning of period ......... -- --
--------- ---------
Cash and cash equivalents, end of period ............... $ -- $ 7,509
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ......................................... $ (10,181) $ (4,260)
========= =========
Income taxes refunded ................................. $ -- $ 11,458
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND
FINANCING ACTIVITIES:
Value of common stock and warrants issued in
connection with note exchange offer and loan
origination ........................................ $ -- $ 4,534
========= =========
Value of common stock issued in exchange for
services ........................................... $ -- $ 631
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
TIMCO AVIATION SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
1. BASIS OF PRESENTATION
Interim Condensed Consolidated Financial Statements
TIMCO Aviation Services, Inc. (the "Company"), formerly known as Aviation Sales
Company, is a Delaware corporation that, through its subsidiaries, provides
aircraft maintenance, repair and overhaul ("MR&O") services to commercial
passenger airlines, air cargo carriers, aircraft leasing companies, maintenance
and repair facilities and aircraft parts redistributors throughout the world. In
May 2001, the Company sold one of its MR&O operations. The results of this
business are included in the accompanying condensed consolidated results of
operations through such date.
On February 28, 2002, the Company completed a significant restructuring of its
capital and equity, including a note exchange and rights offering. See Note 6
for further discussion.
Concurrent with the completion of the note exchange and rights offering, the
Company changed its capitalization by increasing the number of its authorized
shares of common stock from 30.0 million shares to 500.0 million shares and by
reducing the number of its issued and outstanding shares of common stock by
converting every ten shares of its issued and outstanding common stock into one
share. Additionally, the Company changed its corporate name from "Aviation Sales
Company" to "TIMCO Aviation Services, Inc." All share and per share data
contained herein have been restated for the one-share-for-ten-shares reverse
stock split.
On May 6, 2002, the Company entered into an agreement to settle a securities
class action lawsuit previously filed against it and certain of its former
directors and officers in the United States District Court for the Southern
District of Florida. See Note 4 for further discussion.
The accompanying unaudited interim condensed consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission for reporting on Form 10-Q. Pursuant to such rules and
regulations, certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted. The accompanying
unaudited interim condensed consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001, File No. 001- 11775 (the "Form 10-K").
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements of the Company contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of June 30, 2002, the results of its
operations for the three and six month periods ended June 30, 2001 and 2002 and
cash flows for the six month periods ended June 30, 2001 and 2002. The results
of operations and cash flows for the six month period ended June 30, 2002 are
not necessarily indicative of the results of operations or cash flows which may
be reported for the year ending December 31, 2002.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates. Principal estimates
made by the Company include the estimated losses on disposal of discontinued
operations, the allowance to reduce inventory to the lower of cost or net
realizable value, the estimated profit recognized as aircraft maintenance,
design and construction services are performed, the allowances for doubtful
accounts and notes receivable, the realizability of its investment in
affiliates, future cash flows in support of its long-
7
lived assets, medical benefit accruals, the estimated fair value of the
facilities under capital lease, and the allowances for litigation and
environmental costs. A principal assumption made by the Company is that
inventory will be utilized and realized in the normal course of business and may
be held for a number of years.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Intangible
Assets." SFAS No. 142 eliminates the requirement to amortize goodwill and
indefinite-lived intangible assets, addresses the amortization of intangible
assets with defined lives and addresses the impairment testing and recognition
for goodwill and intangible assets. SFAS No. 142 applies to goodwill and
intangible assets arising from transactions completed before and after the
Statement's effective date of January 1, 2002 and requires that goodwill no
longer be amortized, but tested for impairment at least annually. The Company
recorded goodwill amortization of $0.6 million and $1.1 million in the three and
six month periods ended June 30, 2001. At June 30, 2002, the Company has net
goodwill of $26.1 million, which is subject to the new impairment tests
prescribed under the statement. The Company adopted SFAS No. 142 on January 1,
2002. As of June 30, 2002, the Company has completed its impairment assessment
and concluded that no impairment charge will be required at this time.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and the accounting and reporting provisions of Accounting Principles Board
Opinion (APB) No. 30, "Reporting the Results Of Operations -- Unusual and
Infrequently Occurring Events and Transactions." SFAS No. 144 also amends
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. SFAS No. 144 establishes a single accounting model for
assets to be disposed of by sale whether previously held and used or newly
acquired. SFAS No. 144 retains the provisions of APB No. 30 for presentation of
discontinued operations in the income statement, but broadens the presentation
to include a component of an entity. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS No. 144 effective
January 1, 2002 with no material impact on its consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
Under Statement 4, all gains and losses from extinguishment of debt were
required to be aggregated and, if material, classified as an extraordinary item,
net of related income tax effect. This Statement eliminates Statement 4 and as a
result, gains and losses from extinguishment of debt should be classified as
extraordinary items only if they meet the criteria in APB No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." Additionally, this Statement amends SFAS No. 13, "Accounting for
Leases", such that lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in a similar manner as a
sale-leaseback. This Statement will become effective for the Company on
January 1, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." A liability
for a cost associated with an exit or disposal activity shall be recognized and
measured initially at its fair value in the period in which the liability is
incurred, except for certain qualifying employee termination benefits. This
Statement will be effective for exit or disposal activities initiated by the
Company after December 31, 2002.
Comprehensive Income (Loss)
For all periods presented comprehensive income (loss) is equal to net income
(loss).
8
Revenue Recognition
Revenues from aircraft maintenance services are generally recognized when
services are performed and unbilled receivables are recorded based upon the
percentage of completion method. Unbilled receivables are billed on the basis of
contract terms (which are generally on completion of an aircraft) and
deliveries. The Company changed its method of accounting for revenue at its
engine overhaul facility in the second quarter of 2001. Revenues related to
engine overhaul services are now recognized upon shipment of the overhauled
engine. Prior to this change, revenue was recognized as services were performed
based upon a percentage of completion method. The change in the method of
accounting for revenue at the Company's engine overhaul facility did not have a
material impact on the Company's financial position or current or prior period
results of operations. Also, the Company exchanges rotable parts in need of
service or overhaul for new, overhauled or serviceable parts in its inventory
for a fee. Fees on exchanges are recorded as sales at the time the unit is
shipped. In addition, gain on sales of equipment on lease is included in other
operating revenue in the accompanying condensed consolidated statements of
operations.
Liquidity
The accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. On several occasions
during 2001 and 2002 the Company has been out of compliance with certain of the
covenants contained in its credit agreement with its senior lenders and under
its tax retention operating lease ("TROL") financing arrangement (which is
recorded as a capital lease). The Company's senior lenders and the TROL
financing lender waived all of the events of default arising from the covenant
violations which occurred during 2001 and 2002, and the Company was in
compliance with its senior credit agreements at June 30, 2002. Debt
classification will remain contingent upon the continued compliance or waiver of
violations of these covenant requirements.
In July 2002, the Company completed the sale of substantially all of the assets
and business of its Aerocell Structures, Inc. ("Aerocell") flight surfaces
operation. The net purchase price was $9.6 million (subject to post closing
adjustments), of which $9.1 million was received in cash at the closing, and the
balance of which has been placed into escrow and will be received 50% after six
months and the remainder after 12 months, subject to certain indemnity
obligations. The Company has used the proceeds from the sale to repay $7.0
million of term loans. The remainder, net of expenses, is being used for working
capital (see Note 8). For the period ended July 31, 2002, the Company has
recorded an approximate $200,000 gain as a result of this sale.
In July 2002, the Company refinanced all of its senior debt. The Company
obtained a $30.0 million revolving credit facility and a $7.0 million term loan,
both due January 31, 2004, and used the proceeds from these new credit
facilities to repay a previously outstanding $12.0 million senior term loan. In
addition, the Company restructured its TROL financing to a three-year, $25.2
million capital lease liability. The Company also satisfied $1.5 million of a
$10.0 million term loan through a transfer of real estate and extended $6.0
million of such term debt to a January 31, 2004 maturity, with the remaining
balance of $2.5 million due on August 14, 2002 (see Note 8). The Company used
the proceeds from the Aerocell sale to reduce the outstanding term debt as
follows: (i) $3.5 million was used to reduce term debt due to the Company's
revolving credit and term lenders, (ii) $2.5 million was used to repay term debt
due August 14, 2002, and (iii) $1.0 million was used to repay term debt due in
January 2004. As of August 12, 2002, the Company had $11.6 million of letters of
credit outstanding and $3.7 million of availability for borrowing under its
Amended Revolving Credit Facility (defined below).
In May 2001, the Company completed the sale of the assets of its Caribe Aviation
("Caribe") component repair operation. The purchase price was $22.5 million, of
which $21.8 million was received in cash at the closing, and the balance of
which has been received in 2002. The Company used $10.0 million of the proceeds
from the sale to repay the Credit Facility and $5.5 million to repay borrowings
under outstanding term loans (see Note 3). The balance, net of expenses, was
used for working capital. In addition, the purchaser acquired the real estate
and facility on which the Caribe operation was located for an aggregate purchase
price of $8.5 million. The proceeds from the sale of the real estate and
facility were used to reduce the outstanding TROL financing (see Note 4).
9
During 2001 the Company closed two of its airframe heavy maintenance facilities
(one of which has been closed on a temporary basis), consolidated the operations
of one of its component overhaul MR&O operations from two facilities to one,
reduced its headcount at all of its MR&O facilities and implemented salary and
benefit reductions that affected virtually all employees in order to lower its
operating expenses. Further, although the Company expects to be able to meet its
working capital requirements from its available resources and from other
sources, including funds available under its revolving credit facility, from
operations, from sales of assets and from further equity and/or debt infusions,
there can be no assurance that the Company will have sufficient working capital
or that such other sources of funding will be available to the Company to meet
its obligations.
2. DISCONTINUED OPERATIONS
In December 2000, the Company completed the sale of its redistribution
operations, its new parts distribution operations and its parts manufacturing
operations, all of which are treated as discontinued operations in these
condensed consolidated financial statements. See the Form 10-K for particulars.
3. NOTES PAYABLE AND REVOLVING LOAN
Senior Revolving Credit and Term Debt
At June 30, 2002, the Company had a $30.0 million revolving loan and letter of
credit facility (the "Credit Facility") with a group of financial institutions,
which was due to expire in July 2002. On June 28, 2002, in anticipation of
amending the Credit Facility, the Company voluntarily reduced its revolving
loan and letter of credit facility from $37.5 million to $30.0 million.
Interest under the Credit Facility was, at the option of the Company, (a) Prime
plus 3.0% or (b) LIBOR plus 4.5%. Borrowings under the Credit Facility were
secured by a lien on substantially all of the Company's assets and the
borrowing base consisted primarily of certain of the Company's account
receivables and inventory.
The Credit Facility contains certain financial covenants regarding the Company's
financial performance and certain other covenants, including limitations on the
amount of annual capital expenditures and the incurrence of additional debt, and
provides for the suspension of borrowing and repayment of all debt in the event
of a material adverse change in the business of the Company or a change in
control as defined. A default under the Credit Facility could potentially result
in a default under other agreements to which the Company is a party, including
the TROL. In addition, the Credit Facility requires mandatory repayments and a
reduction in the total commitment under the Credit Facility from the proceeds of
a sale of assets or an issuance of equity or debt securities or as a result of
insufficient collateral to meet the borrowing base requirements thereunder. As
of June 30, 2002, $12.2 million was available for borrowing under the Credit
Facility and outstanding letters of credit aggregated $11.6 million.
At June 30, 2002 the Company had a $12.0 million (originally $15.5 million) term
loan from the financial institution that is the agent under the Credit Facility.
The term loan was senior secured debt, beared interest at 12% per annum and
contained financial and other covenants that were consistent with the Credit
Facility. As discussed in Note 1, the Company repaid $3.5 million of this term
loan from the proceeds of the sale of Caribe, and the remaining principal
balance was to come due in July 2002. Under the term loan agreement, the Company
also granted the lender common stock purchase warrants to purchase 12,900 shares
of the Company's common stock exercisable for par value at any time until
December 31, 2005. If the term loan is not repaid in full, the warrants entitle
the holder to require the Company to repurchase the warrants or common shares
issued upon prior exercise of the warrants at $85.00 per share. The lender has
not required the Company to repurchase any warrants through August 12, 2002 and
the put-right under this warrant was extended in connection with the July 2002
refinancing of the Company's senior debt (see Note 8). The Company has recorded
the value of these warrants as additional deferred financing costs and accrued
expenses and has amortized the deferred financing cost to interest expense over
the original term of the loan.
At June 30, 2002, the Company had a $10.0 million term loan from Bank of
America. This term loan was senior secured debt, beared interest at LIBOR plus
2% and was to come due in August 2002. In connection with this term loan, the
Company issued warrants to purchase 25,000 shares of its unissued common stock
at an exercise price of $40.00 per share to each of four
10
individuals, one of whom is the Company's principal stockholder and one of whom
is a director of the Company. Each of these individuals provided credit support
to the financial institution that advanced the loan proceeds. The Company has
recorded the value of these warrants as additional deferred financing costs and
is amortizing this amount to expense over the term of the loan. In May 2001, the
Company obtained a short-term increase in the term loan and thereafter repaid
the additional borrowing from the proceeds of the Caribe sale. The Company's
principal stockholder provided credit support for the increased amount of the
term loan and, in return, received a cash fee of $67,000 and warrants to
purchase 33,333 shares of the Company's common stock at an exercise price of
$14.00 per share. The value of these warrants and the cash fee were charged to
results of operations during the quarter ended June 30, 2001.
In July 2002, the Company refinanced all of its senior revolving credit and term
debt (see Note 8).
Senior Subordinated Notes
New Notes
On February 28, 2002, in connection with the note exchange portion of the
restructuring (see Note 6), the Company issued $100.0 million face value in
aggregate principal amount of 8.0% senior subordinated convertible paid-in-kind
("PIK") notes ("New Notes"), which mature on December 31, 2006. The New Notes
bear interest from the date of issuance and are payable at the Company's option
either in cash or paid-in-kind through the issuance of additional New Notes
semiannually on June 30 and December 31 of each year. If the Company does not
pay interest in cash as of an interest payment date, the Company will
automatically be deemed to have paid such interest in-kind and additional New
Notes in the amount of such interest payment will automatically be deemed to be
outstanding from such date forward.
The New Notes are general unsecured obligations and are subordinated in right of
payment to all current and future senior debt. The New Notes are fully and
unconditionally guaranteed by substantially all of the Company's existing
subsidiaries and each subsidiary that will be organized in the future by the
Company, unless such subsidiary is designated as an unrestricted subsidiary. The
indenture provides that under certain circumstances, the Company may be able to
designate current or future subsidiaries as unrestricted subsidiaries.
Unrestricted subsidiaries will not be subject to many of the restrictive
covenants set forth in the indenture. Subsidiary guaranties are subordinated in
right of payment to all existing and future senior debt of subsidiary
guarantors, including the Credit Facility and the Amended Credit Facility, and
are also effectively subordinated to all secured obligations or subsidiary
guarantors to the extent of the assets securing their obligations, including the
Credit Facility and Amended Credit Facility. The Company has not presented
separate financial statements and other disclosure concerning each subsidiary
guarantor because management has determined that such information is not
material to investors.
The indenture for the New Notes (i) permits the Company to incur indebtedness
equal to the greater of $95.0 million or an amount that satisfies a fixed charge
coverage ratio of 2.25 to 1.00, (ii) requires the Company, upon a change of
control or certain asset sales, to repurchase the New Notes at a price equal to
the redemption price which the Company would be obligated to pay if it redeemed
the New Notes on the date of the change of control or asset sale; and (iii) does
not contain a provision requiring acceleration of any premium due upon
acceleration of the New Notes upon an event of default by reason of any willful
action (or inaction) taken (or not taken) by the Company with the intention of
avoiding the prohibition on the redemption of New Notes.
The New Notes are redeemable at the Company's option at the following
percentages of par plus accrued interest on the par value through the date of
redemption: 2002 - 70.0%, 2003 - 72.5%, 2004 - 73.0%, 2005 - 75.625% and 2006 -
77.5%. The New Notes also provide that the holders will receive an aggregate of
4.5 million shares of common stock if the New Notes are redeemed in 2002 or 2003
and an aggregate of 3.0 million shares of common stock if the New Notes are
redeemed in 2004, 2005 or 2006.
If the New Notes have not already been redeemed or repurchased, the New Notes,
including those New Notes previously issued as paid-in-kind interest and all
accrued but unpaid interest, will automatically convert on December 31, 2006
into an aggregate of 270.3 million shares of common stock. Holders of New Notes
will not receive any cash payment representing principal or accrued and unpaid
interest upon conversion; instead, holders will receive a fixed number of shares
of common stock and a cash payment to account for any fractional shares.
11
Old Notes
In 1998, the Company sold $165.0 million of senior subordinated notes ("Old
Notes") with a coupon rate of 8.125% at a price of 99.395%, which mature on
February 15, 2008. On February 28, 2002, $149.0 million face value of these
notes were cancelled as part of the note exchange in exchange for cash and
securities, and substantially all of the covenant protection contained in the
indenture relating to the remaining Old Notes was extinguished. As a result of
the exchange offer and consent solicitation, $16.2 million in aggregate
principal amount, net of unamortized discount, of Old Notes remain outstanding.
See Note 6 for a description of the note exchange. Interest on the Old Notes is
payable on February 15 and August 15 of each year. The Old Notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior debt, including indebtedness outstanding under the
Credit Facility and under facilities that may replace the Credit Facility in the
future, and to the New Notes. In addition, the Old Notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including the Credit Facility and the Amended Credit Facility
(defined below).
The Old Notes are fully and unconditionally guaranteed, on a senior subordinated
basis, by substantially all of the Company's existing subsidiaries and each
subsidiary that will be organized in the future by the Company, unless such
subsidiary is designated as an unrestricted subsidiary. Subsidiary guarantees
are joint and several, full and unconditional, general unsecured obligations of
the subsidiary guarantors. Subsidiary guarantees are subordinated in right of
payment to all existing and future senior debt of subsidiary guarantors,
including the Credit Facility and the Amended Credit Facility, and are also
effectively subordinated to all secured obligations of subsidiary guarantors to
the extent of the assets securing their obligations, including the Credit
Facility and the Amended Credit Facility.
4. COMMITMENTS AND CONTINGENCIES
Litigation And Claims
Several lawsuits have been filed against the Company and certain of its officers
and directors, and its former auditors, in the United States District Court for
the Southern District of Florida, which have been consolidated into a single
lawsuit. The consolidated complaint, as amended in March 2000, September 2000
and September 2001, alleges violations of Sections 11 and 15 of the Securities
Act of 1933 ("Securities Act") and Sections 10(b) and 20(a) of, and Rule 10b-5
under, the Securities Exchange Act of 1934 ("Exchange Act"). Among other
matters, the complaint alleges that the Company's reported financial results in
1997, 1998 and 1999 were materially misleading and violated generally accepted
accounting principles. The amended consolidated complaint seeks damages and
certification of two classes, one consisting of purchasers of the Company's
common stock in the Company's June 1999 public offering and one consisting of
purchasers of the Company's common stock during the period between April 30,
1997 and April 14, 2000.
As of May 6, 2002, the Company entered into an agreement to settle these
claims. Under the settlement agreement, the fairness of which was approved by
the District Court on August 21, 2002, the Company will pay $11.5 million in
cash, all of which will be paid by the Company's directors' and officers'
liability insurance carrier, and will issue certain securities, as described
below, in full settlement of the claims. The securities to be issued are: (i)
1.25 million shares of the Company's authorized but unissued common stock, (ii)
$4.0 million of the Company's new 8% Junior Subordinated Convertible PIK Notes
due 2007 (with terms similar to, but structurally subordinated to, the New
Notes), and (iii) warrants to purchase 4.15 million shares of the Company's
common stock at an exercise price of $5.16 per share (which warrants are
identical to the warrants issued in the restructuring). Once the settlement
becomes final and non-appealable, all claims against the Company and the other
defendants will be dismissed without any admission of liability or wrongdoing.
For the quarter ended March 31, 2002, the Company recorded a liability of $8.0
million related to the value of the securities to be issued in this settlement.
For the quarter ended June 30, 2002, the Company has marked-to-market the
securities to be issued in this settlement. As a result of this revaluation,
the Company has recorded a gain of $1.875 million for the period ended June 30,
2002. The securities to be issued will continue to be revalued each period
until the settlement becomes final and non-appealable (which is expected to
occur during the third quarter of 2002).
12
During the first quarter of 2000, the U.S. Securities and Exchange Commission
initiated an inquiry into the Company's accounting for certain transactions
occurring prior to 2000. The Company has cooperated with the SEC in its inquiry.
In November 2001, the Company was sued by several former employees of its
Oscoda, Michigan heavy airframe maintenance operation, on behalf of themselves
and purportedly on behalf of a class of similarly situated employees, for
alleged violations of the Worker Adjustment and Retraining Notification Act in
connection with its spring 2001 temporary closure of that operation. The suit,
which was filed in the U.S. District Court for the Eastern District of Michigan,
seeks back pay (including salary and accrued vacations) and other benefits for
each of the affected employees for a sixty day period after such employees were
terminated. The Company believes that it has valid defenses to this suit and is
vigorously defending this suit, which is presently in discovery. Nevertheless,
unfavorable resolution of this suit could have a material adverse effect on the
Company's financial condition and results of operations.
The Company is also involved in various lawsuits and other contingencies arising
out of its operations in the normal course of business. In the opinion of
management, the ultimate resolution of these claims and lawsuits will not have a
material adverse effect upon the financial condition or results of operations of
the Company.
Environmental Matters
The Company is taking remedial action pursuant to Environmental Protection
Agency and Florida Department of Environmental Protection ("FDEP") regulations
at TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact and magnitude of the required
remediation efforts on the Company. Based upon the most recent cost estimates
provided by environmental consultants, the Company believes that the total
testing, remediation and compliance costs for this facility will be
approximately $1.4 million. Testing and evaluation for all known sites on
TIMCO-Lake City's property is substantially complete and the Company has
commenced a remediation program. The Company is currently monitoring the
remediation, which will extend into the future. Subsequently, the Company's
accruals were increased because of this monitoring, which indicated a need for
new equipment and additional monitoring. Based on current testing, technology,
environmental law and clean-up experience to date, the Company believes that it
has established an accrual for a reasonable estimate of the costs associated
with its current remediation strategies. To comply with the financial assurances
required by the FDEP, the Company has issued a $1.4 million standby letter of
credit in favor of the FDEP.
Additionally, there are other areas adjacent to TIMCO-Lake City's facility that
could also require remediation. The Company does not believe that it is
responsible for these areas; however, it may be asserted that the Company and
other parties are jointly and severally liable and are responsible for the
remediation of those properties.
Accrued expenses in the accompanying December 31, 2001 and June 30, 2002
condensed consolidated balance sheets includes $2.0 million related to
obligations to remediate the environmental matters described above. Future
information and developments will require the Company to continually reassess
the expected impact of the environmental matters discussed above. Actual costs
to be incurred in future periods may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. These uncertainties include
the extent of required remediation based on testing and evaluation not yet
completed and the varying costs and effectiveness of remediation methods.
Tax Retention Operating Lease (TROL) Financing
The Company has a TROL financing arrangement that was utilized to develop two
facilities: (i) a corporate headquarters and warehouse facility, which has been
subleased to Kellstrom Industries, Inc., and (ii) a facility to house the
Company's Caribe operations (which were sold in May 2001). The lease is a triple
net lease with annual rent as provided in the lease and matures in July 2002.
The lease contains financial covenants regarding the Company's financial
performance and certain other affirmative and negative covenants, with which the
Company will be obligated to comply during the term of the lease.
Substantially all of the Company's subsidiaries have guaranteed the Company's
obligations under the lease. Additionally, the Company has an option to acquire
the facility at the end of the
13
lease for an option price as determined in the lease. Alternatively, if the
Company does not purchase the facility at the end of the lease, it will be
obligated to pay certain amounts as provided in the lease. Lease payments are
currently at a rate of Prime plus 3.25% to 4.0% and the Company is responsible
for all property taxes, insurance and maintenance of the property.
The original TROL financing was a $43.0 million loan facility provided by a
financial institution. As discussed in Note 1, in conjunction with the sale of
the Caribe operation, the purchaser of that business also acquired the real
estate and facility used by the Caribe business for $8.5 million. These
proceeds were used to repay the portion of the TROL financing. Additionally the
Company had posted, as security for the benefit of the TROL lender, a $9.0
million letter of credit, and in November 2001 the TROL lender drew down in
full the $9.0 million letter of credit. As a result of the lender drawing down
on this letter of credit and other modifications made to the required lease
payments, the Company determined that the lease qualified as a capital lease
and the Company recorded a capitalized lease asset and a related capital lease
liability in the amount of $34.2 million for the quarter ended September 30,
2001. The capital lease liability was then reduced by the application of the
proceeds of the $9.0 million letter of credit. At that time, management
estimated that the recorded value of the capitalized asset exceeded its fair
market value by approximately $9.0 million and recorded an impairment charge
(included in other expense) for that amount. Also during the third quarter of
2001, the Company made the decision to sell this facility. As a result, this
lease has been presented within the accompanying condensed consolidated
financial statements as of December 31, 2001 as a capitalized lease asset held
for sale. Additionally, as a result of this decision, no amortization expense
has been recorded through the period ended March 31, 2002.
As of April 1, 2002, this capitalized lease asset held for sale no longer
qualified for held for sale treatment, in accordance with SFAS No. 144, as the
Company had ceased to actively market this facility, and this asset has been
reclassified to an asset held for use. This capitalized lease asset is included
within fixed assets, net within the accompanying condensed consolidated
financial statements for the quarter ended June 30, 2002. Additionally,
amortization expense of $343,000 has been recognized for the three month period
ended June 30, 2002. Finally, the Company and substantially all of its
subsidiaries have guaranteed the repayment of the remaining $25.2 million
principal balance of the TROL financing. The TROL financing is secured by a lien
on the real property and improvements comprising the facilities and on the
fixtures therein.
Subsequent to June 30, 2002, the Company has restarted the active marketing of
this facility and thus has again met the criteria under SFAS No. 144 for
classification of this asset as a capitalized leased asset held for sale. Based
on this classification, amortization has ceased commencing during the month of
July 2002.
The lease agreement has been amended on several occasions. Under the terms of an
April 2001 amendment, two stockholders of the Company provided a guarantee in an
amount up to $1.0 million. In exchange for providing their guarantee, the
stockholders each received warrants to purchase 5,000 shares of the Company's
common stock at an exercise price of $17.50 per share, the value of which
($102,000) was charged to results of operations during 2001. Such guarantee was
released in conjunction with the sale of Caribe and repayment of proceeds
relating to the sale of the real estate and facility as discussed above. As part
of the April 2001 amendment, the lessor also agreed to waive non-compliance with
financial covenants, if any, through the period ended December 31, 2001. As of
December 31, 2001, the Company was not in compliance with certain covenants
contained in the lease agreement. Subsequently, the lessor has waived all such
events of non-compliance.
In July 2002, the Company entered into an agreement further amending its TROL
financing (see Note 8).
Other Matters
The Company applied for and received $11.1 million of federal income tax refunds
during the quarter ended June 30, 2002, as a result of carrying back net
operating losses to offset taxable income from prior years. Of this amount, $3.8
million has been recognized as an income tax benefit during 2002 and has
resulted through favorable tax legislation passed by the U.S. Congress that
temporarily extended the number of years that net operating losses could be
carried back to offset taxable income. Prior to the passage of this legislation,
these net operating losses were fully reserved as it was determined to be more
likely than not that the Company would not generate taxable income in the near
future and the Company would not have the opportunity to benefit these net
operating losses.
The Company has employment agreements with its executive officers and certain of
its key employees. The employment agreements provide that such officers and key
employees may earn bonuses, based upon a sliding percentage scale of their base
salaries, provided the Company
14
achieves certain financial operating results, as defined. Further, certain of
these employment agreements provide for certain severance benefits in the event
of a change of control.
In January 2001, the Company sold a loan relating to its former corporate
headquarters to its principal stockholder for 90% of the then outstanding
principal balance of $2.0 million. In conjunction with the transaction, the
Company granted to the stockholder warrants to purchase 2,500 shares of common
stock at an exercise price of $36.30 per share. The value of the warrants of
$46,000 was charged to operating results and credited to additional paid-in
capital.
5. Weighted Average Shares
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
--------------------------- ---------------------------
2001 2002 2001 2002
----------- ----------- ----------- -----------
Weighted average common and common
equivalent shares outstanding:
Basic .......................... 1,501,532 30,291,994 1,501,532 20,862,494
Effect of dilutive securities .. -- -- -- --
----------- ----------- ----------- -----------
Diluted ........................ 1,501,532 30,291,994 1,501,532 20,862,494
=========== =========== =========== ===========
Options and warrants outstanding
which are not included in the
calculation of diluted earnings
per share because their impact
is antidilutive ................. 428,500 277,162,706 428,500 188,873,709
=========== =========== =========== ===========
6. NOTE EXCHANGE AND RIGHTS OFFERING
On February 28, 2002 the Company completed a significant restructuring of its
capital and equity. The restructuring consisted of four parts. The first part
was a reverse split (on a one-share-for-ten-shares basis) of the Company's
outstanding common stock, reducing its outstanding common shares from 15.0
million shares to 1.5 million shares (5% of the restructured entity) and an
increase in the Company's authorized shares from 30.0 million shares to 500.0
million shares. The second part was an offer to the holders of the Company's Old
Notes to exchange their Old Notes for up to $10.0 million in cash, $100.0
million of the New Notes, 4.5 million shares of the Company's common stock (15%
of the restructured entity) and five-year warrants to purchase an additional 3.0
million shares of common stock at an exercise price of $5.16 per share
(collectively, the "Note Exchange"). A condition to the closing of the Note
Exchange offer was that the holders of 80% or more of the outstanding Old Notes
tender their Old Notes in the Note Exchange. The third part was a rights
offering to the existing stockholders to raise funds to pay the cash portion of
the Note Exchange offer and the expenses of the restructuring, and to provide
the Company with working capital for ongoing business operations. In the rights
offering, the Company offered 24.0 million shares of common stock (80% of the
restructured entity) to raise $20.0 million. In connection with the rights
offering, Lacy J. Harber, the Company's principal stockholder, agreed to
purchase unsold allotments. The last part consisted of the issuance to the
pre-restructuring holders of the Company's common stock of five-year warrants to
purchase an additional 3.0 million shares of common stock at an exercise price
of $5.16 per share.
In the rights offering, the Company sold 12.0 million shares of common stock to
the existing stockholders (including Mr. Harber), and Mr. Harber purchased the
balance of the shares (12.0 million shares) pursuant to his obligation to
purchase unsold allotments. In the Note Exchange, the Company exchanged
approximately $149.0 million face value of Old Notes (approximately 90% of the
Old Notes) for $5.1 million in cash, and all of the New Notes, shares and
warrants described above. The Company used the net proceeds of the rights
offering, approximating $10.0 million after payment of the cash proceeds of the
Note Exchange, accrued
15
interest on the Old Notes not tendered, and expenses of the restructuring, to
reduce trade payables and to provide working capital for the Company's ongoing
business operations. The restructuring has been recorded in accordance with SFAS
No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings."
As a result of the restructuring, the Company has recognized an extraordinary
gain of $27.3 million, net of $0 tax expense, in the first quarter of 2002.
Additionally, due to the application of SFAS No. 15, the Company will no longer
record interest expense on the New Notes, as the New Notes are carried at their
maximum potential cash redemption value (including interest) through their
maturity. This maximum potential cash redemption value equates to the present
value, through 2006, of the $100.0 million notes plus the value of stock to be
issued upon redemption of these notes in 2006. For a description of the terms of
the New Notes, see Note 3.
$16.2 million in aggregate principal amount, net of unamortized discount, of the
Old Notes remain outstanding. As part of the Note Exchange, substantially all of
the covenant protections contained in the indenture for the Old Notes was
removed.
The Company paid cash and issued 360,360 shares of common stock as consideration
for services provided by a third party in connection with the restructuring.
7. IMPACT OF ADOPTING SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
As noted in note 1, effective January 1, 2002, the Company has adopted SFAS No.
142. The impact of adopting this Statement and the discontinuance of recording
goodwill amortization expense is as follows:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------------------- --------------------------
2001 2002 2001 2002
---------- --------- ---------- ----------
(In thousands, Except Share Data)
(Unaudited)
Reported (loss) income before
extraordinary gain .............. $ (54,068) $ 235 $ (69,285) $ (6,193)
Reported net (loss) income ....... $ (54,068) $ 235 $ (69,285) $ 21,086
Add back: goodwill amortization . 550 -- 1,100 --
---------- --------- ---------- ----------
Adjusted (loss) income before
extraordinary gain .............. $ (53,518) $ 235 $ (68,185) $ (6,193)
Adjusted net (loss) income ....... $ (53,518) $ 235 $ (68,185) $ 21,086
========== ========= ========== ==========
Basic and diluted earnings per share:
Reported (loss) income before
extraordinary gain .............. $ (36.01) $ 0.01 $ (46.14) $ (0.30)
Reported net (loss) income ....... $ (36.01) $ 0.01 $ (46.14) $ 1.01
Goodwill amortization ........... 0.37 -- 0.73 --
---------- --------- ---------- ----------
Adjusted (loss) income before
extraordinary gain .............. $ (35.64) $ 0.01 $ (45.41) $ (0.30)
Adjusted net (loss) income ....... $ (35.64) $ 0.01 $ (45.41) $ 1.01
========== ========= ========== ==========
16
8. SUBSEQUENT EVENTS
Refinancing of Senior Revolving Credit and Senior Term Debt
On July 12, 2002, the Company entered into an agreement amending and restating
its senior credit facilities with a syndicate of four lenders led by
Citicorp USA Inc. and UPS Capital Corporation pursuant to the terms of a Fifth
Amended and Restated Credit Agreement (the "Amended Credit Agreement"). Under
the Amended Credit Agreement, the Company has obtained a $30.0 million senior
secured revolving line of credit (the "Amended Revolving Credit Facility") and
a $7.0 million senior secured term loan (the "Amended Term Loan" and
collectively with the Amended Revolving Credit Facility, the "Amended Credit
Facility").
The Company utilized the proceeds from the Amended Credit Facility to repay
outstanding borrowings under its previously outstanding revolving credit
facility and its previously outstanding $12.0 million senior secured term loan.
The interest rate on the Amended Revolving Credit Facility is, at the Company's
option, (a) prime plus 3% per annum, or (b) LIBOR plus 4.5% per annum. The
interest rate on the Amended Term Loan is 12% per annum. The Amended Revolving
Credit Facility is due on January 31, 2004. The Amended Term Loan is due in
quarterly installments of $500,000, commencing September 30, 2002, with the
principal balance due in full on January 31, 2004. $3.5 million of the Amended
Term Loan was repaid from the proceeds of the Aerocell sale.
The Amended Credit Agreement contains certain financial covenants regarding the
Company's financial performance and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the suspension of the Amended Credit Facility
and repayment of all debt in the event of a material adverse change in the
business or a change in control. Generally, the Amended Credit Agreement
requires mandatory repayments and reduction of the commitments thereunder from
proceeds of a sale of assets or an issuance of equity or debt securities.
Mandatory repayments are also required as a result of insufficient collateral to
meet the borrowing base requirements thereunder or in the event the outstanding
obligations under the Amended Credit Facility exceed the commitments thereunder.
Substantially all of the Company's assets are pledged as collateral for amounts
borrowed.
On July 12, 2002, the Company also restructured its outstanding $10.0 million
senior secured term loan with Bank of America. $5.0 million of this loan (the
"$5.0 million BofA Loan") is now due on January 31, 2004. The $5.0 million
BofA Loan continues to bear interest at the rate of LIBOR plus 2% and continues
to be credit supported by two individuals, one of whom is the Company's
principal stockholder. Further, $2.5 million of the original BofA loan remained
due on August 14, 2002 and was repaid from the proceeds of the Aerocell sale.
The $2.5 million balance of the original Bank of America term loan has also been
repaid. At the closing of the senior term debt refinancing, one of the
individuals who had provided credit support for this loan and who is a director
of the Company, paid Bank of America $2.5 million, reducing the Company's
obligation under this term loan from $10.0 million to $7.5 million (which amount
was then restructured as set forth above). The Company transferred to this
individual a 100,000 square foot warehouse facility in Pearland, Texas, which
had been previously utilized by the Company's redistribution operation, in
satisfaction of $1.5 million of this loan (which is at least as favorable a
price, based on a third party appraisal, for this property as could have been
obtained from an unaffiliated third party). In addition, the Company agreed to
pay the remaining $1.0 million balance of this loan, with interest at the rate
of 12% per annum, on the earlier of the Company's sale of Aerocell or January
31, 2004, and the balance of this loan has recently been repaid from the
proceeds of the Aerocell sale.
The remaining $8.5 million in senior secured term loans continues to be secured
by a lien on substantially all of the assets of the Company.
17
Amendment to TROL Financing Agreements
On July 12, 2002, the Company entered into an agreement amending its TROL
financing (the "Amended TROL Financing Agreement"). Under the terms of
the Amended TROL Financing Agreement, the maturity date of the TROL financing
has been extended until June 30, 2005 and the base rent under the TROL has been
increased to the greater of: (i) the amount being received by the Company under
its sublease for the facility plus, commencing July 1, 2003, an additional
monthly payment by the Company, or (ii) $210,000. The TROL financing continues
to be secured by the real property and improvements comprising the facilities.
Settlement With Kellstrom
On July 17, 2002, the Company closed on the transactions contemplated by the
Post-Closing Resolution Agreement, dated as of June 10, 2002 (the "PCRA")
between the Company and Kellstrom Industries, Inc. ("Kellstrom"). The settlement
resolves and settles globally outstanding disputes between the Company and
Kellstrom (the "Settlement") relating to matters arising out of the Company's
December 2000 sale of substantially all of the assets of its redistribution
operation to Kellstrom.
As part of the Settlement:
a. Kellstrom purchased certain furniture, fixtures and equipment ("FF&E") from
Aviation Sales Distribution Services Company ("ASDC"), a subsidiary of the
Company, which equipment is being used by Kellstrom in the operation of its
business;
b. Kellstrom "put" certain uncollected accounts receivable which were sold by
ASDC to Kellstrom as part of the sale of the assets of the redistribution
operation to the Company in accordance with the terms of the Asset Purchase
Agreement, dated December 1, 2000, among Kellstrom, the Company and ASDC
(the "APA");
c. Kellstrom and the Company resolved outstanding purchase price adjustment
disputes under the APA;
d. The Company and Kellstrom settled and setoff amounts due and owing in the
ordinary course between Kellstrom and the Company, including certain
rental amounts owed by Kellstrom under the Miramar Lease (defined below);
e. Kellstrom's sub-lease (the "Miramar Lease") of the Company's 525,000 square
foot Miramar, Florida warehouse and office facility (the "Miramar
Facility") was amended (the "Amended Kellstrom Lease") to provide for a
term of twenty (20) years with an annual minimum rental of $2.75 million
for the first five years, $3.0 million for years six through ten and at
fair market value thereafter (all subject to CPI increases). Further, the
Amended Kellstrom Lease provides Kellstrom with a one-time right to
terminate the Amended Kellstrom Lease upon the completion of the 7th lease
year after the closing of the Settlement;
f. The Non-Competition Agreement between the Company and Kellstrom was amended
to, among other things, allow the Company's Aerocell Structures flight
surfaces MR&O operation to exchange flight surfaces with its customers and
to allow the Company, during the six months following the completion of the
settlement to sell up to $4.0 million of aircraft parts in the open market;
and
g. The Cooperation Agreement between Kellstrom and the Company, which
obligated the Company to purchase aircraft parts from Kellstrom, was
terminated.
The Settlement resulted in a net cash payment to the Company of approximately
$426,000. The closing of the Settlement occurred in connection with the sale of
Kellstrom's business to an entity, Kellstrom Aerospace, LLC, organized by
Inverness Management LLC. As part of that sale, the Amended Kellstrom Lease was
assigned to Kellstrom Aerospace LLC. Such sale, and the terms of the Settlement,
were approved by the Bankruptcy Court in Kellstrom's Chapter 11 bankruptcy
proceeding.
Additionally, simultaneous with the Settlement, the Company resolved certain
purchase price adjustment issues with KAV Inventory, LLC ("KAV"), an entity
owned 50% by the Company and 50% by Kellstrom, under the Inventory Purchase
Agreement, dated December 1, 2000, among the
18
Company, ASDC and KAV. Further, the consignment agreement between KAV and
Kellstrom (which has been assigned to Kellstrom Aerospace, LLC) and the loan
arrangement between KAV and Bank of America were simultaneously amended.
Finally, simultaneous with the Settlement, the four parties (one of which is an
entity controlled by the Company's principal stockholder) that had provided
credit support to Kellstrom in December 2000 at the time of the Company's sale
of its redistribution operations to Kellstrom entered into an agreement with
Kellstrom's senior lenders to share proceeds from a sale of an office and
warehouse facility owned by Kellstrom and regarding certain other matters.
Additionally, as part of the same agreement, the Company entered into a release
agreement with Kellstrom's senior lenders with respect to certain matters.
Sale of Aerocell Assets
On July 31, 2002, the Company completed the sale of substantially all of the
assets and business of its Aerocell Structures operations. The net purchase
price was $9.6 million, (subject to the post-closing adjustment described
below), of which $9.1 million was received in cash at the closing and the
balance of which has been placed into escrow and will be disbursed in the
manner set forth below. The Company used the proceeds from the sale to repay
$3.5 million of the $7.0 million Amended Term Loan and $3.5 million to
repay the $2.5 million BofA Loan and the $1.0 million term loan due to a related
party. The remainder, net of expenses, is being used for working capital. For
the period ended July 31, 2002, the Company has recorded an approximate
$200,000 gain as a result of this sale.
Pursuant to the asset purchase agreement relating to the sale, the Company has
agreed that the value of the Aerocell assets at the closing date was at least
$11.7 million. The agreement provides procedures relating to the determination
of the closing date value of the Aerocell assets and requires a post-closing
payment to the purchaser (on a dollar-for-dollar basis) if it is ultimately
determined that the closing date value of the Aerocell assets was lower than the
targeted amount.
The agreement also provides that the funds in escrow will be held to support
certain indemnification rights provided in the agreement, and, provided that no
claims for indemnity have been asserted, $250,000 of the funds being held in
escrow will be released six months after the closing date and the balance of
the funds being held in escrow will be released one year after the closing
date. The agreement also provides that the Company will receive certain
rebates in the future for work which the Company helps procure for the
purchaser. However, before any such amounts are payable under this rebate, the
purchaser will receive a credit to the extent that certain specified inventory
of Aerocell is not sold within one year following the Closing Date. There is
also additional inventory of Aerocell as to which the Company will have to pay
up to $200,000 in cash one year from the closing if that inventory has not been
sold or consumed by that date.
19
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "TIMCO," "WE," "OUR" AND
"US" IN THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES TIMCO AVIATION SERVICES,
INC. (FORMERLY KNOWN AS AVIATION SALES COMPANY) AND ITS SUBSIDIARIES. THIS
QUARTERLY REPORT ON FORM 10-Q CONTAINS OR MAY CONTAIN FORWARD-LOOKING
STATEMENTS, SUCH AS STATEMENTS REGARDING OUR STRATEGY AND ANTICIPATED TRENDS IN
THE INDUSTRY IN WHICH WE OPERATE. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON
OUR CURRENT EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF RISKS, UNCERTAINTIES AND
ASSUMPTIONS RELATING TO OUR OPERATIONS AND RESULTS OF OPERATIONS, COMPETITIVE
FACTORS, SHIFTS IN MARKET DEMAND, AND OTHER RISKS AND UNCERTAINTIES, INCLUDING,
IN ADDITION TO THOSE DESCRIBED BELOW AND ELSEWHERE IN THIS QUARTERLY REPORT ON
FORM 10-Q AND IN OUR ANNUAL REPORT ON FORM 10-K FOR 2001 (THE "FORM 10-K"), OUR
ABILITY TO CONTINUE TO GENERATE SUFFICIENT WORKING CAPITAL TO MEET OUR OPERATING
REQUIREMENTS AND SERVICE OUR INDEBTEDNESS, OUR MAINTAINING GOOD WORKING
RELATIONSHIPS WITH OUR VENDORS AND CUSTOMERS, COMPETITIVE PRICING FOR OUR
PRODUCTS AND SERVICES, OUR ABILITY TO ACHIEVE GROSS PROFIT MARGINS AT WHICH WE
CAN BE PROFITABLE, INCLUDING MARGINS ON SERVICES WE PERFORM AT A FIXED PRICE
BASIS, INCREASED COMPETITION IN THE AIRCRAFT MAINTENANCE, REPAIR AND OVERHAUL
MARKET AND THE IMPACT ON THAT MARKET AND THE COMPANY OF THE TERRORIST ATTACKS ON
SEPTEMBER 11, 2001, OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL IN OUR
BUSINESSES, UTILIZATION RATES FOR OUR MR&O FACILITIES, OUR ABILITY TO
EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS, OUR ABILITY TO EFFECTIVELY MANAGE OUR
BUSINESS, ECONOMIC FACTORS WHICH AFFECT THE AIRLINE INDUSTRY AND CHANGES IN
GOVERNMENT REGULATIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM RESULTS EXPRESSED OR IMPLIED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY US IN THIS QUARTERLY REPORT ON FORM 10-Q. WE
DO NOT UNDERTAKE ANY OBLIGATION TO REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
The following discussion and analysis should be read in conjunction with the
information set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Form 10-K.
Note Exchange Offer and Rights Offering
On February 28, 2002, we completed a significant restructuring of our capital
and equity. The restructuring consisted of four parts. The first part was a
reverse split (on a one-share-for-ten-shares basis) of our outstanding common
stock, reducing our outstanding common shares from 15.0 million shares to 1.5
million shares (5% of the restructured entity) and an increase in our authorized
shares from 30.0 million shares to 500.0 million shares. The second part was an
offer to the holders of our $165.0 million of 8 1/8% senior subordinated notes
due 2008 to exchange their Old Notes (the "Old Notes") for up to $10.0 million
in cash, $100.0 million of new 8% senior subordinated convertible pay-in kind
notes due 2006 (the "New Notes"), 4.5 million shares of our common stock (15% of
the restructured entity) and five-year warrants to purchase an additional 3.0
million shares of common stock at an exercise price of $5.16 per share
(collectively, the "Note Exchange"). A condition to the closing of the Note
Exchange offer was that the holders of 80% or more of the outstanding Old Notes
tender their Old Notes in the Note Exchange. The third part was a rights
offering to our existing stockholders to raise funds to pay the cash portion of
the Note Exchange offer and the expenses of the restructuring, and to provide us
with working capital for ongoing business operations. In the rights offering, we
offered 24.0 million shares of our common stock (80% of the restructured entity)
to raise $20.0 million. In connection with the rights offering, Lacy J. Harber,
our principal stockholder, agreed to purchase unsold allotments. The last part
consisted of the issuance to the pre-restructuring holders of our common stock
of five-year warrants to purchase an additional 3.0 million shares of common
stock at an exercise price of $5.16 per share.
In the rights offering, we sold 12.0 million shares of common stock to our
existing stockholders (including Mr. Harber), and Mr. Harber purchased the
balance of the shares (12.0 million shares) pursuant to his obligation to
purchase unsold allotments. In the Note Exchange, we exchanged $149.0 million
face value of Old Notes (approximately 90% of the Old Notes) for $5.1 million in
cash, and all of the New Notes, shares and warrants described above. We used the
net proceeds of the rights offering, approximating $10.0 million after payment
of the cash proceeds of the Note Exchange, accrued interest on the bonds not
tendered, and expenses of the restructuring, to reduce trade payables and to
provide working capital for our ongoing business operations. The restructuring
has been recorded in accordance with SFAS No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructurings." As a result, we have recognized an
extraordinary gain of $27.3 million, net of $0 tax expense, in the first
20
quarter of 2002. Additionally, because of SFAS No. 15, we will not record
interest expense on the New Notes, as the New Notes are already carried on our
consolidated financial statements at their maximum potential cash redemption
value (including interest) through their maturity. This maximum potential cash
redemption value equates to the present value, through 2006, of the $100.0
million notes plus the value of stock to be issued upon redemption of these
notes in 2006.
The New Notes are redeemable at our option at the following percentages of par
plus accrued interest on the par value through the date of redemption: 2002 -
70.0%, 2003 - 72.5%, 2004 - 73.0%, 2005 - 75.625% and 2006 - 77.5%. Pursuant to
the terms of the New Notes, which were issued in the Note Exchange, we are also
obligated to issue additional shares of common stock when the New Notes are
either redeemed or mature. If the New Notes are redeemed in 2002 or 2003, the
Company will issue an additional 4.5 million shares of common stock as part of
the redemption consideration. If the New Notes are redeemed in 2004, 2005 or
2006 (prior to maturity), the Company will issue an additional 3.0 million
shares of common stock as part of the redemption consideration. If the New Notes
have not been redeemed prior to their maturity at the close of business on
December 31, 2006, the New Notes will automatically convert into an additional
270.3 million shares of our common stock.
As a result of the exchange offer and consent solicitation, $16.2 million in
aggregate principal amount of the Old Notes, net of unamortized discount, remain
outstanding. As part of the Note Exchange, substantially all of the covenant
protections contained in the indenture for the Old Notes were removed.
AGREEMENT TO SETTLE SECURITIES CLASS ACTION LITIGATION
As of May 6, 2002, we entered into an agreement to settle the securities class
action litigation previously filed against us and certain of our former
directors and officers, and our former auditors, in the United States District
Court for the Southern District of Florida. Under the settlement agreement, the
fairness of which was approved by the District Court on August 21, 2002,
the Company will pay $11.5 million in cash, all of which will be paid by
our directors' and officers' liability insurance carrier, and will issue
certain securities, as described below, in full settlement of the claims. The
securities to be issued are: (i) 1.25 million shares of our authorized but
unissued common stock, (ii) $4.0 million of our new 8% Junior Subordinated
Convertible PIK Notes due 2007 (with terms similar to, but structurally
subordinated to, the New Notes), and (iii) warrants to purchase 4.15 million
shares of our common stock at an exercise price of $5.16 per share (which
warrants are identical to the warrants issued in the restructuring). Once the
settlement becomes final and non-appealable, all claims against us and the
other defendants will be dismissed without any admission of liability or
wrongdoing. For the quarter ended March 31, 2002, we recorded a
liability of $8.0 million related to the value of the securities to be issued
in this settlement. For the quarter ended June 30, 2002, we have
marked-to-market the securities to be issued in the settlement. As a result of
this revaluation, we have recorded a gain of $1.875 million for the
period ended June 30, 2002. The securities to be issued will be revalued each
period until the District Court's order becomes final and non-appealable (which
is expected to occur during the third quarter of 2002).
SETTLEMENT WITH KELLSTROM
On July 17, 2002, we closed on the transactions contemplated by the Post-Closing
Resolution Agreement, dated as of June 10, 2002 (the "PCRA") between us
and Kellstrom Industries, Inc. ("Kellstrom"). The settlement resolves and
settles globally outstanding disputes between us and Kellstrom (the
"Settlement") relating to matters arising out of our December 2000 sale of
substantially all of the assets of our redistribution operation to Kellstrom.
As part of the Settlement:
a. Kellstrom purchased certain furniture, fixtures and equipment ("FF&E") from
one of our subsidiaries, Aviation Sales Distribution Services Company
("ASDC"), which equipment is being used by Kellstrom in the operation of
its business;
b. Kellstrom "put" back to us certain uncollected accounts receivable which
were sold by ASDC to Kellstrom as part of the sale of the assets of the
redistribution operation in accordance with the terms of the Asset Purchase
Agreement, dated December 1, 2000, among us, Kellstrom, and ASDC (the
"APA");
21
c. We and Kellstrom resolved outstanding purchase price adjustment disputes
under the APA;
d. We and Kellstrom settled and setoff amounts due and owing in the ordinary
course between us and Kellstrom, including certain rental amounts owed by
Kellstrom under the Miramar Lease (defined below);
e. Kellstrom's sub-lease (the "Miramar Lease") of our 525,000 square foot
Miramar, Florida warehouse and office facility (the "Miramar Facility") was
amended (the "Amended Kellstrom Lease") to provide for a term of twenty
(20) years with an annual minimum rental of $2.75 million for the first
five years, $3.0 million for years six through ten and at fair market value
thereafter (all subject to CPI increases). Further, the Amended Kellstrom
Lease provides Kellstrom with a one-time right to terminate the Amended
Kellstrom Lease upon the completion of the 7th lease year after the closing
of the Settlement;
f. The Non-Competition Agreement between us and Kellstrom was amended to,
among other things, allow our Aerocell Structures flight surfaces MR&O
operation to exchange flight surfaces with its customers and to allow us,
during the six months following the completion of the settlement, to sell
up to $4.0 million of aircraft parts in the open market; and
g. The Cooperation Agreement between us and Kellstrom, which obligated us to
purchase aircraft parts from Kellstrom, was terminated.
The Settlement resulted in a net cash payment to us of approximately $426,000.
The closing of the Settlement occurred in connection with the sale of
Kellstrom's business to an entity, Kellstrom Aerospace, LLC, organized by
Inverness Management LLC. As part of that sale, the Amended Kellstrom Lease was
assigned to Kellstrom Aerospace LLC. Such sale, and the terms of the Settlement,
were approved by the Bankruptcy Court in Kellstrom's Chapter 11 bankruptcy
proceeding.
Additionally, simultaneous with the Settlement, we resolved certain purchase
price adjustment issues with KAV Inventory, LLC, ("KAV") an entity owned 50% by
us and 50% by Kellstrom, under the Inventory Purchase Agreement, dated December
1, 2000, among us, ASDC and KAV. Further, the consignment agreement between KAV
and Kellstrom (which has been assigned to Kellstrom Aerospace, LLC) and the loan
arrangement between KAV and Bank of America were simultaneously amended.
Finally, simultaneous with the Settlement, the four parties (one of which is an
entity controlled by our principal stockholder) that had provided credit support
to Kellstrom in December 2000 at the time of the sale of our redistribution
operations to Kellstrom entered into an agreement with Kellstrom's senior
lenders to share proceeds from a sale of Kellstrom's office and warehouse
facility in Sunrise, Florida, and regarding certain other matters. Additionally,
as part of the same agreement, the Company entered into a release agreement with
Kellstrom's senior lenders with respect to certain matters.
SALE OF AEROCELL ASSETS
On July 31, 2002, we completed the sale of substantially all of the assets and
business of our Aerocell Structures operation. The net purchase price was $9.6
million (subject to the post-closing adjustment described below), of which $9.1
million was received in cash at the closing, and the balance of which has been
placed into escrow and will be disbursed in the manner set forth below. The
Company used the proceeds from the sale to repay $7.0 million of term
loans. The remainder, net of expenses, is being used for working capital. For
the period ended July 31, 2002, the Company has recorded an approximate $200,000
gain as a result of this sale.
The agreement under which the Aerocell assets were sold provided that the value
of the Aerocell assets at the closing date would be at least $11.7 million. The
agreement also provided procedures relating to the determination of the closing
date valuation of the Aerocell assets and requires payment, on a
dollar-for-dollar basis, if the closing date value of the Aerocell assets is
determined to be lower than the targeted amount.
The agreement further provides that the funds in escrow will be held to support
certain indemnification rights provided in the agreement, and, provided that no
claims for indemnity have been asserted, $250,000 of the funds being held in
escrow will be released six months after the closing date and the balance of
the funds being held in escrow will be released one year after the closing
date. The agreement also provides that we will receive certain rebates in the
future for work which we help procure for the purchaser. However, before
any such amounts are payable under this rebate, the purchaser will receive a
credit to the extent
22
that certain specified inventory of Aerocell is not sold within one year
following the closing date. There is also additional inventory of Aerocell as to
which we will have to pay up to $200,000 in cash one year from the
closing date if that inventory has not been sold or consumed by that date.
RECENT DEVELOPMENTS CONCERNING OUR OPERATIONS
The September 11, 2001 terrorist attacks against the United States of America
have had a severe impact on the aviation industry. As a result of these attacks
and their related aftermath, many commercial passenger airlines and air cargo
carriers reported significant reductions in their capacity and have taken out
of service upwards of 20% of their aircraft. This reduction in capacity caused
by the September 11, 2001 events caused the airline industry to incur
significant losses in 2001 and lessened the aircraft maintenance required by
such airlines (and thereby the amount of maintenance being outsourced to
companies like TIMCO). The impact of these attacks and the overall state of the
economy has resulted in continued losses during 2002 for some airlines and with
the filing for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Court by certain carriers. The most notable of late has been the
filing for protection from creditors under Chapter 11 by U.S. Airways on August
11, 2002. In addition to U.S. Airways, other carriers, including United
Airlines, which is one of our major customers, have publicly discussed the
potential of seeking protection from creditors through a voluntary bankruptcy
filing. As related to us, current exposures to carriers that are at risk of
filing for protection is being continuously evaluated and monitored.
Additionally, we are positioning ourself for potential favorable implications
of these protection filings and rebirths of the airlines as it is anticipated
that additional maintenance outsourcing opportunities could result as these
airlines look for cost reduction alternatives to internal labor sources.
While recently airlines are reporting significant increases in their passenger
volumes and it appears that passenger levels will in the future return to
pre-September 11th levels, the effect of the terrorist acts and the state of the
economy in general will continue to have a negative impact on our business. In
response, during 2001 and the first half of 2002 we have taken steps, including
head count reductions, to reduce our costs. These terrorist attacks have also
impacted our competition, with some of our competitors exiting the MR&O
business.
While we believe that we will meet our working capital requirements during 2002
from funds available under our revolving credit facility, from our operations,
from sales of assets or our equity securities, from debt infusions and other
sources, there can be no assurance that we will have sufficient working capital
to meet our financial obligations.
RESULTS OF OPERATIONS
General
Operating revenues consist primarily of service revenues and sales of materials
consumed while providing services, net of allowances for returns. Cost of sales
consists primarily of labor, materials, overhead and freight charges.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future. Many factors affect our operating results,
including:
- - decisions made regarding sales of our assets to reduce our debt,
- - timing of repair orders and payments from large customers,
- - the state of the economy generally and the state of the airline industry
specifically,
- - competition from other third-party MR&O service providers,
- - the number of airline customers seeking repair services at any time,
- - the impact of fixed pricing on gross margins and our ability to accurately
project our costs in a dynamic environment,
- - our ability to fully and efficiently utilize our hangar space dedicated to
maintenance and repair services,
- - the volume and timing for 727 cargo conversions and the impact during
future periods on airline use of both the 727 fleet type and JT8D engines
(both of which are older models) as a result of increased fuel costs and
other factors,
- - our ability to attract and retain a sufficient number of mechanics to
perform the MR&O services requested by our customers, and
- - the timeliness of customer aircraft arriving for scheduled maintenance.
Large portions of our operating expenses are relatively fixed. Since we
typically do not obtain long-term commitments from our customers, we must
anticipate the future volume of orders based upon the historic patterns of our
customers and upon discussions with our customers as to
23
their future requirements. Cancellations, reductions or delays in orders by a
customer or group of customers have in the past and could in the future have a
material adverse effect on our business, financial condition and results of
operations.
Operating revenue for the six months ended June 30, 2002 decreased $46.6 million
or 30.6% to $105.8 million, from $152.5 million for the same period in 2001.
Operating revenue for the first half of 2001 included $32.2 million from
facilities and operations that were closed or sold in 2001. Without the revenue
from these facilities and operations, comparative 2001 six-month revenue would
have been $120.2 million. Operating revenue for the three months ended June 30,
2002 decreased $22.6 million or 31.9% to $48.3 million, from $70.9 million for
the same period in 2001. Comparative 2001 three-month revenue without the
revenue from operations which were closed or sold would have been $60.1 million.
The decrease in revenue is primarily attributable to decreased revenue from our
heavy airframe maintenance operations. This decrease was generally caused by a
reduction in market opportunities due to adverse market conditions, which have
caused many of our customers to delay maintenance on their aircraft or park
older aircraft maintained by us due to rising fuel prices and general economic
conditions. In addition, revenue decreased due to the sale of the Caribe MR&O
operation in the second quarter of 2001, the consolidation of our Winston
Salem, North Carolina heavy airframe maintenance facility into our Greensboro,
North Carolina operations and the closure of our Oscoda airframe heavy
maintenance operations. Finally, 2001 revenues included revenues from sales of
leased assets from our leasing portfolio. All such leases have now expired and
all but one lease package has been sold.
Gross profit increased to $11.4 million for the six months ended June 30, 2002,
compared with a gross loss of ($0.1) million for the six months ended June 30,
2001. The gross profit for the three months ended June 30, 2002 was $5.1
million, an increase of $4.6 million over the 2001 second quarter. This increase
is due primarily to improved operating efficiencies, resulting in a higher
revenue realization per labor hour, and cost reductions achieved through
consolidation of operations in addition to company-wide salary and benefit
reductions in April 2001. Gross profit as a percentage of revenues increased to
10.7% and 10.6% for the six and three-month periods ended June 30, 2002,
respectively, from (0.1%) and 0.7% for the same respective periods in 2001.
Gross profit levels during any period are dependent upon the number and type of
aircraft serviced, the contract terms under which services are performed and
the efficiencies that can be obtained in the performance of such services.
Significant changes in any one of these factors can have a material impact on
the amount and percentage of gross profits in any particular period.
Additionally, gross profit is impacted by considerations as to the value of
our inventory. While we believe that we have appropriate reserves for inventory
obsolescence (and we further increased our reserves for obsolete inventory in
the second quarter of 2002 by $1.6 million due to current market conditions in
the aircraft parts market), the size of our inventory reserves may need to
increase in the future, depending on the market for aircraft parts in the
future and the fleet types of the parts in our inventory compared to the types
of aircraft for which we are performing maintenance procedures.
Operating expenses decreased $21.1 million or 72.2% to $8.1 million for the six
months ended June 30, 2002, compared with $29.2 million for the six months ended
June 30, 2001. Operating expenses for the three months ended June 30, 2002
decreased $16.2 million or 78.0% to $4.6 million from the same period in 2001.
First quarter operating expenses were $3.5 million. Operating expenses as a
percentage of revenues were 7.7% and 9.5% for the six and three-month periods
ended June 30, 2002, respectively, compared to 19.2% and 29.4% for the same
respective periods in 2001. Operating expenses as a percentage of revenues were
6.2% for the first quarter of 2002.
Operating expenses for the six months ended June 30, 2001 included a charge of
approximately $12.0 million ($11.0 million during the quarter ended June 30,
2001) relating to the closure of the Oscoda, Michigan heavy airframe maintenance
facility, impairment of assets at the Oscoda, Michigan engine overhaul
operation, allowance for a receivable from an airframe customer experiencing
significant financial difficulties and the consolidation of Aircraft Interior
Design into a single facility. The remaining reduction of operating expenses is
mainly due to the lower sales volumes noted above, the closing of our Miramar
headquarters and moving those offices to our Greensboro location, the sale of
Caribe and the salary and benefit reductions noted above.
As a result of these factors, income from operations was $3.2 million for the
2002 first half, compared to a loss from operations of $29.3 million for the
first half of 2001, and income from
24
operations for the second quarter of 2002 was $0.5 million, compared to a loss
of $20.3 million for the second quarter of 2001.
Interest expense for the six months ended June 30, 2002 decreased by $3.4
million or 26.0% to $9.7 million, from $13.1 million for the six months ended
June 30, 2001. Interest expense for the quarter ended June 30, 2002 decreased
by $2.7 million or 41.5% to $3.9 million, from $6.6 million for same period in
2001. The decrease is primarily attributable to completion of the Note Exchange
and Rights Offering which eliminated interest expense on $149.0 million of the
Old Notes since the end of February 2002 (see Note 6 of the Notes to the
Condensed Consolidated Financial Statements for an explanation as to why
interest is not recorded on the New Notes), lower outstanding debt balances as
a result of selling Caribe, completion of the restructuring and slightly lower
interest rates from period to period, somewhat offset by higher deferred
financing fees. Amortization of deferred financing costs (which is included in
interest expense) was $4.3 million and $2.0 million for the six and three
months ended June 30, 2002, respectively, compared to $2.8 million and $1.2 for
the same periods of 2001.
We recorded a charge of $8.0 million during the first quarter of 2002 related
to an agreement to settle a pending class action securities claim. For
the period ended June 30, 2002, the securities to be issued in this settlement
have been revalued, resulting in a gain during the 2002 second quarter of
$1.875 million. We will continue to revalue these securities until the order
approving the settlement becomes final and non-appealable (which is expected to
occur during the third quarter of 2002). See Note 4 of Notes to Condensed
Consolidated Financial Statements.
Other income - net was $1.7 million for the first half of 2002 and $1.0 million
for second quarter ended June 30, 2002, or $5.2 million and $5.9 million lower
than the other income-net for the same periods in 2001. Other income-net for
the second quarter of 2001 included a gain on sale of Caribe and income on
a forfeited lease deposit, totaling $7.9 million. We also recorded a change in
the second quarter of 2001 to write-off $29.4 million of note receivable due to
us from KAV.
As a result of the above factors, our loss from continuing operations before
income taxes, discontinued operations and extraordinary gain for the six months
ended June 30, 2002 was $10.9 million, compared to a loss of $64.9 million for
the six months ended June 30, 2001. Our continuing operations loss before
income taxes and discontinued operations for the quarter ended June 30, 2002
was $0.5 million, compared to a loss of $49.4 million for the quarter ended
June 30, 2001. Without the non-cash charge relating to the settlement of the
class action, we would have reported a loss from continuing operations before
income taxes, discontinued operations and extraordinary gain of $4.8 million
and $2.3 million for the six and three month periods ended June 30, 2002.
We recorded a $3.8 million tax benefit during the first quarter of 2002
as a result of the passage of legislation, which permits businesses to carry net
operating losses back to offset taxable income from the previous five years
(compared to two years under prior law). Prior to the passage of this
legislation, these net operating losses were fully reserved as it was determined
to be more likely than not that we would not generate taxable income in
the near future and that we would not have the opportunity to benefit
these net operating losses.
For the reasons set forth above, our loss from continuing operations for the six
months ended June 30, 2002 was $7.1 million or $0.34 per basic share and diluted
share compared to a loss of $64.9 million or $43.25 per basic share and diluted
share for the six months ended June 30, 2001. The loss from continuing
operations for the three months ended June 30, 2002 was $0.5 million or $0.01
per basic share and diluted share, compared to a loss of $49.4 million or $32.92
per basic share and diluted share for the three months ended June 30, 2001.
Weighted average common and common equivalent shares outstanding (diluted) were
20.9 million and 30.3 million for the six and three months ended June 30, 2002,
respectively, and 1.5 million for the six and three months ended June 30, 2001.
Income from discontinued operations for the six month and three month periods
ended June 30, 2002 was $0.9 million and $0.7 million, respectively, or $0.04
and $0.02, respectively, per basic share and diluted share, compared to a loss
of $4.3 million and $4.6 million, or $2.89 and $3.09 per basic share and diluted
for the same respective periods of 2001. The six and three month periods ended
June 30, 2001 include $5.1 million of charges for reserves relating to assets
whose realization was impacted by the operations of KAV and the financial
condition of Kellstrom.
25
During the first quarter of 2002, the Company recognized a $27.3 million
extraordinary gain relating to the Note Exchange. See discussion above and Note
6 of Notes to Condensed Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
As of June 30, 2002, we had outstanding indebtedness of $184.4 million
(excluding outstanding letters of credit of $12.1 million), of which $52.4
million is senior debt that has been refinanced in July 2002, including amounts
due under the TROL financing which is now characterized as a capital lease, and
the remainder of which is other indebtedness, including the New Notes and the
Old Notes. Our ability to make payments of principal and interest on
outstanding debt will depend upon our future operating performance, which will
be subject to economic, financial, competitive and other factors beyond our
control. The level of our indebtedness is also important due to:
- - our vulnerability to adverse general economic and industry conditions,
- - our ability to obtain additional financing for future working capital
expenditures, general corporate and other purposes, and
- - the dedication of a substantial portion of our future cash flow from
operations to the payment of principal and interest on indebtedness,
thereby reducing the funds available for operations and future business
opportunities.
During 2001 and 2002 to date, we have relied upon borrowings under our
revolving credit facility, proceeds from term loans, sales of assets, tax
refunds and the Rights Offering, along with cash provided by operations
during 2002, to meet our working capital requirements. We cannot assure you
that financing alternatives will be available to us in the future to support
our working capital requirements.
During the quarter ended June 30, 2002 the Company applied for and received
$11.1 million of federal income tax refunds as a result of carrying back net
operating losses to offset taxable income from prior years. Of this amount, $3.8
million has been recognized as an income tax benefit during 2002 and has
resulted through favorable tax legislation passed by the U.S. Congress that
increased the number of years that net operating losses could be carried back to
offset taxable income. Prior to the passage of this legislation, these net
operating losses were fully reserved as it was determined to be more likely than
not that we would not generate taxable income in the near future and
that we would not have the opportunity to benefit from these net operating
losses.
While we had a negative stockholders' equity $85.3 million at June 30, 2002, it
includes as a liability $115.8 million of the New Notes. While we have the
right, but not the obligation, to redeem the New Notes for cash and equity,
other than in connection with a change in control we will never be obligated to
make any cash payments to the holders of the New Notes. As such, had our New
Notes been converted into common stock as of June 30, 2002, our pro-forma
stockholders' equity would have been $30.5 million.
Cash
Net cash provided by continuing operating activities during the six months ended
June 30, 2002 was $10.5 million, compared to $5.0 million for the same period in
2001. Cash provided by operating activities was primarily the result of
earnings, adjusted for non-cash charges, of approximately $5.5 million and
decreases in accounts receivable, inventories and other current assets of $5.9
million, $8.6 million and $9.9 million, respectively, partially offset by
reductions in trade payables of $13.9 million and other liabilities of $5.5
million. Cash of $0.9 million was used in investing activities during the first
half of 2002 for the purchase of fixed assets. Cash used in financing activities
during the period was $2.4 million. Net proceeds from the Rights Offering of
$19.8 million were used to fund the Note Exchange, including $5.1 million for
the retirement of Old Notes and $5.0 million for expenses of the Note Exchange.
The remaining proceeds, along with cash from operations, were used to pay down
$10.9 million of the revolver balance, to pay $1.0 million of bank and
refinancing fees and to pay $0.1 of capital leases. Cash of $0.3 million was
provided by our discontinued operations.
26
Senior Credit Facilities
In July 2002, we entered into an agreement amending and restating our senior
credit facilities with a syndicate of four lenders led by Citicorp USA Inc. and
UPS Capital Corporation pursuant to the terms of a Fifth Amended and Restated
Credit Agreement (the "Amended Credit Agreement"). Under the Amended Credit
Agreement, we have obtained a $30.0 million senior secured revolving line of
credit (the "Amended Revolving Credit Facility") and a $7.0 million senior
secured term loan (the "Amended Term Loan" and collectively with the Amended
Revolving Credit Facility, the "Amended Credit Facility").
We have utilized the proceeds from the Amended Credit Facility to repay
outstanding borrowings under our previously outstanding revolving credit
facility and our previously outstanding $12.0 million senior secured term loan.
See Note 3 and 8 of the Notes to the Condensed Consolidated Financial
Statements. As of August 12, 2002, the outstanding aggregate amount of letter of
credit under the Amended Revolving Credit Facility was $11.6 million and
availability under the Amended Revolving Credit Facility was $3.7 million.
The interest rate on the Amended Revolving Credit Facility is, at the Company's
option, (a) prime plus 3% per annum, or (b) LIBOR plus 4.5% per annum. The
interest rate on the Amended Term Loan is 12% per annum. The Amended Revolving
Credit Facility is due on January 31, 2004. The Amended Term Loan is due in
quarterly installments of $500,000, commencing September 30, 2002, with the
principal balance due in full on January 31, 2004.
The Amended Credit Agreement contains certain financial covenants regarding our
financial performance and certain other covenants, including limitations on the
amount of annual capital expenditures and the incurrence of additional debt, and
provides for the suspension of the Amended Credit Facility and repayment of all
debt in the event of a material adverse change in the business or a change in
control. Generally, the Amended Credit Agreement requires mandatory repayments
and reduction of the commitments thereunder from proceeds of a sale of assets or
an issuance of equity or debt securities. Mandatory repayments are also required
as a result of insufficient collateral to meet the borrowing base requirements
thereunder or in the event the outstanding obligations under the Amended Credit
Facility exceed the commitments thereunder. Substantially all of our assets are
pledged as collateral for amounts borrowed.
In July 2002, we also restructured our outstanding $10.0 million senior secured
term loan with Bank of America. $5.0 million of this loan (the "$5.0 million
BofA Loan") is now due on January 31, 2004. The $5.0 million BofA Loan continues
to bear interest at the rate of LIBOR plus 2% and continues to be credit
supported by two individuals, one of whom is our principal shareholder. After
the refinancing, $2.5 million of the original BofA loan (the "$2.5 million BofA
loan") continued to be due on August 14, 2002, and such loan was repaid from the
proceeds of the Aerocell sale.
The remaining $2.5 million of the original BofA loan (the "Quevedo Loan") was
restructured as follows: (i) at the closing of the refinancing, Mr. Quevedo, a
director of the Company, paid Bank of America $2.5 million, reducing our
obligation under this term loan from $10.0 million to $7.5 million (which amount
was then restructured as set forth above); (ii) we transferred to Mr. Quevedo a
100,000 square foot warehouse facility in Pearland, Texas which had been
previously been utilized by our redistribution operation in satisfaction of $1.5
million of the Quevedo Loan (which is at least as favorable a price, based on a
third party appraisal, for this property as could have been obtained from an
unaffiliated third party); and (iii) we agreed to pay Mr. Quevedo the remaining
$1.0 million balance of this loan, with interest at the rate of 12% per annum)
on the earlier of the sale of Aerocell or January 31, 2004 (such amount was
repaid from the proceeds of the Aerocell sale).
The remaining $8.5 million in senior secured term loans continues to be secured
by a lien on substantially all of our assets.
Senior Subordinated Notes
New Notes
On February 28, 2002, in connection with our Note Exchange, we issued $100.0
million face value in aggregate principal amount of our New Notes, which mature
on December 31, 2006. The New
27
Notes bear interest at the rate of 8.0% per annum from the date of issuance, and
are payable at our option either in cash or paid- in-kind through the issuance
of additional New Notes, semiannually on June 30 and December 31 of each year.
We expect to elect to pay interest in-kind. If we do not pay interest in cash as
of an interest payment date, we will automatically be deemed to have paid such
interest in-kind and additional New Notes in the amount of such interest payment
will automatically be deemed to be outstanding from such date forward.
The New Notes are general unsecured obligations, subordinated in right of
payment to all existing and future senior debt, including indebtedness
outstanding under the Amended Credit Facility and any future credit facility
that may replace the Amended Credit Facility. The New Notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations including the Amended Credit Facility. The New Notes are also
effectively subordinated in right of payment to all existing and future
liabilities of any of our subsidiaries that do not guarantee the New Notes.
The New Notes are fully and unconditionally guaranteed, on a senior subordinated
basis, by substantially all of our existing subsidiaries and each subsidiary
that we organize in the future, unless such subsidiary is designated as an
unrestricted subsidiary (the "Subsidiary Guarantors"). Subsidiary guarantees are
joint and several, full and unconditional, general unsecured obligations of the
Subsidiary Guarantors. Subsidiary guarantees are subordinated in right of
payment to all existing and future senior debt of Subsidiary Guarantors,
including the Credit Facility, and are also effectively subordinated to all
secured obligations of Subsidiary Guarantors to the extent of the assets
securing such obligations, including the Amended Credit Facility.
The indenture for the New Notes (i) permits us to incur indebtedness equal to
the greater of $95 million or an amount that satisfies a fixed charge coverage
ratio of 2.25 to 1.00, (ii) requires us, upon a change of control or certain
asset sales, to repurchase the New Notes at a price equal to the redemption
price which we would be obligated to pay if we redeemed the New Notes on the
date of the change of control or asset sale; and (iii) does not contain a
provision requiring acceleration of any premium due upon acceleration of the New
Notes upon an event of default by reason of any willful action (or inaction)
taken (or not taken) by us with the intention of avoiding the prohibition on the
redemption of New Notes.
The New Notes are redeemable at our option at the following percentages of par
plus accrued interest on the par value through the date of redemption: 2002 -
70.0%, 2003 - 72.5%, 2004 - 73.0%, 2005 - 75.625% and 2006 - 77.5%. The New
Notes also provide that the holders will receive an aggregate of 4.5 million
shares of common stock if the New Notes are redeemed in 2002 or 2003 and an
aggregate of 3.0 million shares of common stock if the New Notes are redeemed in
2004, 2005 or 2006.
If the New Notes have not already been redeemed or repurchased, the New Notes,
including those New Notes previously issued as paid-in-kind interest and all
accrued but unpaid interest, will automatically convert on December 31, 2006
into an aggregate of 270.3 million shares of our common stock. Holders of New
Notes will not receive any cash payment representing principal or accrued and
unpaid interest upon conversion; instead, holders will receive a fixed number of
shares of common stock and a cash payment to account for any fractional shares.
Old Notes
In 1998, we sold $165.0 million of the Old Notes due in 2008 with a coupon rate
of 8.125% at a price of 99.395%. As a result of the Note Exchange, $16.2 million
in aggregate principal amount of the Old Notes remain outstanding. Interest on
the Old Notes is payable on February 15 and August 15 of each year. The Old
Notes are general unsecured obligations, subordinated in right of payment to all
existing and future senior debt, including indebtedness outstanding under the
Amended Credit Facility and under senior credit facilities which may replace the
Amended Credit Facility in the future, and to the New Notes. In addition, the
Old Notes are effectively subordinated to all secured obligations to the extent
of the assets securing such obligations, including the Amended Credit Facility,
and to the New Notes. The Old Notes are also effectively subordinated in right
of payment to all existing and future liabilities of any of our subsidiaries
that do not guarantee the Old Notes. As a result of the Note Exchange,
substantially all of the covenant protection contained in the indenture relating
to the Old Notes was extinguished.
28
The Old Notes are fully and unconditionally guaranteed, on a senior
subordinated basis, by substantially all of our existing subsidiaries and each
subsidiary that we organize in the future, unless such subsidiary is
designated as an unrestricted subsidiary (the "Subsidiary Guarantors").
Subsidiary guarantees are joint and several, full and unconditional, general
unsecured obligations of the Subsidiary Guarantors. Subsidiary guarantees are
subordinated in right of payment to all existing and future senior debt of
Subsidiary Guarantors, including the Amended Credit Facility, and are also
effectively subordinated to all secured obligations of Subsidiary Guarantors to
the extent of the assets securing such obligations, including the Amended
Credit Facility.
Lease for Miramar facilities
We have a TROL financing arrangement that was utilized to develop two
facilities: (i) a corporate headquarters and warehouse facility, which has been
subleased to Kellstrom, and (ii) a facility to house our Caribe operation that
was sold in May 2001. The lease is a triple net lease with annual rent as
provided in the lease. The lease contains financial covenants regarding our
financial performance and certain other affirmative and negative covenants, with
which we will be obligated to comply during the term of the lease.
In July 2002, we entered into an agreement amending our TROL financing (the
"Amended TROL Financing Agreement"). Under the terms of the Amended TROL
Financing Agreement, the maturity date of the TROL financing has been extended
until June 30, 2005 and the base rent under the TROL has been increased to the
greater of: (i) the amount being received under our sublease for the facility,
plus, commencing July 1, 2003, an additional monthly payment by us, or (ii)
$210,000. The TROL financing continues to be secured by the real property and
improvements comprising the facilities, including the fixtures therein.
Substantially all of our subsidiaries have guaranteed our obligations under the
lease. Additionally, we have an option to acquire the new facility at the end of
the lease for an option price as determined in the lease. Alternatively, if we
do not purchase the new facility at the end of the lease, we will be obligated
to pay certain amounts as provided in the lease. Lease payments are currently at
a rate of Prime plus 3.25% to 4.0% and we are responsible for all property
taxes, insurance and maintenance of the property.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Financial Reporting Release No. 60, which was recently released by the U.S.
Securities and Exchange Commission, encourages all companies to include a
discussion of critical accounting policies or methods used in the preparation of
the financial statements. Our consolidated financial statements include a
summary of the significant accounting policies and methods used in the
preparation of our consolidated financial statements.
Revenue Recognition
Revenues from MR&O services are recognized when services are performed and
unbilled receivables are recorded based upon the percentage of completion
method. Unbilled receivables are billed on the basis of contract terms
(generally upon completion of an aircraft) and deliveries. Revenues related to
engine overhaul services are recognized upon shipment of the overhauled engine.
Inventory Valuation
Inventories, which consist primarily of new, overhauled, serviceable and
repairable aircraft parts, are stated at the lower of cost or market on
primarily a specific identification basis. In instances where bulk purchases of
inventory items are made, cost is determined based upon an allocation by
management of the bulk purchase price to the individual components. Expenditures
required for the recertification of parts are capitalized as inventory and are
expensed as the parts associated with the recertification are sold.
Use of Estimates
Management's discussion and analysis of financial condition and results of
operations is based
29
upon our condensed consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of our financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of contingent
assets and liabilities. On an ongoing basis, management evaluates these
estimates, including those related to estimated losses on disposal of
discontinued operations, the allowances to reduce inventory to the lower of cost
or net realizable value, the estimated profit recognized as aircraft
maintenance, design and construction services are performed, the allowance for
doubtful accounts and notes receivable, the realizability of its investment in
affiliates, future cash flows in support of long lived assets, medical benefit
accruals, the estimated fair values of facilities under capital leases and
allowances for litigation and environmental costs. Management bases their
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions and conditions.
30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to the Company's Unaudited Condensed Consolidated Financial
Statements included in this filing.
ITEM 2. CHANGES IN SECURITIES
See Note 6 to the Company's Unaudited Condensed Consolidated Financial
Statements included in this filing.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were presented to the Company's stockholders during the second
quarter of 2002.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) Exhibits
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K
During the quarter ended June 30, 2002 the Company filed a Current Report
on Form 8-K reporting under Item 4 the election to change its independent
auditors from Arthur Andersen LLP to KPMG LLP.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
TIMCO Aviation Services, Inc.
By: /s/ C. Robert Campbell
------------------------------------
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Dated: August 28, 2002
32
Exhibit Index
Exhibit
Number Description
- ------ -----------
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
33