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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
Commission File No. 1-11775
AVIATION SALES COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 65-0665658
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6905 NW 25TH STREET 33122
MIAMI, FLORIDA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (305) 592-4055
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (S229.405) is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
As of February 20, 1997, 8,562,500 shares of Common Stock were
outstanding and the aggregate market value (based on the closing price on the
New York Stock Exchange on February 20, 1997, which was $26.50 per share) of the
Common Stock held by non-affiliates was approximately $107,656,250.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders scheduled to be held in May 1997 are incorporated by reference
into Part III hereof. Certain exhibits listed in Part IV of this Annual Report
on Form 10-K are incorporated by reference from prior filings made by the
Registrant under the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended.
1. PART I
THIS ANNUAL REPORT ON FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS THAT ARE SUBJECT TO RISK AND UNCERTAINTY. THERE CAN BE NO ASSURANCE
THAT THESE FUTURE RESULTS WILL BE ACHIEVED. READERS ARE CAUTIONED THAT A NUMBER
OF FACTORS, INCLUDING THOSE IDENTIFIED BELOW, COULD ADVERSELY AFFECT THE
COMPANY'S ABILITY TO OBTAIN THESE RESULTS: (A) ECONOMIC FACTORS WHICH AFFECT THE
AIRLINE INDUSTRY, (B) CHANGES IN GOVERNMENT REGULATION OF THE AVIATION INDUSTRY
AND (C) INCREASED COMPETITION IN THE AIRCRAFT SPARE PARTS REDISTRIBUTION MARKET.
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE "COMPANY"
THROUGHOUT THIS ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL INFORMATION
CONTAINED HEREIN, REFER TO THE OPERATIONS OF ASC ACQUISITION PARTNERS, L.P. (AND
ITS PREDECESSOR AJT CAPITAL PARTNERS) PRIOR TO THE COMPANY'S JUNE 1996 INITIAL
PUBLIC OFFERING, AND TO THE OPERATIONS OF THE COMPANY AND ITS SUBSIDIARIES
THEREAFTER.
ITEM 1. BUSINESS.
COMPANY OVERVIEW
The Company is a recognized world leader in the aircraft spare parts
redistribution market and provides a wide range of value-added inventory
management services to its customers. The Company sells aircraft spare parts to
major commercial passenger airlines, air cargo carriers, maintenance and repair
facilities and other redistributors throughout the world. Parts sold by the
Company include rotable and expendable airframe and engine components for
commercial airplanes, including Boeing, McDonnell Douglas, Lockheed and Airbus
aircraft and Pratt & Whitney, General Electric and Rolls Royce jet engines. The
inventory management services offered by the Company include purchasing
services, repair management, warehouse management, aircraft disassembly
services, consignment and leasing of inventories of aircraft parts and engines.
During 1996, the Company generated operating revenues of $161.9 million,
operating income of $22.3 million and net income of $15.5 million. Of such
revenues, approximately 58% were derived from sales to domestic customers and
approximately 42% were derived from sales to international customers.
Since the Company's customers consist of the airlines, maintenance and
repairs facilities that service airlines and other aircraft spare parts
redistributors, the Company's business is impacted by the economic factors which
affect the airline industry. When such factors adversely affect the airline
industry, they tend to reduce the overall demand for aircraft spare parts,
causing downward pressure on pricing and increasing the credit risk associated
with doing business with airlines. Additionally, factors such as the price of
fuel affect the aircraft spare parts market, since older aircraft (into which
aircraft spare parts are most often placed) become less viable as the price of
fuel increases. There can be no assurance that economic and other factors which
might affect the airline industry will not have an adverse impact on the
Company's results of operations.
The operations of the business are conducted by the Company and its
wholly-owned subsidiaries, Aviation Sales Operating Company (and its
wholly-owned subsidiaries, Aviation
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Sales Leasing Company and Aviation Sales Bearings Company) and Aviation Sales
Finance Company. Substantially all of the operating assets of the Company are
owned by Aviation Sales Operating Company.
INDUSTRY OVERVIEW AND TRENDS
The Company believes that the annual worldwide market for aircraft
spare parts is approximately $10.0 billion, of which approximately $1.3 billion
reflects annual sales of aircraft spare parts in the redistribution market. The
redistribution market is highly fragmented, with a limited number of large,
well-capitalized companies selling a broad range of aircraft spare parts, and
numerous smaller competitors servicing specialized niches. The Company believes
that the significant trends impacting the redistribution market will continue to
increase its overall size while reducing the number of competitors. These trends
are as follows:
GROWTH IN MARKET FOR AIRCRAFT SPARE PARTS. According to Boeing's 1996
Market Outlook (the "Boeing Report"), the worldwide fleet of commercial
airplanes is expected to double from 11,066 airplanes at the end of 1995 to
23,081 airplanes by 2015. Further, the Boeing Report projects that cargo jet
aircraft will increase from 1,219 airplanes in 1995 to 2,260 airplanes by 2015.
Seventy percent of the airplanes delivered to cargo operators are expected to be
used aircraft converted from commercial passenger service. Additionally, the
Company believes that the number of planes in service for more than 10 years is
continuing to increase, and these older planes are the primary market for
redistributors. Finally, cost considerations are forcing many airlines and
repair and maintenance facilities which had historically purchased their
inventory requirements from new parts manufacturers to utilize aircraft spare
parts sold by redistributors. The Company believes that all of these factors
will increase the demand for aircraft spare parts from the redistribution
market.
REDUCTION IN NUMBER OF APPROVED VENDORS. In order to reduce purchasing
costs and streamline purchasing decisions, airline purchasing departments have
been reducing the number of their "approved" suppliers. During the last few
years, several major airlines have reduced their supplier lists from as many as
50 to a core group of five to ten suppliers. In each such case to date, the
Company was one of the suppliers selected. The Company believes that this trend
will continue in the future and that, due to its market presence and reputation
for quality, the Company will continue to be selected as an approved supplier.
CONSOLIDATION OF REDISTRIBUTION MARKET. As a result of reductions in
the supplier base by airline purchasing departments, there has been and the
Company believes there will continue to be a consolidation in the redistribution
market. The Company further believes that only those redistributors such as the
Company, with extensive inventories, adequate capital and the ability to provide
the documentation of traceability necessary to comply with the applicable
regulatory and customer requirements, will survive the consolidation of the
redistribution market.
INCREASED OUTSOURCING OF INVENTORY MANAGEMENT FUNCTION. Airlines incur
substantial expenditures in connection with fuel, labor, and aircraft ownership.
Further, airlines have come under increasing pressure during the last decade to
reduce the costs associated with providing air transportation services. While
several of the expenditures required to operate an airline are beyond the direct
control of airline operators (e.g., the price of fuel and labor costs), the
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Company believes that obtaining replacement parts from the redistribution market
and outsourcing inventory management functions are areas in which airlines can
reduce their operating costs. Outsourcing inventory management functions allows
these functions to be handled more inexpensively and efficiently by a
redistributor like the Company that can achieve economies of scale unavailable
to individual airlines. Several smaller and start-up airlines and cargo
operators do not presently own an inventory of aircraft spare parts, but rather
have entered into agreements with redistributors for the supply of all or a
portion of their aircraft spare parts requirements. Additionally, other
airlines, including several large airlines, have begun to outsource portions of
their purchasing services, repair management and warehouse management. The
Company believes that its offering of a broad array of inventory management
services to its customers, in conjunction with the sale of aircraft spare parts,
will give the Company a significant competitive advantage in servicing its
customers.
INCREASING EMPHASIS ON TRACEABILITy. Due to concerns regarding
unapproved aircraft spare parts, regulatory authorities have increased the level
of documentation which must be maintained on aircraft spare parts. This
requirement has, in turn, been extended by end-users to the vendors of the
parts. The sophistication required to track the history of an inventory
consisting of thousands of aircraft spare parts is considerable and has required
companies to invest significantly in information systems technology. The Company
has the benefit of its investment in technology and intends to continue to
maintain its systems to allow it to effectively compete in the redistribution
market. The high cost of required technology to effectively compete in the
redistribution market has made entry into and survival in the aircraft spare
parts redistribution market increasingly difficult and expensive.
INCREASED CONSIGNMENT. Certain of the Company's customers adjust
inventory levels on a periodic basis by disposing of excess aircraft parts.
Traditionally, larger airlines have used internal purchasing agents to manage
such dispositions. The Company believes that major airlines and other owners of
aircraft spare parts, in order to concentrate on their core businesses and to
more effectively redistribute their excess parts inventories, are increasingly
entering into long-term consignment agreements with redistributors. By
consigning inventories to a redistributor such as the Company, customers are
able to distribute their aircraft spare parts to a larger number of prospective
inventory buyers, allowing the customer to maximize the value of its inventory.
Consignment also enables the Company to offer for sale significant parts
inventory at minimal capital cost to the Company. Consignment agreements are
generally entered into on a long-term basis for a large group of parts or entire
airplanes which are disassembled for sale of the individual parts. In the Boeing
Report it is noted that 5,408 aircraft will be removed from active commercial
service between 1994 and 2014. Many of these aircraft will be disassembled in
order to sell their parts.
LEASING. Over the last few years, several smaller and start-up airlines
have chosen to lease inventories of aircraft spare parts in order to preserve
capital while maintaining adequate spare parts support. The Company believes
that this trend to lease aircraft spare parts will continue in the future and
that it has a competitive advantage in providing this leasing service due to its
ability to maximize the residual value of the leased parts after termination of
the lease through sales of the parts in the ordinary course of its business.
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COMPETITIVE STRENGTHS
The Company believes that its primary competitive strengths are its
leading market position; its proprietary information systems; its comprehensive
customer service, including 24-hour a day customer aircraft parts support; and
its availability of capital.
COMPANY STRATEGY
The Company believes that it is one of a limited number of companies
with the breadth of inventory, technical and financial expertise, computer
information systems and financial strength to satisfy customer demands and be
profitable in the consolidating aircraft spare parts redistribution market. The
basic components of the Company's business strategy are the following:
INTERNAL GROWTH. The Company's strategy is to increase operating
revenues and operating income through continued customer penetration in its
existing markets and expansion into new markets. The Company intends to achieve
this by continuing to increase the size and breadth of its inventory and by
continuing to offer its customers a broad array of inventory management services
allowing its customers to reduce their costs of operations by outsourcing some
or all of their inventory management functions and to take advantage of
opportunities to maximize the value of their spare parts inventory. The Company
seeks to maintain close working relationships with its customers and to become
their vendor of choice.
CAPITALIZE ON LARGE BULK PURCHASE OPPORTUNITIES. While there is no
predictability as to when opportunities to purchase large inventories in bulk
will become available in the aircraft spare parts industry, such opportunities
have historically become available on a regular basis. "Bulk" purchase
opportunities arise when airlines, in order to reduce capital requirements, sell
large amounts of inventory in a single transaction or when inventories of
aircraft spare parts are sold in conjunction with bankruptcy proceedings. Bulk
inventory purchases allow the Company to obtain large inventories of aircraft
spare parts at a lower cost than can ordinarily be obtained by purchasing on an
individual basis, resulting in generally higher gross margins on sales of such
parts. Since 1992, the Company has evaluated a number of bulk purchase
opportunities and has successfully completed two large bulk inventory purchases.
Because of its market presence, the Company is usually solicited for a bid when
bulk inventories become available for purchase anywhere in the world. The
Company believes that its market presence, experience in evaluating bulk
acquisitions, sophisticated management information systems and capital strength
enable the Company to quickly analyze and complete large bulk purchases
opportunities to the extent that the economics of such purchases are considered
favorable. The Company further believes that future economic downturns may
provide the Company with the opportunity to acquire additional aircraft spare
parts inventories at favorable prices.
PURSUE ACQUISITIONS OF COMPLEMENTARY BUSINESSES. A key element of the
Company's strategy involves growth through acquisitions of other companies,
assets or product lines that would complement or expand the Company's existing
aircraft spare parts redistribution and inventory management services business.
The Company believes that acquisitions will enable it to leverage its fixed
costs of operations and further expand the products and services which it can
offer to its customers.
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In 1996, the Company acquired the assets and businesses (and assumed
certain liabilities) of AvEng Trading Partners, Inc. ("AvEng") and of Dixie
Bearings, Incorporated ("Dixie"). The acquisitions have enabled the Company to
further penetrate the aviation engine parts market and to enter the new aircraft
parts market through the sale of aircraft bearings for use in aircraft,
respectively.
RISKS RELATING TO GROWTH STRATEGY AND FUTURE ACQUISITIONS
A key element of the Company's strategy involves growth through the
acquisition of additional inventories of aircraft spare parts and the
acquisition of other companies, assets or product lines that would complement or
expand the Company's existing aircraft spare parts redistribution and inventory
management services business. The Company's ability to grow by acquisition is
dependent upon, and may be limited by, the availability of suitable aircraft
parts inventories, acquisition candidates and capital, and by restrictions
contained in the Company's credit agreements. In addition, acquisitions involve
risks that could adversely affect the Company's operating results, including the
assimilation of the operations and personnel of acquired companies, the
potential amortization of acquired intangible assets and the potential loss of
key employees of acquired companies. There can be no assurance that the Company
will be able to consummate acquisitions on satisfactory terms.
AIRCRAFT SPARE PARTS
Aircraft spare parts can be categorized by their ongoing ability to be
repaired and returned to service. The general categories are as follows: (a)
rotable; (b) repairable; and (c) expendable. A rotable is a part which is
removed periodically as dictated by an operator's maintenance procedures or on
an as needed basis and is typically repaired or overhauled and re-used an
indefinite number of times. An important subset of rotables is life limited
parts. A life limited rotable has a designated number of allowable flight hours
and/or cycles (one take-off and landing generally constitutes one cycle) after
which it is rendered unusable. A repairable is similar to a rotable except that
it can only be repaired a limited number of times before it must be discarded.
An expendable is generally a part which is used and not thereafter repaired for
further use.
Aircraft spare parts conditions are classified within the industry as
(a) factory new, (b) new surplus, (c) overhauled, (d) serviceable and (e) as
removed. A factory new or new surplus part is one that has never been installed
or used. Factory new parts are purchased from manufacturers or their authorized
distributors. New surplus parts are purchased from excess stock of airlines,
repair facilities or other redistributors. An overhauled part has been
completely disassembled, inspected, repaired, reassembled and tested by a
licensed repair facility. An aircraft spare part is classified serviceable if it
is repaired by a licensed repair facility rather than completely disassembled as
in an overhaul. A part may also be classified serviceable if it is removed by
the operator from an aircraft or engine while operating under an approved
maintenance program and is functional and meets any manufacturer or time and
cycle restrictions applicable to the part. A factory new, new surplus,
overhauled or serviceable part designation indicates that the part is eligible
for immediate use on an aircraft. A part in an as
5
removed condition requires functional testing, repair or overhaul by a licensed
facility prior to being returned to service in an aircraft.
OPERATIONS
The Company's core business is the buying and selling of aircraft spare
parts. The Company also provides value-added inventory management services to
its customers. These value-added services have become a more significant part of
the Company's business over the last year and the Company believes that they
provide significant opportunities for expansion of the Company's business in the
future.
INVENTORY SALES
The daily operations of the Company encompass inventory sales,
brokering and exchanging aircraft spare parts. The Company advertises its
available inventories held for sale or exchange on the Inventory Locator Service
("ILS") and the Airline Inventory Redistribution System ("AIRS") electronic
databases. Buyers of aircraft spare parts can access the ILS and AIRS databases
and determine the companies which have the desired inventory available. The
Company estimates that 70% of its daily sales activity results from an ILS or
AIRS inquiry. All major airlines and repair agencies subscribe to one or both of
these databases and accordingly, the Company maintains continual on-line direct
access with them. The Company also maintains direct Electronic Data Interchanges
("EDI") with significant customers. These programs provide for the electronic
exchange of pricing and availability from the Company to the customer in
response to an electronic request for quotation. ILS and AIRS do not, however,
list price information relating to particular parts. Knowledge of the value of
particular parts is provided by the Company's proprietary database.
The Company currently has over 485,000 line items in stock with market
availability, pricing and historical data available on more than 3.6 million
line items. The Company sells new, overhauled and serviceable replacement parts
from its inventory. Additionally, the Company will purchase parts on behalf of
its customers against specific orders. The Company also offers a customer
exchange program for rotables. In an exchange transaction, the Company
"exchanges" a new surplus, overhauled or serviceable component taken from stock
with a customer's as-removed unit which has failed. The Company receives an
exchange fee for completing the transaction, plus reimbursement from the
customer for the cost to overhaul or repair the as-removed unit. If the
as-removed part cannot be repaired, it is returned to the customer and the
exchange transaction is converted to an outright sale at a sales price agreed
upon at the time the exchange transaction was negotiated.
The Company's inventory consists principally of new, overhauled,
serviceable and repairable aircraft spare parts that are purchased from many
sources. Parts that are to be installed in an aircraft must meet certain
standards established by the Federal Aviation Administration ("FAA") and/or the
equivalent regulatory agencies in other countries. Specific regulations vary
from country to country, although regulatory requirements in other countries
generally coincide with FAA requirements. Parts must be traceable to sources
deemed acceptable by such agencies. See "Government Regulation and Traceability"
below. Parts owned or acquired by the Company may not meet applicable standards
or standards may change
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in the future, causing parts which are already contained in the Company's
inventory to be scrapped or modified. Aircraft manufacturers may also develop
new parts to be used in lieu of parts already contained in the Company's
inventory. In all such cases, to the extent that the Company has such parts in
its inventory, their value may be reduced.
As a result of the acquisition of AvEng, the Company has expanded its
inventory of engine spare parts that it can offer to its customers.
Additionally, the acquisition of Dixie, represents the Company's entrance into
the new parts distribution marketplace.
INVENTORY MANAGEMENT SERVICES
The Company is meeting the outsourcing requirements of its customers
through providing a number of inventory management services. These services
assist airlines in streamlining their inventory management operations while
utilizing their capital more efficiently and reducing their costs. Through the
offering of various services, the Company believes it can provide an inventory
management program geared to a customer's particular requirements.
CONSIGNMENT. By consigning inventories to a redistributor such as the
Company, customers are able to distribute their aircraft spare parts to a larger
number of prospective inventory buyers, allowing the customer to maximize the
value of its inventory. Consignment also enables the Company to offer for sale
significant parts inventory at minimal capital cost to the Company. The Company
presently has several consignment agreements in place with major airlines, and
its revenues from consignment arrangements have increased significantly over the
last few years.
PURCHASING SERVICES AND REPAIR MANAGEMENT. The Company provides
services whereby it purchases spare parts for several smaller and start-up
airlines. These arrangements allow the Company's customers to take advantage of
the Company's greater purchasing power. The Company also provides repair
management services to certain of its customers, whereby the Company receives a
fee for managing a customer's required spare parts repair requirements. The
Company believes that it is well positioned to offer these repair management
services, since a significant portion of the component repair cost relates to
the procurement of the parts to be utilized in the repair. Additionally, because
of its size, the Company procures significant repair services for its own
account, and maintains comprehensive databases on repair and replacement part
costs, allowing it to capitalize on favorable pricing for repair services
available only to large users of repair services. This permits the Company to
offer these services on a cost-effective basis to its customers.
LEASING. The Company (through its subsidiary, Aviation Sales Leasing
Company) provides long-term leasing of inventories of aircraft spare parts to
airline customers. An increasing number of smaller and start-up airlines have
chosen to lease aircraft spare parts in order to preserve capital while
maintaining adequate spare parts support. The Company believes that it has a
competitive advantage in aircraft spare parts leasing due to its ability to
maximize the residual value of the parts after termination of the lease through
sales of the parts in the ordinary course of its business. As of December 31,
1996, the Company had $18.0 million of inventories on long-term lease, $8.5
million of which were maintained outside the United States.
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AIRCRAFT DISASSEMBLY. The Company provides "teardown" services at its
Ardmore, Oklahoma facility, both in connection with consignment arrangements and
for the purpose of returning disassembled aircraft spare parts directly to a
customer. The Company expects that the increasing number of older aircraft will
increase the demand for aircraft spare parts and result in expanded
opportunities for aircraft disassembly.
WAREHOUSE MANAGEMENT. The Company provides warehouse management
services which allow a customer to avoid the costs associated with the operation
of its own inventory warehouse facility by maintaining inventory at the
Company's warehouse facility. The Company also will manage a customer's
inventory at the customer's own facility.
SALES AND MARKETING; CUSTOMERS
The Company utilizes inside salespersons, regional field salespersons,
independent contract representatives and overseas sales offices in its sales and
marketing efforts. The Company's outside sales force is responsible for
obtaining new customers and maintaining relationships with existing customers.
The majority of the Company's day-to-day sales are accomplished through the
Company's inside sales force.
The Company staffs its South Florida facility to provide sales and
delivery services seven days a week, 24 hours a day. This service is critical to
provide support to airline customers which, at any time, may have an aircraft
grounded in need of a particular part. The Company's South Florida location,
with easy access to Miami International Airport and Fort Lauderdale
International Airport, assists the Company in providing reliable and timely
delivery of purchased products.
The Company has over 1,000 customers, which include commercial
passenger airlines, air cargo carriers, maintenance and repair facilities and
other aircraft parts redistribution companies. The Company's top 10 and top 100
customers accounted for approximately 23% and 69% in 1995, and 26% and 69% in
1996, of operating revenues, and no single customer accounted for more than 10%
of operating revenues.
MANAGEMENT INFORMATION SYSTEMS
The Company has developed a proprietary management information system
which is an important component of its business and a significant factor in the
Company's leading position in the redistribution market. The Company's
management information systems collect and report data regarding inventory
turnover and traceability, pricing, market availability, customer demographics
and other important data used by the Company. The Company currently maintains
marketing data on and is able to estimate the value of more than 3.6 million
line items. The Company also maintains databases on recommended upgrades or
replacements including airworthiness directives. Access to such information
gives the Company the best possible opportunity to avoid purchases of aircraft
spare parts which might be deemed unusable. In addition, the data maintained by
the Company allows it to provide its customers with information with respect to
obsolescence and interchangeability of parts. The Company utilizes electronic
data scanning and document image storage technology for accurate and rapid
retrieval of inventory traceability documents that must accompany all sales.
These documents are required
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by the Company's customers in order for them to comply with applicable
regulatory guidelines. The Company believes that its continued investment in the
development of information systems is a key factor in maintaining its
competitive advantage.
The Company believes that to maintain its competitive advantages,
accommodate growth and keep pace with the rapid changes in technology, that it
will be prudent to continue to acquire state of the art management information
systems to ensure the capability to meet the Company's needs for the forseeable
future. In that regard, the Company is currently evaluating the prospect of
purchasing and implementing a new management information system.
COMPETITION
There are numerous suppliers of aircraft spare parts in the aviation
market worldwide and, through inventory listing services, customers have access
to a broad array of suppliers. These include major aircraft manufacturers,
airline and aircraft service companies and aircraft spare parts redistributors.
Competition in the redistribution market is generally based on price,
availability of product and quality, including traceability. The Company's major
competitors include AAR Corp., The AGES Group and The Memphis Group. There is
also substantial competition, both domestically and overseas, from smaller,
independent dealers who generally participate in niche markets. Several of the
Company's competitors have greater financial and other resources than the
Company. There can be no assurance that competitive pressures will not
materially and adversely affect the Company's business, financial condition or
results of operations.
GOVERNMENT REGULATION AND TRACEABILITY
The FAA regulates the manufacture, repair and operation of all aircraft
and aircraft parts operated in the United States. Its regulations are designed
to ensure that all aircraft and aviation equipment are continuously maintained
in proper condition to ensure safe operation of the aircraft. Similar rules
apply in other countries. All aircraft must be maintained under a continuous
condition monitoring program and must periodically undergo thorough inspection
and maintenance. The inspection, maintenance and repair procedures for the
various types of aircraft and equipment are prescribed by regulatory authorities
and can be performed only by certified repair facilities utilizing certified
technicians. Certification and conformance is required prior to installation of
a part on an aircraft. Presently, whenever necessary with respect to a
particular part, the Company utilizes FAA and/or Joint Aviation Authority
certified repair stations to repair and certify parts to ensure worldwide
marketability. The operations of the Company may in the future be subject to new
and more stringent regulatory requirements. In that regard, the Company closely
monitors the FAA and industry trade groups in an attempt to understand how
possible future regulations might impact the Company.
An important factor in the aircraft spare parts redistribution market
relates to the documentation or traceability that is supplied with an aircraft
spare part. The Company requires all of its suppliers to provide adequate
documentation as dictated by the appropriate regulatory authority. The Company
utilizes electronic data scanning and storage techniques to maintain complete
copies of all documentation. Documentation required includes, where applicable,
(a) a maintenance release from a certified airline or repair facility signed and
dated by a licensed
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airframe and/or powerplant mechanic who repaired the aircraft spare part and an
inspector certifying that the proper methods, materials and workmanship were
used, (b) a "teardown" report detailing the discrepancies and corrective actions
taken during the last shop repair and (c) an invoice or purchase order from an
approved source.
PRODUCT LIABILITY
The Company's business exposes it to possible claims for personal
injury or death which may result from the failure of an aircraft spare part sold
by it. While the Company maintains what it believes to be adequate liability
insurance to protect it from such claims, and while no material claims have, to
date, been made against the Company, no assurance can be given that claims will
not arise in the future or that such insurance coverage will be adequate.
Additionally, there can be no assurance that insurance coverages can be
maintained in the future at an acceptable cost. Any such liability not covered
by insurance could have a material adverse effect on the financial condition of
the Company.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 295
persons. None of the Company's employees are covered by collective bargaining
agreements. The Company believes that its relations with its employees are good.
COMPANY HISTORY AND RECENT DEVELOPMENTS
The Company's predecessors commenced operations in February 1992
through the acquisition by AJT Capital Partners, a Delaware general partnership
d/b/a Aerospace International Services ("AIS"), of the aircraft spare parts
inventory and certain other assets owned by the Estate of Eastern Airlines, Inc.
(the "Eastern Inventory"). During the period from February 1992 through December
1994, AIS's primary business was the marketing and sale of the Eastern
Inventory. In December 1994, AIS formed ASC Acquisition Partners, L.P. d/b/a
Aviation Sales Company (the "Partnership") to acquire the assets and business of
the Aviation Sales Company business unit ("ASC") from Aviall Services, Inc.
In June 1996, the Company completed an initial public offering of its
common stock (the "Offering"). Immediately prior to the Offering, all but one of
the parties holding interests in the Partnership contributed their interest in
the Partnership to the Company in exchange for shares of common stock.
Simultaneously, one of the parties holding an interest in the Partnership
contributed its interest in the Partnership to the Company in exchange for
shares of common stock and an amount equal to the proceeds to be received by the
Company from the Underwriters for 500,000 shares of common stock sold in the
Offering, plus up to 75,000 additional shares of common stock (and/or the
proceeds in respect of the sale of such shares to the extent of the
over-allotment option was exercised). Following the Offering, the operations of
the business have been conducted by the Company.
Subsequent to the Offering, the Company acquired AvEng and Dixie. These
acquisitions have enabled the Company to further penetrate the aviation engine
market and to enter the new parts market for the sale of bearings for use in
aircraft.
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ITEM 2. PROPERTIES.
The Company's executive offices are located in Miami, Florida. All of
the Company's properties are maintained on a regular basis and are adequate for
the Company's present requirements. The Company is currently evaluating the
possibility of consolidating its inventory into a single warehouse facility.
The following table identifies the principal properties utilized by the
Company. All properties are leased. See Notes 6 and 8 to Notes to Consolidated
Financial Statements.
APPROXIMATE
FACILITY DESCRIPTION LOCATION SQUARE FOOTAGE
- -------------------- -------- --------------
Corporate Headquarters
and Central Warehouse Miami, FL 166,000
Aircraft Dissembly and Storage Ardmore, OK 130,000
Warehouse Pearland, TX 100,000
Warehouse Miami, FL 40,000
Warehouse Miami, FL 10,000
Regional Purchasing Office Van Nuys, CA 6,300
Office and Warehouse College Park, GA 6,000
Warehouse Claremore, OK 1,000
ITEM 3. LEGAL PROCEEDINGS.
The Company is not presently involved in any material legal
proceedings. From time to time the Company may be named as a defendant in suits
for product defects, breach of warranty, breach of implied warranty of
merchantability or other actions relating to products which it distributes which
are manufactured by others. The Company believes that this exposure is
adequately covered by its products liability insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no vote of security holders during the fourth quarter of the
last fiscal year.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following information relates to the Company's common stock, par
value $.001 per share (the "Common Stock"), which currently is listed on the New
York Stock Exchange under the symbol AVS. At February 20, 1997, there were
approximately 24 stockholders of record of the Company's Common Stock. The
foregoing number does not include beneficial holders of the Company's common
stock. The high and low sales prices of the Common Stock for each quarter since
the effective date of the Offering, June 26, 1996, as reported by the New York
Stock Exchange, are set forth below:
1996
----
HIGH LOW
Second Quarter $ 20 3/4 $ 19
Third Quarter $ 21 1/2 $ 18
Fourth Quarter $ 20 3/4 $ 18 3/4
The Company did not declare any cash dividends for the year ended
December 31, 1996. See Note 5 to the Notes to the Consolidated Financial
Statements for information concerning restrictions in the Company's credit
agreements with financial institutions regarding the payment of dividends and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
12
ITEM 6. SELECTED FINANCIAL DATA.
The following table represents selected consolidated financial
information of the Company. The selected financial data set forth below should
be read in conjunction with the Consolidated Financial Statements, the notes
thereto, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Annual Report on Form 10-K.
INCEPTION
(FEBRUARY 28, 1992) YEAR ENDED DECEMBER 31,
TO --------------------------------------------------------------
DECEMBER 31, 1992 1993 1994 1995 1996
------------------- ------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF
INCOME DATA:
Operating revenues $32,227 $23,429 $28,191 $113,803 $161,944
Cost of sales 16,697 11,162 12,017 71,314 110,359
------------ ------------ ------------ ----------- ------------
Gross profit 15,530 12,267 16,174 42,489 51,585
------------ ------------ ------------ ----------- ------------
Operating expenses
Operating 2,970 3,121 2,900 8,989 9,320
Selling 3,590 1,845 2,043 4,820 6,977
General and administrative 5,057 4,199 5,167 8,641 10,681
Depreciation and amortization 2,063 217 415 1,466 2,323
------------ ------------ ------------ ----------- ------------
Total operating expenses 13,680 9,382 10,525 23,916 29,301
------------ ------------ ------------ ----------- ------------
Income from operations 1,850 2,885 5,649 18,573 22,284
Interest and other expenses, net 3,806 6,041 4,458 8,287 5,350
------------ ------------ ------------ ----------- ------------
Net income (loss) before taxes (1,956) (3,156) 1,191 10,286 16,934
Income tax benefit - - - - (426)
------------ ------------ ------------ ----------- ------------
Income (loss) before extra-
ordinary item (1,956) (3,156) 1,191 10,286 17,360
Extraordinary item, net of income
taxes - - - - 1,862
------------ ------------ ------------ ----------- ------------
Net income (loss) ($1,956) ($3,156) $1,191 $10,286 $15,498
============ ============ ============ =========== ============
Pro Forma Data:
Historical income (loss) before
income taxes ($1,956) ($3,156) $1,191 $10,286 $16,934
Pro forma benefit (provision) for
income taxes 763 1,231 (465) (4,012) (6,604)
------------ ------------ ------------ ----------- ------------
Pro forma income (loss) before
extraordinary item (1,193) (1,925) 726 6,274 10,330
Extraordinary item, net of income
taxes - - - - 1,862
------------ ------------ ------------ ----------- ------------
Pro forma net income (loss) ($1,193) ($1,925) $726 $6,274 $8,468
============ ============ ============ =========== ============
Pro forma net income (loss)
per share (1) ($0.24) ($0.39) $0.14 $1.16 $1.21
============ ============ ============ =========== ============
13
AS OF DECEMBER 31,
-----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(IN THOUSANDS)
BALANCE SHEET DATA:
Accounts receivable $4,705 $4,166 $16,980 $23,776 $37,087
Inventories 44,473 34,025 52,765 48,957 72,974
Working capital 33,946 24,519 51,871 46,641 68,999
Total assets 55,688 42,401 89,265 93,478 145,183
Total debt 44,472 31,992 69,152 62,043 38,984
Stockholders' equity 6,044 2,888 7,079 14,199 81,071
___________________
(1) Weighted average shares outstanding are 5,000,000 for period February 28,
1992 (inception) to December 31, 1992 and 1993; 5,063,561 for 1994;
5,400,000 for 1995 and 6,960,295 for 1996.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The Company's predecessor, Aerospace International Services ("AIS"),
commenced operations in February 1992 through the acquisition of certain
aircraft spare parts owned by Eastern Air Lines, Inc. (the "Eastern Inventory"),
for an aggregate purchase price of $55.2 million. During the period between
February 1992 and December 1994 the primary business of AIS was the marketing
and sale of the Eastern Inventory. During December 1994, AIS organized ASC
Acquisition Partners L.P. (the "Partnership"), and completed the acquisition of
certain assets and assumed certain liabilities of the Aviation Sales Company
business unit from Aviall Services, Inc. ("Aviall") for an aggregate purchase
price of $46.8 million.
On June 26, 1996, the Company completed an initial public offering of
3,250,000 shares of its Common Stock at an offering price of $19 per share. On
July 25, 1996, the Company sold an additional 487,500 shares of its Common Stock
at the same price upon the exercise of an underwriters' over-allotment option.
Immediately prior to the initial public offering, all but one of the
parties holding interests in the Partnership contributed their interest in the
Partnership to the Company in exchange for shares of Common Stock.
Simultaneously, one of the parties holding an interest in the Partnership
contributed its interest in the Partnership to the Company in exchange for
shares of Common Stock and an amount equal to the proceeds to be received by the
Company from the underwriters for 500,000 shares of Common Stock sold in the
offering, plus up to 75,000 additional shares of common stock (and/or the
proceeds in respect of the sale of such shares to the extent that the
underwriters' exercised their over-allotment option).
The Company received aggregate net proceeds in the Offering of $64.6
million. Of this amount, $10.2 million was used to repay the indebtedness
incurred to one of the shareholders of the Company in connection with the
formation of the Company and the balance was used to repay senior and
subordinated indebtedness. See "Liquidity and Capital Resources" below.
Subsequent to the completion of the Offering, on August 9, 1996, the
Company completed the acquisition of certain assets of the business of Dixie
relating primarily to the sale of new bearings for use in aircraft for the
purchase price of approximately $9 million. In addition, the Company assumed
certain liabilities in the amount of approximately $25,000. The acquisition was
accounted for using the purchase method of accounting. As a result of the Dixie
acquisition, the Company's operating revenues increased approximately $7.0
million from the date of the acquisition through December 31, 1996.
On December 10, 1996 (effective November 30, 1996), the Company
completed the acquisition of AvEng for a purchase price equal to 400,000 shares
of the Company's Common Stock. The acquisition was accounted for using the
pooling of interests method of accounting. As a result of the acquisition, the
Company's operating revenues include Aveng's total revenues for 1996 amounting
to approximately $9.3 million.
15
RESULTS OF OPERATIONS
Operating revenues consist primarily of gross sales, net of allowances
for returns and other adjustments. Cost of sales consists primarily of product
costs, freight charges, commissions to outside sales representatives and an
inventory provision for damaged and obsolete products. Product costs consist of
the acquisition cost of the products and any costs associated with repairs,
overhaul or certification.
Operating revenues and gross profit depend in large measure on the
volume and timing of bookings received during the quarter and the mix of
aircraft spare parts contained in the Company's inventory. Revenues and gross
profit can be impacted by the timing of bulk inventory purchases. In general,
bulk inventory purchases allow the Company to obtain large inventories of
aircraft spare parts at a lower cost than can ordinarily be obtained by
purchasing such parts on an individual basis.
The Company's operating results are affected by many factors, including
the timing of orders from large customers, the timing of expenditures to
purchase inventory in anticipation of future sales, the timing of bulk inventory
purchases and the mix of available aircraft spare parts contained, at any time,
in the Company's inventory. A large portion of the Company's operating expenses
are relatively fixed. Since the Company typically does not obtain long-term
purchase orders or commitments from its customers, it must anticipate the future
volume of orders based upon the historic purchasing patterns of its customers
and upon its discussion with its customers as to their future requirements.
Cancellations, reductions or delays in orders by a customer or group of
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
16
YEAR ENDED DECEMBER 31, 1995 V. YEAR ENDED DECEMBER 31, 1996
The following table sets forth certain information relating to the
Company's operations for the periods indicated:
1995 1996
--------------------------- ---------------------------
$ % $ %
------------ ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
Operating revenues $113,803 100.0% $161,944 100.0%
Cost of sales 71,314 62.7% 110,359 68.1%
------------ ------------- ------------- ------------
Gross profit 42,489 37.3% 51,585 31.9%
Operating expenses
Operating 8,989 7.9% 9,320 5.8%
Selling 4,820 4.2% 6,977 4.3%
General and administrative 8,641 7.6% 10,681 6.6%
Depreciation and amortization 1,466 1.3% 2,323 1.4%
------------ ------------- ------------- ------------
Total 23,916 21.0% 29,301 18.1%
------------ ------------- ------------- ------------
Income from operations 18,573 16.3% 22,284 13.8%
Interest and other expenses, net 8,287 7.3% 5,350 3.3%
------------ ------------- ------------- ------------
Income before income tax benefit
and extraordinary item 10,286 9.0% 16,934 10.5%
Income tax benefit - - (426) (0.2%)
------------ ------------- ------------- ------------
Income before extraordinary item 10,286 9.0% 17,360 10.7%
Extraordinary item, net of income taxes - - 1,862 1.1%
------------ ------------- ------------- ------------
Net income $10,286 9.0% $15,498 9.6%
============ ============= ============= ============
The Company's operating revenues increased by approximately $48.1
million, or 42.3%, from 1995 to 1996. Of this amount, approximately $16.3
million was derived from the operations associated with AvEng and Dixie, both of
which were acquired during 1996. The balance represents increased sales due to
expansion of the Company's customer base and increased sales to existing
customers. During this period, domestic sales increased 39.1% from $68.0 million
to $94.6 million and international sales increased 47.3%, from $45.7 million to
$67.3 million.
The Company's gross profit increased 21.4%, from $42.5 million in 1995
to $51.6 million in 1996. The increase in gross profit is primarily attributable
to the increase in sales. Gross margins decreased from 37.3% in 1995 to 31.9% in
1996 due to a change in the mix of inventories sold. Due to the acquisition of
ASC in December 1994, the Company's gross profit was benefited by the impact of
this bulk inventory acquisition throughout 1995. No such acquisition of
inventory favorably benefited gross margins during 1996.
The Company's operating expenses for 1996, in absolute dollars,
increased $5.4 million, or 22.5%, compared to 1995 (of which approximately $1.5
million of the increase is attributable to the operating expenses of AvEng and
Dixie during 1996 and the balance is attributable to the Company's existing
operations). Primarily due to economies of scale and improved operating
efficiencies, total operating expenses as a percentage of revenue decreased from
21.0% in 1995 to 18.1% in 1996.
17
Interest and other expenses decreased $2.9 million, or 35.4% from
1995 to 1996 as a result of the repayment and restructuring of the Company's
Amended Credit Facility.
As a result of the above factors, income from operations (before income
tax (benefit) expense and extraordinary item) increased $6.6 million, or 64.6%,
from 1995 to 1996.
In connection with the Offering, the Company repaid certain debt. As a
result, the Company wrote-off approximately $3,053,000 in deferred financing
costs relating to that debt. See Note 5 to Notes to Consolidated Financial
Statements.
Income taxes for 1996 were offset by one-time deferred tax benefits of
approximately $4.9 million associated with the organization of the Company. See
Notes 1 and 10 to Notes to Consolidated Financial Statements.
Based on all of the above factors, the Company's 1996 net income was
$15.5 million ($2.22 per share), an increase of $5.2 million, or 51%, compared
to 1995 net income of $10.3 million.
YEAR ENDED DECEMBER 31, 1994 V. YEAR ENDED DECEMBER 31, 1995
The following table sets forth certain information relating to the
Company's operations for the periods indicated:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1994 1995
--------------------------- ---------------------------
$ % $ %
------------ ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
Operating revenues $28,191 100.0% $113,803 100.0%
Cost of sales 12,017 42.6% 71,314 62.7%
------------ ------------- ------------- ------------
Gross profit 16,174 57.4% 42,489 37.3%
Operating expenses
Operating 2,900 10.3% 8,989 7.9%
Selling 2,043 7.2% 4,820 4.2%
General and administrative 5,167 18.3% 8,641 7.6%
Depreciation and amortization 415 1.5% 1,466 1.3%
------------ ------------- ------------- ------------
Total 10,525 37.3% 23,916 21.0%
------------ ------------- ------------- ------------
Income from operations 5,649 20.0% 18,573 16.3%
Interest and other expenses, net 4,458 15.8% 8,287 7.3%
------------ ------------- ------------- ------------
Net income $1,191 4.2% $10,286 9.0%
============ ============= ============= ============
The Company's operating revenues for 1995 increased 303.7% over 1994,
primarily due to the inclusion in 1995 of one full year of sales from ASC,
compared to one month in 1994.
The Company's gross profit increased by $26.3 million from 1994 to 1995
due to the increase in operating revenues. However, there was a decline in the
gross margin from 57.4% to 37.3% which was primarily attributable to the change
in the nature of the operation of the business, from 1994, when the Company's
primary business was the liquidation of the Eastern
18
Inventory, to 1995, when the Company's primary business was the purchasing and
sale of spare parts and the providing of inventory management services on a
day-to-day basis through the operations of ASC.
The Company's operating expenses for 1995 increased $13.4 million, or
127.2%, compared to 1994 due to the increase in operating revenues. Operating
expenses as a percentage of operating revenues were 21.0% for 1995, compared to
37.3% for 1994. The decrease in operating expenses as a percentage of operating
revenues was primarily due to the economies of scale derived from the increased
revenues as a result of the acquisition of ASC.
As a result of the above factors, income from operations for 1995
increased $12.9 million over 1994. Interest and other expenses increased 85.9%
from $4.5 million in 1994 to $8.3 million in 1995, primarily as a result of the
debt incurred to finance the acquisition of ASC. The Company's net income
increased by $9.1 million from 1994 to 1995.
THE ACQUISITION LOANS
In December 1994, to complete the acquisition of ASC and to refinance
debt incurred in connection with the acquisition of the Eastern Inventory, the
Company borrowed $65.4 million from certain financial institutions and $7.0
million from certain stockholders (collectively, the "Acquisition Loans").
The portion of the Acquisition Loans which was due to financial
institutions was composed of two term loans ("Term Loan A" and "Term Loan B")
and the revolving credit facility. Term Loan A was in the original principal
amount of $45.0 million and Term Loan B was in the original principal amount of
$15.0 million. On July 2, 1996, the Company made a lump-sum principal payment on
Term Loan A in the amount of $15.0 million and repaid in full the outstanding
balance under Term Loan B, utilizing a portion of the proceeds of the Offering.
The balance of Term Loan A was restructured as described below. See "Liquidity
and Capital Resources".
On December 1, 1994, the Company entered into an interest rate cap
agreement which provides that the prime interest rate on $30.0 million of its
term loans will not exceed 9 percent through December 2, 1997. In exchange for
this interest rate limitation, the Company agreed to make quarterly payments to
its lenders ranging from $57,000 to $186,000, depending on the level of the
prime rate. Quarterly payments totaling $228,000 were made during each of the
years ended December 31, 1995 and 1996, which are included in interest expense,
amortization of deferred financing costs and loan administration fees in the
Company's Consolidated Financial Statements.
In December 1994, the Company entered into a subordinated loan
agreement whereby the Company borrowed $7.0 million from certain parties related
to several of its stockholders (the "Subordinated Debt"). On July 2, 1996, the
Company repaid in full the Subordinated Debt with a portion of the proceeds of
the Offering.
19
LIQUIDITY AND CAPITAL RESOURCES
Since its formation, the Company has been financed primarily with its
cash flow from operations, and in 1994 and 1996 with its cash flows from
financing activities. Cash flow from operations was $12.1 million in 1994 and
$14.0 million in 1995. During 1996, the Company used cash of $8.0 million in its
operations. During 1994 and 1996, $35.6 million and $26.8 million, respectively,
of cash flow was provided by financing activities.
The Company's primary uses of cash to date have been investing
activities, and the repayment of indebtedness. Cash used in investing activities
was $47.1 million in 1994, $4.7 million in 1995 and $17.8 million in 1996. Cash
provided by financing activities in 1994 was utilized to complete the
acquisition of ASC. Cash provided by financing activities in 1996 was primarily
provided from the proceeds of the Offering and was utilized to repay related
party debt and to reduce the amounts owed under senior and subordinated
indebtedness, as discussed in further detail below. Cash used in financing
activities was $10.5 million in 1995, relating primarily to the repayment of the
Company's obligations under the senior debt and senior revolving facility.
Through July 1, 1996, the Company had a revolving credit facility
(collectively with the term loans, the "Credit Facility") with certain financial
institutions which provided working capital of up to $20.0 million with interest
at prime plus 1.5% subject to an availability calculation based on the eligible
borrowing base. The eligible borrowing base included certain receivables and
inventories of the Company. The revolving credit facility was to terminate on
November 30, 1999.
The Credit Facility contained certain financial covenants regarding the
financial performance of the Company and certain other covenants including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provided for the suspension of the Credit Facility and
repayment of all debt in the event of a material adverse change in the business
or a change in control. In addition, the Credit Facility required mandatory
repayments from excess cash flow. Substantially all of the Company's assets were
pledged as collateral for amounts borrowed.
On June 26, 1996, the Company's Registration Statement on Form S-1 was
declared effective. On July 2, 1996, the Company closed its initial public
offering of 3,250,000 shares of its Common Stock at $19 per share. In addition,
the Company granted the underwriters a 30-day option to purchase up to 487,500
additional shares to cover over-allotments. On July 25, 1996, underwriters
exercised the over-allotment option and the Company sold an additional 487,500
shares of its Common Stock. The net proceeds from the Offering, after all
expenses, were $64,576,607. Of such proceeds, $10,160,250 were used to pay
indebtedness due to J/T Aviation Partners in connection with the formation of
the Company. The remaining proceeds were used to repay senior and subordinated
indebtedness.
On July 2, 1996, the Company completed the repayment of indebtedness
and restructuring of its credit facility per the terms of an Amended and
Restated Credit Facility (the "Amended Credit Facility"), dated June 27, 1996.
The Amended Credit Facility consists of (a) a term loan facility (the "Amended
Term Loan") in an original principal amount of $20 million,
20
and (b) a $50.0 million revolving loan, letter of credit and acquisition loan
facility, subject to an availability calculation based on the eligible borrowing
base (the "Amended Revolving Credit Facility"). The eligible borrowing base
includes certain receivables and inventories of the Company. At December 31,
1996, the Company had availability under the Amended Credit Facility of
approximately $26.9 million. The letter of credit portion of the Amended
Revolving Credit Facility is subject to a $10.0 million sublimit and the
acquisition loan portion of the Revolving Credit Facility is subject to a $30.0
million sublimit with the imposition of certain borrowing criteria based on the
satisfaction of certain debt ratios. The unused portion of the acquisition loan
portion of the Amended Revolving Credit Facility expires on the second
anniversary of the closing date of the Amended Credit Facility. The interest
rate on the Amended Credit Facility is, at the option of the Company, (a) prime
plus a margin, or (b) LIBOR plus a margin, where the margin determination is
made based upon the Company's financial performance over the prior 12 month
period (ranging from 0.25% to 1.25% in the event prime is utilized, or 1.75% to
2.75% in the event LIBOR is utilized). At December 31, 1996, the margin was .25%
for prime rate loans and 1.75% for LIBOR rate loans.
The Amended Term Loan amortizes in equal quarterly installments and
terminates on December 1, 1999. Interim payments under the Amended Revolving
Credit Facility will be made from daily collections of the Company's accounts
receivable. The Amended Revolving Credit Facility will terminate on December 1,
1999. The Amended Credit Facility contains similar financial and other covenants
of the Company and similar mandatory prepayment events as set forth in the
original Credit Facility. However, in contrast to the Credit Facility, the
Amended Credit Facility does not require the application of excess cash flows.
Events of default are similar to the Credit Facility; provided however that an
event of default based on a change of control will pertain to a change in more
than 50% of the members of the Board of Directors of either the Company or its
Aviation Sales Operating Company subsidiary in place on the closing date of the
Amended Credit Facility. At December 31, 1996, the Company was in compliance
with all of its requirements under the Amended Credit Facility. The Amended
Credit Facility also contains mandatory prepayment events and is secured by a
lien on substantially all of the assets of the Company. At December 31, 1996,
the outstanding balances under the Amended Term Loan and Amended Revolving
Credit Facility are $22.3 million and $16.7 million, respectively.
During 1996, the Company incurred capital expenditures of approximately
$1.1 million, the majority of which was used to make enhancements to the
Company's management information systems, telecommunication systems and other
capital equipment and improvements. Additionally, immediately prior to the
Offering, the Partnership distributed to its partners 40% of its 1996 net income
through the closing of the initial public offering and additional amounts due to
the partners relating to the Partnership's 1995 net income. These distributions
were approximately $3.0 million and were paid from borrowings under the
revolving portion of the credit facility.
The repayment of indebtedness with the net proceeds of the offering
improved the Company's liquidity by reducing both the Company's interest expense
and the principal amount of the indebtedness required to be repaid in the
future. The Company believes that cash flow from operations and borrowing
availability under the Amended Credit Facility will be sufficient to satisfy the
Company's anticipated working capital requirements over the next two years.
21
As part of its growth strategy, the Company intends to pursue
acquisitions of bulk inventories of aircraft spare parts and complementary
businesses. Additionally, the Company is currently evaluating the prospect of
purchasing and implementing a new management information system and exploring
the possibility of consolidating its various facilities into a single warehouse
facility. Financing for such activities would be provided from operations and
from the proceeds of the Amended Credit facility. The Company may also issue
additional debt and/or equity securities in connection with one or more of these
activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial information required by Item 8 is included elsewhere in
this Report (see Part IV, Item 14).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held in May 1997, under the caption, "Election of Directors", to
be filed by the Registrant.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held in May 1997, under the caption, "Executive Compensation",
to be filed by the Registrant.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held in May 1997, under the caption, "Security Ownership of
Certain Beneficial Owners and Management ", to be filed by the Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is hereby incorporated by reference
from the Registrant's definitive Proxy Statement for the Annual Meeting
scheduled to be held in May 1997, under the caption "Certain Transactions", to
be filed by the Registrant.
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The consolidated balance sheets as of December 31, 1995 and December
31, 1996 and the related consolidated statements of income, partners'
capital and stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1996 are filed as part of this
report:
(1) FINANCIAL STATEMENTS PAGE
-------------------- -----
Report of Independent Certified Public Accountants........................................................F- 2
Consolidated Balance Sheets at December 31, 1995 and 1996.................................................F- 3
Consolidated Statements of Income for the three years ended December 31, 1996.............................F- 5
Consolidated Statements of Partners' Capital and Stockholders' Equity for the three years ended
December 31, 1996.........................................................................................F- 6
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996.........................................................................................F- 7
Notes to Consolidated Financial Statements................................................................F- 9
(2) Consolidated Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 1996...............F - 24
(3) Exhibits
3.1 Certificate of Incorporation of the Company and amendment thereto(1)
3.2 Second Amendment to Certificate of Incorporation(2)
3.3 Bylaws of the Company(1)
4. Form of Registration Rights Agreement(1)
10.1 Credit Agreement, dated as of December 2,1994 by and between the
Partnership and Citicorp Securities, Inc. as agent(1)
10.2 Lease, dated as of December 2, 1994, by and between Aviation Properties
and the Partnership(1)
10.3 Lease, dated as of December 2, 1994, by and between Aviation Properties
of Texas(1)
+10.4 Amended Employment Agreement, effective as of December 2, 1994, by and
between Dale S. Baker and the Company(2)
24
+10.5. Amended Employment Agreement, effective as of December 2, 1994, by and
between Harold Woody and the Company(2)
+10.6 Amended Employment Agreement, effective as of December 2, 1994, by and
between Joseph E. Civiletto and the Company(2)
+10.7 Amended Employment Agreement, effective as of June 1, 1996, by and
between James D. Innella and the Company(2)
+10.8 Amended Employment Agreement, effective as of June 1, 1996, by and
between Michael A. Saso and the Company(2)
+10.9 1996 Director Stock Option Plan(2)
+10.10 1996 Stock Option Plan(2)
+*10.11 1997 EBITDA Incentive Compensation Plan
10.12 Form of Amended and Restated Credit Agreement, dated June 26, 1996, by
Aviation Sales Operating Company and Citicorp USA, Inc. as agent(3)
10.13 Asset Purchase Agreement dated as of August 9, 1996 by and between
Dixie Bearings Incorporated and Aviation Sales Bearing Company(4)
*10.14 Asset Purchase Agreement dated as of November 30, 1996 by and between
AvEng Trading Partners, Inc. and the Company
*21.1 List of Subsidiaries of Registrant
*23.1 Consent of Arthur Andersen LLP
*27.1 Financial Data Schedule
____________________________
* Filed herewith
+ Compensation plan or agreement
(1) Incorporated by reference to Company's Registration Statement on Form
S-1 dated April 15, 1996 (File No. 333-3650)
(2) Incorporated by reference to Amendment No. 1 to Company's Registration
Statement on Form S-1 dated June 6, 1996 (File No. 333-3650)
(3) Incorporated by reference to Amendment No. 2 to Company's Registration
Statement dated June 26, 1996 (File No. 333-3650)
(4) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996
(B) Reports on Form 8-K. None.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AVIATION SALES COMPANY
(Registrant)
By /s/ DALE S. BAKER March 4, 1997
--------------------------------------
Dale S. Baker
President, Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
By /s/ DALE S. BAKER March 4, 1997
--------------------------------------
Dale S. Baker
President, Chief Executive Officer and
Chairman of the Board (Principal
Executive Officer)
By /s/ JOSEPH E. CIVILETTO March 4, 1997
--------------------------------------
Joseph E. Civiletto
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
By /s/ HAROLD M. WOODY March 4, 1997
--------------------------------------
Harold M. Woody
Executive Vice President - Sales and
Marketing and Director
By /s/ JAMES D. INNELLA March 4, 1997
--------------------------------------
James D. Innella
Vice President and Chief Operating Officer
By /s/ ROBERT ALPERT March 4, 1997
--------------------------------------
Robert Alpert
Director
By /s/ SAM HUMPHREYS March 4, 1997
--------------------------------------
Sam Humphreys
Director
By /s/ TIM WATKINS March 4, 1997
--------------------------------------
Tim Watkins
Director
By /s/ KAZUTAMI OKUI March 4, 1997
--------------------------------------
Kazutami Okui
Director
26
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3
Consolidated Statements of Income for the three years ended
December 31, 1996 F-5
Consolidated Statements of Partners' Capital and Stockholders' Equity
for the three years ended December 31, 1996 F-6
Consolidated Statements of Cash Flows for the three years ended
December 31, 1996 F-7
Notes to Consolidated Financial Statements F-9
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts for the three
years ended December 31, 1996 F-24
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Aviation Sales Company:
We have audited the accompanying consolidated balance sheets of Aviation Sales
Company (a Delaware corporation) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, partners' capital and
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aviation Sales Company and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Miami, Florida,
February 5, 1997.
F-2
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
1995 1996
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 253,307 $ 1,262,149
Accounts receivable, net of allowance for doubtful accounts
of $1,951,395 and $3,779,580 in 1995 and 1996, respectively 23,775,795 37,086,899
Inventories (Note 1) 48,956,682 72,974,397
Prepaid expenses 56,963 4,067,332
Deferred income taxes (Note 10) - 1,972,410
---------------- --------------
Total current assets 73,042,747 117,363,187
---------------- --------------
SPARE PARTS ON LEASE, net of accumulated amortization of
$1,024,904 and $2,601,069 in 1995 and 1996, respectively (Note 4) 11,697,151 17,950,783
---------------- --------------
FIXED ASSETS:
Property and equipment 3,121,702 4,333,070
Less - Accumulated depreciation (1,259,658) (2,027,197)
---------------- --------------
Total fixed assets 1,862,044 2,305,873
---------------- --------------
AMOUNTS DUE FROM RELATED PARTIES 3,031,198 2,914,615
---------------- --------------
OTHER ASSETS:
Deposits and other 872,464 369,191
Deferred income taxes (Note 10) - 3,406,331
Deferred financing costs, net (Note 1) 2,972,454 872,568
---------------- --------------
Total other assets 3,844,918 4,648,090
---------------- --------------
Total assets $ 93,478,058 $145,182,548
================ ==============
F-3
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
DECEMBER 31,
---------------------------------------
1995 1996
---- ----
LIABILITIES, PARTNERS' CAPITAL AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $10,453,278 $15,736,288
Accrued expenses 5,905,662 8,501,372
Notes payable, current maturities -
Senior (Note 5) 10,000,000 7,428,571
Revolver (Note 5) 42,808 16,697,985
---------------- ----------------
Total current liabilities 26,401,748 48,364,216
---------------- ----------------
LONG-TERM LIABILITIES:
Deferred income (Note 4) 877,315 890,065
Notes payable -
Senior (Note 5) 45,000,000 14,857,143
Other (Note 5) 7,000,000 -
---------------- ----------------
Total long-term liabilities 52,877,315 15,747,208
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 8)
PARTNERS' CAPITAL 14,057,567 -
---------------- ----------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding - -
Common stock, $.001 par value, 30,000,000 shares
authorized, 400,000 and 8,562,500 shares outstanding
in 1995 and 1996, respectively 400 8,563
Additional paid-in capital - 71,305,305
Retained earnings 141,028 9,757,256
---------------- ----------------
Total stockholders' equity 141,428 81,071,124
---------------- ----------------
Total liabilities, partners' capital and stockholders' equity $93,478,058 $145,182,548
================ ================
The accompanying notes are an integral part of these consolidated balance sheets.
F-4
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996
---- ---- ----
OPERATING REVENUES:
Sales of aircraft parts, net $27,799,227 $108,434,709 $151,407,093
Rentals from leases and other 391,752 5,368,174 10,536,776
---------------- ----------------- -----------------
28,190,979 113,802,883 161,943,869
COST OF SALES 12,016,623 71,314,263 110,358,502
---------------- ----------------- -----------------
16,174,356 42,488,620 51,585,367
---------------- ----------------- -----------------
OPERATING EXPENSES:
Operating 2,900,168 8,988,894 9,319,981
Selling 2,043,147 4,820,081 6,977,518
General and administrative 5,167,245 8,640,423 10,681,242
Depreciation and amortization 414,618 1,465,915 2,322,791
---------------- ----------------- -----------------
10,525,178 23,915,313 29,301,532
---------------- ----------------- -----------------
INCOME FROM OPERATIONS 5,649,178 18,573,307 22,283,835
OTHER EXPENSES:
Interest expense and amortization of deferred
financing costs 4,458,664 8,287,584 5,350,020
---------------- ----------------- -----------------
INCOME BEFORE BENEFIT FOR INCOME
TAXES AND EXTRAORDINARY ITEM 1,190,514 10,285,723 16,933,815
INCOME TAX BENEFIT - - (426,033)
---------------- ----------------- -----------------
INCOME BEFORE EXTRAORDINARY ITEM 1,190,514 10,285,723 17,359,848
EXTRAORDINARY ITEM, NET OF INCOME
TAXES (Note 5) - - 1,862,140
---------------- ----------------- -----------------
NET INCOME $1,190,514 $10,285,723 $15,497,708
================ ================= =================
EARNINGS PER SHARE:
Income before extraordinary item $2.49
Extraordinary item, net of income taxes 0.27
-----------------
Net income $2.22
=================
PRO FORMA EARNINGS PER SHARE (Note 10):
Pro forma income before extraordinary item $0.14 $1.16 $1.48
Extraordinary item, net of income taxes - - 0.27
---------------- ----------------- -----------------
Pro forma net income $0.14 $1.16 $1.21
================ ================= =================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 5,063,561 5,400,000 6,960,295
================ ================= =================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
AND STOCKHOLDERS' EQUITY
TOTAL COMMON STOCK ADDITIONAL
PARTNERS' ----------------------- PAID-IN
CAPITAL SHARES AMOUNT CAPITAL
-------------- ----------- ---------- -------------
BALANCE AS OF DECEMBER 31, 1993 $2,888,184 - $ - $ -
Net income 1,190,514 - - -
Capital contributions 3,000,000 - - -
-------------- ----------- ---------- -------------
BALANCE AS OF DECEMBER 31, 1994 7,078,698 - - -
Net income 10,285,723 - - -
Distribution to partners (3,306,854) - - -
Acquisition of AvEng Trading Partners,
Inc. (Note 2) - 400,000 400 -
-------------- ----------- ---------- -------------
BALANCE AS OF DECEMBER 31, 1995 14,057,567 400,000 400 -
Distributions to partners prior to initial
public offering (3,041,936) - - -
Net income 5,881,480 - - -
Exchange of partnership interests for
common stock (Note 1) (16,897,111) 4,425,000 4,425 6,732,436
Net proceeds from initial public offering - 3,737,500 3,738 64,572,869
-------------- ----------- ---------- -------------
BALANCE AS OF DECEMBER 31, 1996 $ - 8,562,500 $8,563 $71,305,305
============== =========== ========== =============
TOTAL
TOTAL PARTNERS' CAPITAL
RETAINED STOCKHOLDERS' AND STOCKHOLDERS'
EARNINGS EQUITY EQUITY
-------------- -------------- ---------------
BALANCE AS OF DECEMBER 31, 1993 $ - $ - $2,888,184
Net income - - 1,190,514
Capital contributions - - 3,000,000
-------------- -------------- ---------------
BALANCE AS OF DECEMBER 31, 1994 - - 7,078,698
Net income - - 10,285,723
Distribution to partners - - (3,306,854)
Acquisition of AvEng Trading Partners,
Inc. (Note 2) 141,028 141,428 141,428
-------------- -------------- ---------------
BALANCE AS OF DECEMBER 31, 1995 141,028 141,428 14,198,995
Distributions to partners prior to initial
public offering - - (3,041,936)
Net income 9,616,228 9,616,228 15,497,708
Exchange of partnership interests for
common stock (Note 1) - 6,736,861 (10,160,250)
Net proceeds from initial public offering - 64,576,607 64,576,607
-------------- -------------- ---------------
BALANCE AS OF DECEMBER 31, 1996 $9,757,256 $81,071,124 $81,071,124
============== ============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
F-6
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------
1994 1995 1996
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $1,190,514 $10,285,723 $15,497,708
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 1,197,540 2,132,522 2,938,974
Provision for doubtful accounts 110,000 360,000 1,954,000
Deferred income taxes - - (5,378,741)
Extraordinary item, net of income taxes - - 1,862,140
(Increase) decrease in accounts receivable, net 1,261,264 (7,204,803) (12,366,644)
(Increase) decrease in inventories 3,616,958 4,330,960 (18,017,715)
(Increase) decrease in prepaid expenses 109,286 (95) (4,010,369)
(Increase) decrease in deposits and other 185,505 (662,426) 503,273
Increase (decrease) in accounts payable 3,361,242 4,270,902 5,238,370
Increase (decrease) in accrued expenses 1,071,100 365,864 3,786,258
Increase (decrease) in deferred income - 103,575 12,750
---------------- ----------------- ---------------
Net cash provided by (used in) operating activities 12,103,409 13,982,222 (7,979,996)
---------------- ----------------- ---------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of certain assets of the Aviation Sales
Company business unit (44,076,495) (1,060,538) -
Purchase of certain assets of Dixie Bearings, Incorporated - - (8,953,820)
Purchases of equipment, net (534,565) (897,544) (1,111,368)
Purchases of spare parts on lease - (2,722,054) (7,829,797)
Payments to/from related parties (2,465,519) (60,059) 116,583
---------------- ----------------- ---------------
Net cash used in investing activities (47,076,579) (4,740,195) (17,778,402)
---------------- ----------------- ---------------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of senior debt 60,000,000 - -
Repayment of senior debt - (5,000,000) (5,000,000)
Net issuance (repayment) of senior revolving facility 1,818,763 (2,109,400) 15,763,592
Repayment of senior notes payable (23,180,282) - -
Issuance of subordinated debt - AIS partnership 4,200,000 - -
Repayment of senior and junior subordinated debt - AIS
partnership (11,400,000) - -
Advances from partners - AIS partnership 376,364 - -
Repayments to partners - AIS partnership (376,364) - -
Issuance of subordinated debt - ASC partnership 7,000,000 - -
Contributions from (distributions to) partners - ASC
partnership 3,000,000 (3,306,854) (3,041,936)
Payment of initial public offering proceeds to
original credit facility and subordinated debt - - (52,806,400)
Payment to J/T Aviation Partners - - (10,160,250)
Net borrowings under new credit facility - - 16,697,985
Payment under new credit facility - - (2,857,143)
Issuance of senior debt under acquisition facility - - 6,000,000
Payments of senior debt under acquisition facility - - (857,143)
Proceeds from initial public offering - - 64,576,607
Payment of deferred financing costs (5,866,328) (54,745) (1,548,072)
---------------- ----------------- ---------------
Net cash provided by (used in) financing activities 35,572,153 (10,470,999) 26,767,240
---------------- ----------------- ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 598,983 (1,228,972) 1,008,842
---------------- ----------------- ---------------
CASH AND CASH EQUIVALENTS, beginning of period 883,296 1,482,279 253,307
---------------- ----------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $1,482,279 $253,307 $ 1,262,149
================ ================= ===============
F-7
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 4,231,428 $ 7,717,005 $ 4,884,720
============== ============== ==============
Income taxes paid $ - $ - $ 3,002,431
============== ============== ==============
Purchase of net assets from Aviation Sales Company
business unit:
Accounts receivable $ 14,184,533 $ - $ -
Inventories 22,357,509 (522,439) -
Spare parts on lease 10,000,000 - -
Fixed assets 750,000 - -
Accounts payable (2,441,807) 1,582,977 -
Deferred income (773,740) - -
-------------- -------------- --------------
Cash paid $ 44,076,495 $1,060,538 $ -
============== ============== ==============
Transfer of building to AVTEX:
Net book value of building $1,772,567 $ - $ -
Mortgage by AVTEX (1,266,947) - -
-------------- -------------- --------------
Due from related party $505,620 $ - $ -
============== ============== ==============
Purchase of certain assets of the business of Dixie
Bearings, Incorporated:
Accounts receivable $ - $ - $ 2,898,460
Inventories - - 6,000,000
Fixed assets - - 100,000
Accounts payable - - (44,640)
-------------- -------------- --------------
Cash paid $ - $ - $ 8,953,820
============== ============== ==============
Excluded from the consolidated statement of cash flows was the effect of certain
noncash activities. The Company issued 400,000 shares of common stock in
conjunction with the acquisition of AvEng Trading Partners, Inc. See Note 2.
The accompanying notes are an integral part of these consolidated financial statements.
F-8
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Aviation Sales Company ("ASC" or the "Company") is a Delaware
corporation. The operations of the Company were initially conducted by AJT
Capital Partners d/b/a Aerospace International Services ("AIS"). AIS was formed
in February 1992 to acquire certain aircraft spare parts owned by Eastern Air
Lines, Inc. (the "EAL Inventory") and certain outstanding accounts receivable.
On December 2, 1994, (effective November 30, 1994) AIS organized ASC Acquisition
Partners, L.P. (the "Partnership") to acquire the Aviation Sales Company
business unit from Aviall Services, Inc. ("Aviall") and to operate the business
of AIS and the Partnership on a going forward basis. Simultaneously with the
acquisition, AIS contributed all of its assets to the Partnership. For
accounting purposes, the Partnership and AIS were considered related parties as
the ultimate ownership interests of the Partnership were held by parties who
owned substantially the same ownership percentage in AIS. As a result, the
combination was accounted for in a manner similar to a pooling of interests.
On June 26, 1996, all but one of the parties holding interests in the
Partnership contributed their interests in the Partnership to the Company in
exchange for shares of common stock. Simultaneously, one of the parties holding
an interest in the Partnership, J/T Aviation Partners ("J/T"), contributed its
interest in the Partnership to the Company in exchange for shares of common
stock and an amount equal to the proceeds to be received by the Company for
575,000 shares of common stock sold in the offering, as more completely
described below.
On June 26, 1996, the Company's Registration Statement on Form S-1 was
declared effective. On July 2, 1996, the Company closed its public offering of
3,250,000 shares of its common stock at $19 per share. In addition, the Company
granted the underwriters of its public offering a 30-day option to purchase up
to 487,500 additional shares of its common stock to cover the over-allotment
option. On July 25, 1996, the underwriters exercised the over-allotment option
and the Company sold an additional 487,500 shares of its common stock.
The net proceeds from the offering after all expenses were $64,576,607.
Of such proceeds, $10,160,250 was used to pay indebtedness due to J/T in
connection with the formation of the Company. The remaining proceeds were used
to repay senior and subordinated indebtedness - see Note 5.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-9
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of ASC and its wholly-owned subsidiaries Aviation Sales Operating Company, Inc.
(and its wholly-owned subsidiaries, Aviation Sales Leasing Company and Aviation
Sales Bearings Company) and Aviation Sales Finance Company. All significant
intercompany transactions and balances have been eliminated.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding during the
period. The dilutive effect of all outstanding stock options is considered
common stock equivalents and is calculated using the treasury stock method.
Primary and fully diluted net income per share are the same for 1996.
CASH AND CASH EQUIVALENTS
The Company considers all deposits with an original maturity of three
months or less to be cash equivalents. Cash and cash equivalents at December 31,
1995 and 1996, include cash held by the Company in demand deposit accounts.
REVENUE RECOGNITION
Sales of aircraft parts are recognized as revenues when the product is
shipped and title has passed to the customer. The Company records reserves for
estimated sales returns in the period sales are made.
INVENTORIES
Inventories, which consist primarily of aviation parts, are stated at
the lower of cost or market. 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 costs as incurred and are
expensed as the parts associated with the re-certification are sold.
SPARE PARTS ON LEASE
The Company, primarily through Aviation Sales Leasing Company, leases
spare part inventories to the airline industry on a worldwide basis through
operating leases. Operating lease income is recognized on a straight-line basis
over the term of the underlying leases. The cost of spare parts on lease are
amortized, principally on a straight-line basis, to the estimated remaining net
realizable value over the lease term or the economic life of the spare parts
inventory.
F-10
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
For financial reporting purposes, the Company provides for depreciation
of property and equipment using the straight-line method at annual rates
sufficient to amortize the cost of the assets during their estimated useful
lives. Estimated useful lives range from 3 to 7 years for the Company's property
and equipment.
Maintenance and repair expenditures are charged to expense as incurred,
and expenditures for betterments and major renewals are capitalized. The
carrying amounts of assets which are sold or retired and the related accumulated
depreciation are removed from the accounts in the year of disposal, and any
resulting gain or loss is reflected in income. Such gains or losses were not
significant during the years ended December 31, 1994, 1995 and 1996.
Depreciation expense amounted to $345,174, $510,455 and $767,539 for
the years ended December 31, 1994, 1995 and 1996, respectively.
DEFERRED FINANCING COSTS
The costs associated with obtaining financing for the Company's
acquisitions are included in the accompanying consolidated balance sheets as
deferred financing costs and are being amortized over the initial terms of the
loans to which such costs relate. Amortization expense for the years ended
December 31, 1994, 1995 and 1996 was $781,103, $677,597 and $595,268,
respectively.
DEFERRED INCOME
Advance payments and deposits received on operating leases are
initially deferred and subsequently recognized as the Company's obligations
under the lease agreement are fulfilled.
STOCK COMPENSATION PLANS
At December 31, 1996, the Company has two stock-based compensation
plans, which are fully described in Note 11. The Company accounts for the fair
value of its grants under those plans in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The
Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") on January 1, 1996. The
disclosure provisions of the statement have been omitted as the impact of all
options issued is not significant.
F-11
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
Prior to June 26, 1996, the business of the Company was conducted by
the Partnership and therefore was not subject to income taxes. The Company, as a
result of the transfer of the net assets of the Partnership to the Company and
the initial public offering of its common stock, became subject to federal and
state income taxes. At that time, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Deferred income taxes, which arose primarily as a result of temporary
differences between the Partnership's book and tax basis of certain assets and
liabilities, were recorded, resulting in an adjustment to the Company's reported
earnings in the period of adoption. A deferred income tax benefit of $914,459
was credited to operations at the time of adoption. The transfer of J/T's
interest in the Partnership to the Company described in Note 1 resulted in a
step-up in basis in the Company's net assets for tax purposes. As a result,
during 1996, a deferred tax benefit of $3,962,498 was recorded. See Note 10.
Under SFAS 109, deferred tax assets or liabilities are computed based
upon the difference between the financial statement and income tax basis of
assets and liabilities using the enacted marginal tax rate applicable when the
related asset or liability is expected to be realized or settled. Deferred
income tax expenses or benefits are based on the changes in the asset or
liability from period to period. If available evidence suggests that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized, a valuation allowance is required to reduce the deferred tax assets to
the amount that is more likely than not to be realized. Future changes in such
valuation allowance would be included in the provision for deferred income taxes
in the period of change.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable
and accounts payable approximate fair value due to the short maturity of the
instruments and the provision for what management believes to be adequate
reserves for potential losses. The fair value of long-term debt is estimated
using quoted market prices, whenever available, or an appropriate valuation
method and approximates the carrying amount of long-term debt in the
accompanying consolidated balance sheets.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of" ("SFAS 121") in 1996. SFAS 121 establishes accounting
standards for recording the impairment of long-lived assets, certain
identifiable intangibles and goodwill. The adoption of SFAS 121 did not have a
material impact on the Company's financial position or results of its
operations.
F-12
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
NOTE 2 - ACQUISITIONS
On December 10, 1996, the Company acquired AvEng Trading Partners, Inc.
("AvEng") for consideration of 400,000 shares of the Company's common stock.
Although the acquisition was accounted for using the pooling of interests method
of accounting, the accompanying consolidated statements of income, partners'
capital and stockholders' equity and cash flows prior to December 31, 1995 have
not been restated to give retroactive effect for the acquisition due to the
immateriality of the restated amounts.
On August 9, 1996, the Company completed the acquisition of certain
assets of the business of Dixie Bearings, Incorporated ("Dixie") relating
primarily to the sale of new bearings for use in aircraft for a purchase price
of approximately $9 million. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the operations of Dixie since the
acquisition have been included in the accompanying consolidated financial
statements from the date of acquisition. The historical operations of Dixie,
when compared to the historical operations of the Company, are not significant.
In connection with the acquisition, the Company borrowed $6,000,000 of senior
notes payable to financial institutions and paid the balance in cash. See Note
5.
NOTE 3 - ACCOUNTS RECEIVABLE
The Company distributes products in the United States and abroad to
commercial airlines, air cargo carriers, distributors, maintenance facilities,
corporate aircraft operators and other aerospace companies. The Company's credit
risks consist of accounts receivable from customers in the aviation industry.
The Company performs periodic credit evaluations of its customers' financial
conditions and provides allowances for doubtful accounts as required. No single
customer represents greater than 10 percent of total revenues or accounts
receivable for the years ended December 31, 1994, 1995 or 1996.
F-13
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - SPARE PARTS ON LEASE
In connection with the Aviation Sales Company business unit
acquisition, the Company acquired certain aircraft spare parts and assumed
leases to third parties pursuant to noncancelable operating leases ranging from
three to five years. The leases generally provide for residual payments to the
Company should the parts be damaged or unlocatable at the expiration of the
lease term. The cost and accumulated amortization of the spare parts under the
leases were as follows:
DECEMBER 31,
--------------------------
1995 1996
---- ----
Aircraft spare parts at cost.......... $12,722,055 $20,551,852
Accumulated amortization.............. (1,024,904) (2,601,069)
------------ ------------
$11,697,151 $17,950,783
============ ============
At December 31, 1995 and 1996, $9,316,198 and $8,464,366, respectively,
of spare parts on lease were maintained in the Far East.
Deposits of $877,315 and $890,065, respectively, received from the
leases are recorded as deferred income in the accompanying December 31, 1995 and
1996 consolidated balance sheets and will be applied in connection with final
settlement of these leases.
Amortization expense amounted to $69,444, $955,460 and $1,576,165 for
the years ended December 31, 1994, 1995 and 1996, respectively.
Future minimum lease receivables under the leases are as follows:
YEARS ENDING DECEMBER 31,
- -------------------------
1997...................................... $ 4,470,616
1998...................................... 2,313,063
1999...................................... 2,064,300
2000...................................... 1,897,200
2001...................................... 510,000
Thereafter................................... 382,500
-----------
$11,637,679
===========
F-14
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NOTES PAYABLE
At December 31, 1995 and 1996, notes payable consisted of the
following:
DECEMBER 31,
--------------------------------------------------------------
1995 1996
------------------------------ ------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT RATE AMOUNT RATE
-------------- -------------- -------------- -------------
Senior bank loans:
Term Loan - A $40,000,000 10.33% $ - -
Term Loan - B 15,000,000 10.83% - -
Revolving credit facility 42,808 -
Amended Term Loan - - 17,142,857 7.77%
Amended Revolving Credit Facility:
Revolving loan - - 16,697,985 8.50%
Acquisition loan facility - - 5,142,857 8.07%
Subordinated debt due to partners
of ASC 7,000,000 13.83% - -
Less - Current maturities (10,042,808) (24,126,556)
-------------- --------------
Net long-term notes payable $52,000,000 $14,857,143
============== ==============
Term Loan A, in the original principal amount of $45,000,000, was
repayable in 18 consecutive equal quarterly installments of $2,500,000
commencing on August 31, 1995, with the final installment due November 30, 1999.
Term Loan A bore interest at prime plus 1.5 percent. Term Loan B, in the
original principal amount of $15,000,000, bore interest at prime plus 2 percent.
Term Loan B was repayable in two equal installments of $7,500,000 each, due on
May 31, 2000 and November 30, 2000. The revolving credit facility (the
"Revolving Credit Facility"), provided working capital of up to $20,000,000 to
the Company with interest at prime plus 1.5 percent, subject to an availability
calculation of the Company's eligible borrowing base. In addition, the Company
was required to make mandatory repayments from excess cash flows, as defined.
The eligible borrowing base included certain receivables and inventories of the
Company. The Revolving Credit Facility was to terminate on November 30, 1999. At
December 31, 1995, the Company had availability under the Revolving Credit
Facility of approximately $19.0 million. The Revolving Credit Facility contained
certain financial covenants regarding the financial performance of the Company,
certain reporting requirements, a limitation on the amount of annual capital
expenditures and limitations on the incurrence of additional debt and provided
for the suspension of the Revolving Credit Facility and repayment of all debt in
the event of a material adverse change in the business or a change in control of
the Company. Substantially all of the Company's assets were pledged as
collateral for amounts borrowed pursuant to the Revolving Credit Facility.
The Company incurred interest expense of $375,000, $4,601,962 and
$1,918,555 for the years ended December 31, 1994, 1995 and 1996, respectively,
in connection with Term Loan A;
F-15
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NOTES PAYABLE (Continued)
$131,250, $1,646,667 and $784,792 for the years ended December 31, 1994, 1995
and 1996, respectively, in connection with Term Loan B; and $34,667, $155,749
and $332,645 for the years ended December 31, 1994, 1995 and 1996, respectively,
in connection with the Revolving Credit Facility.
On December 1, 1994, the Company entered into an agreement which
provides that the prime interest rate on $30,000,000 of senior term loans will
not exceed 9 percent through December 2, 1997. In exchange for this interest
rate limitation, the Company agreed to make quarterly payments to its lenders
ranging from $57,000 to $186,000 depending on the level of the prime rate, as
defined. Quarterly payments totaling $228,000 were made during each of the years
ended December 31, 1995 and 1996, and are included in interest expense in the
accompanying consolidated statements of income.
On July 2, 1996, the Company completed the repayment of indebtedness
and restructuring of its Revolving Credit Facility per the terms of an amended
credit facility (the "Amended Credit Facility"), dated June 27, 1996. The
Amended Credit Facility consists of (a) a term loan facility (the "Amended Term
Loan") in an original principal amount of $20.0 million and (b) a $50.0 million
revolving loan, letter of credit and acquisition loan facility, subject to an
availability calculation based on the eligible borrowing base (the "Amended
Revolving Credit Facility"). At December 31, 1996, the Company has availability
under the Amended Revolving Credit Facility of approximately $26.9 million. The
letter of credit portion of the Amended Revolving Credit Facility is subject to
a $10.0 million sublimit and the acquisition loan portion of the Amended
Revolving Credit Facility is subject to a $30.0 million sublimit with the
imposition of certain borrowing criteria based on the satisfaction of certain
debt ratios. The unused portion of the acquisition loan portion of the Amended
Revolving Credit Facility expires on the second anniversary of the closing date
of the Amended Credit Facility. The interest rate on the Amended Credit Facility
is, at the option of the Company, (a) prime plus a margin, or (b) LIBOR plus a
margin, where the margin determination is made based upon the Company's
financial performance over the prior 12 month period (ranging from 0.25% to
1.25% in the event prime is utilized, or 1.75% to 2.75% in the event LIBOR is
utilized). At December 31, 1996, the margin is .25% for prime rate loans and
1.75% for LIBOR rate loans. In connection with the repayment and restructuring
of the Revolving Credit Facility, the Company wrote-off $3,052,688 of deferred
financing costs. This write-off is classified as an extraordinary item, net of
income taxes, in the accompanying consolidated statements of income.
The Amended Term Loan will amortize in equal quarterly installments and
will terminate on December 1, 1999. Interim payments under the Amended Revolving
Credit Facility will be made from daily collections of the Company's accounts
receivable. The Amended Revolving Credit Facility will terminate on December 1,
1999. The Amended Credit Facility contains certain financial covenants regarding
the financial performance of the Company 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, as defined. At December 31, 1996, the Company
was in compliance with all of its requirements under the Amended Credit
Facility. The Amended Credit Facility also
F-16
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - NOTES PAYABLE (Continued)
contains mandatory prepayment events and is secured by a lien on substantially
all of the assets of the Company. The Company incurred interest expense of
$850,347 and $298,017 for the year ended December 31, 1996, in connection with
the Amended Term Loan and Amended Revolving Credit Facility, respectively.
As described in Note 2, the Company borrowed $6.0 million on August 9,
1996, under the acquisition loan portion of the Amended Revolving Credit
Facility for the acquisition of certain assets of the business of Dixie. Loans
made under the acquisition subfacility shall be repayable in consecutive equal
quarterly installments, each due on the same dates as the Amended Term Loan
installments are due with a final payment on November 30, 1999, unless the
Amended Revolving Credit Facility termination earlier occurs.
The Company entered into a subordinated loan agreement (the
"Subordinated Debt") on December 2, 1994, whereby the Partnership borrowed
$7,000,000 from the partners which was payable in a single lump sum on the
earlier of June 2, 2001, or six months after amounts borrowed pursuant to the
credit facility have been paid in full. Upon the earlier to occur of June 2,
2001 or the repayment of the Subordinated Debt in full, the Company was required
to pay to the partners an additional facility fee of $350,000, provided that, if
the Subordinated Debt was prepaid in full prior to June 2, 1996, the Company
would be released from its obligation to pay such facility fee. On July 2, 1996,
the Company repaid the Subordinated Debt in full and the facility fee with a
portion of the proceeds of the initial public offering. The Subordinated Debt
agreement provided that amounts borrowed become due and payable should the
Company default pursuant to the terms of the credit facility. The Subordinated
Debt bore interest at prime plus 5 percent. During the years ended December 31,
1994, 1995 and 1996, the Company incurred interest expense of $84,389, $975,868
and $475,563, respectively, in connection with the Subordinated Debt.
NOTE 6 - RELATED-PARTY TRANSACTIONS
On December 2, 1994, the Company entered into a 20-year lease with
Aviation Properties, a Delaware general partnership ("Aviation Properties"),
pursuant to which the Company leases its corporate headquarters and warehouse in
Miami, Florida (the "Miami Property"). The Company makes annual payments under
such lease in the amount of approximately $892,990. The sole partners of
Aviation Properties are (a) AVAC Corporation ("AVAC") and (b) J/T Aviation
Partners, a Delaware general partnership ("J/T"). The sole stockholder and
president of AVAC is Robert Alpert, a principal stockholder and director of the
Company. J/T is also a principal stockholder of the Company.
In connection with Aviation Properties' purchase of the Miami Property,
the Company made a $2,465,519 loan to Aviation Properties, which loan bears
interest at 8% per annum, with principal and interest due in a single payment on
December 2, 2004.
On December 2, 1994, the Company entered into a six-year lease with
Aviation Properties of Texas, a Delaware general partnership ("AVTEX"), pursuant
to which the Company leases a warehouse in Pearland, Texas. The Company is
required to make annual
F-17
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - RELATED-PARTY TRANSACTIONS (Continued)
payments under such lease in the amount of $114,468. The sole partners of AVTEX
are AVAC and J/T.
The Company believes the terms of the loan to Aviation Properties and
the terms of the leases with Aviation Properties and AVTEX are no less favorable
than could be obtained from an unaffiliated third party.
The Company is obligated to pay a fee of $50,000 per quarter to an
entity controlled by Mr. Alpert for consulting services. The Company's
obligation to pay this fee will expire at the end of February 1997. The Company
believes the terms of the consulting agreement are no less favorable than could
be obtained from an unaffiliated third party.
RCP Management L.P. ("RCP") was an issuer of subordinated debt to the
Company. AVAC is an affiliated entity of RCP.
Tomen America, Inc., was an issuer of subordinated debt to the Company.
T/M Aviation (Japan), Inc. and TM Aviation (USA), Inc. hold an equity interest
in J/T, a principal stockholder in the Company. TM Aviation (Japan), Inc. is a
wholly owned subsidiary of Tomen Corporation. TM Aviation (USA), Inc. is a
wholly owned subsidiary of Tomen America, Inc., which is a wholly owned
subsidiary of Tomen Corporation.
Japan Fleet Service Co. Ltd., a Japanese corporation ("JFS Japan"), was
an issuer of subordinated debt to the Company and is an affiliate of J/T. Japan
Fleet Service (Delaware), Inc. ("JFS Delaware") is a wholly owned subsidiary of
Japan Fleet Service (Europe) B.V. ("JFS Europe") and holds an equity interest in
J/T. JFS Europe is 60 percent owned by Japan Fleet Service (s) Pte. Ltd. ("JFS
Singapore") and 40 percent owned by JFS Japan.
In accordance with a management agreement between AIS and RCP, all
full-time, non-temporary personnel working for the benefit of AIS were employed
through Aircraft Spare Parts, Inc. ("ASPI"), which is an affiliate of RCP.
Effective December 2, 1994, Aviation Sales Management Company ("ASMC") replaced
ASPI as the employer. J/T is a principal shareholder in ASMC. The Company
reimburses ASMC and, prior to December 2, 1994, AIS reimbursed ASPI for all of
its related expenditures. During the year ended December 31, 1994, Aircraft
Spare Parts, Inc. was reimbursed by AIS approximately $3,259,127 for
personnel-related costs. ASMC was reimbursed approximately $404,274, $0 and $0,
respectively, by the Company for each of the periods in the three years ended
December 31, 1996.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is currently involved in various lawsuits and other
contingencies arising out of operations in the normal course of business. In the
opinion of management, the ultimate resolution of those claims and lawsuits will
not have a material adverse effect on the financial position or results of
operations of the Company.
On July 29, 1994, AIS filed an action against the Brazoria County,
Texas, Appraisal District seeking relief from ad valorem tax appraisals of
certain property for tax years 1993 and 1994. On February 7, 1995, a settlement
was reached in the matter, and the appraised value on the property was reduced
for 1993 and 1994. The settlement resulted in a reduction of 1993 and
F-18
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - COMMITMENTS AND CONTINGENCIES (Continued)
1994 property taxes of $435,939 and $33,964, respectively. This reduction in tax
liability of $469,903 was recorded in general and administrative expense in
1994.
On June 18, 1993, the estate of Eastern Air Lines, Inc. ("EAL") filed
an action against AIS claiming that certain errors were made by EAL in the
calculation of credits received by AIS against the purchase of the EAL Inventory
at closing on February 28, 1992. On February 25, 1994, the Company filed a
counterclaim against the estate of EAL in the United States Bankruptcy Court. In
October 1994, the Company and EAL agreed to settle all claims and mutually
release all parties. As a result of the settlement, the Company recorded
additional general and administrative expense of $869,081 for the year ended
December 31, 1994.
The Company has certain employment agreements with officers and
employees dated December 1994, which extend from three to five years and are
renewable in one-year periods thereafter. The employment agreements provide that
such officers and employees may earn bonuses, based upon a sliding percentage
scale of their base salaries, provided the Company achieves certain financial
operating results, as defined. Further, each of the employment agreements
provides that in the event of (a) a change in control of the Company including
the vesting of decision-making authority in one of the Company's current
officers; (b) the sale of all or substantially all of the assets of the Company
to a third party for which the executive officer does not continue in
employment; or (c) the merger or consolidation of the Company with an entity for
which the executive officer does not continue in employment, the employment
agreement shall be terminable by the executive officer upon 90 days' notice and
one year's base salary shall be payable to the executive officer as a
termination fee.
At January 1, 1995, five officers and employees of the Company were
granted options (the "Options") by the partners to purchase an aggregate of
13.5% of the outstanding limited partnership interests in the Partnership for an
aggregate exercise price of $1,437,027, which was greater than the fair market
value, as determined by an independent, third party, of the interests in the
Partnership at that date. At January 1, 1996, the Options were exercised in full
by delivery to the partners of full recourse promissory notes representing the
payment in full of the exercise price of the Options.
The Company has purchase commitments to various airlines whereby the
Company sells aircraft inventory as agent for such airlines. Pursuant to such
agreements, the Company has commitments to various airlines requiring the
Company to purchase a minimum amount of inventory from such airlines before
February 1997. In the opinion of management, the Company's commitments will be
realized through future sales of aircraft inventory owned by such airlines.
Effective January 1, 1995, the Company established a qualified defined
contribution plan (the "Plan") for eligible employees. The Plan provides that
employees may contribute up to the maximum percent of pretax earnings as allowed
by the U.S. tax code and the Company may elect, at its discretion, to make
contributions to the Plan in any year. The Company contributed approximately
$197,000 and $309,000 to the Plan in 1995 and 1996, respectively. The Company
does not provide retired employees any health or life insurance benefits.
F-19
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LEASES
The Company leases certain buildings and office equipment under
operating lease agreements. Two of the buildings are leased from related parties
of the Company. See Note 6. For the years ended December 31, 1994, 1995 and
1996, rent expense under these leases amounted to $407,857, $1,554,677 and
$1,813,113, respectively. Minimum rental commitments under operating leases are
as follows:
LEASE OBLIGATIONS LEASE OBLIGATIONS
YEARS ENDING DECEMBER 31, TO RELATED PARTIES TO THIRD PARTIES
------------------------- ------------------ -----------------
1997 $ 1,007,458 437,610
1998 1,007,458 212,690
1999 1,007,458 117,218
2000 997,919 112,950
2001 892,990 28,238
Thereafter 12,427,448 -
------------------ -----------------
$17,340,731 $ 908,706
================== =================
NOTE 9 - DOMESTIC AND EXPORT SALES INFORMATION
Information about the Company's domestic and export sales for the
three years ended December 31, 1996 follows (in thousands):
1994 1995 1996
-------- -------- --------
NET REVENUES BY GEOGRAPHICAL AREA
United States............................... $25,864 $ 68,052 $ 94,591
Export Sales:
Europe................................. 2,327 28,666 40,308
Far East............................... - 7,525 13,907
Latin America.......................... - 9,560 13,138
-------- -------- --------
$ 28,191 $113,803 $161,944
======== ======== ========
NOTE 10 - INCOME TAXES
Prior to June 26, 1996, the operations of the Company were conducted by
the Partnership, a Delaware general partnership and, therefore, the results of
operations for the years ended December 31, 1994, 1995 and for the period
January 1, 1996 through June 26, 1996, do not include a provision for income
taxes, as the income of the Partnership passed directly to its partners.
F-20
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (Continued)
The following pro forma adjustments to record income taxes at the
Company's estimated effective tax rate have been reflected in the pro forma
earnings per share data presented in the accompanying consolidated statements of
income for all periods presented:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
---- ---- ----
Historical income before income
taxes and extraordinary item $1,190,514 $10,285,723 $16,933,815
Pro forma provision for income taxes (464,300) (4,011,432) (6,604,188)
------------- ------------- -------------
Pro forma income before extraordinary item 726,214 6,274,291 10,329,627
Extraordinary item, net of income taxes - - (1,862,140)
------------- ------------- -------------
Pro forma net income $726,214 $6,274,291 $8,467,487
============= ============= =============
Pro forma net income per share has been computed by dividing pro forma
net income by the number of shares of ASC common stock which the partners of the
Partnership received upon the formation of the Company. For periods prior to the
closing of the Company's public offering, the pro forma weighted average number
of common shares outstanding assumes that the 4,425,000 shares issued to the
partners and the 575,000 shares of common stock, the net proceeds in respect of
which were paid to J/T, were outstanding in all periods. Additionally, the
400,000 shares issued in connection with the acquisition of AvEng are included
for all periods from the date of inception of AvEng at November 4, 1994.
The benefit for income taxes for the year ended December 31, 1996
consists of the following:
Current
Federal $3,279,832
State 482,328
-------------
3,762,160
-------------
Deferred
Federal (4,689,159)
State (689,582)
-------------
(5,378,741)
-------------
Total benefit for income taxes (1,616,581)
Less: benefit for income taxes relating
to extraordinary item (1,190,548)
Benefit for income taxes relating -------------
to continuing operations $ (426,033)
=============
F-21
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets as of December 31, 1996 are as follows:
Deferred tax assets, net:
Allowance for doubtful accounts $1,103,384
Inventories 1,144,941
Property and equipment 3,735,079
Spare parts on lease (198,626)
Other 11,706
------------
5,796,484
Less: valuation allowance (417,743)
------------
Net deferred tax asset $5,378,741
============
The reconciliation of the federal statutory rate and the Company's
effective tax rate is as follows:
1996
----
Federal income tax at the statutory rate 35.0
Increases (reductions) in tax rate resulting from:
Partnership income not subject to taxation (12.2)
Step-up in tax basis resulting from transfer
of J/T's interest (see Note 1) (21.0)
Transfer of net assets of the Partnership to
the Company (see Note 1) (7.1)
State income taxes, net of federal tax benefit 4.6
Other (1.8)
------
Effective income tax rate (2.5)
======
NOTE 11 - STOCK OPTION PLANS
In connection with the organization of the Company, the company adopted
two stock option plans (the "Plans"). Pursuant to the 1996 Director Stock Option
Plan (the "Director Plan"), options to acquire a maximum of the greater of
150,000 shares or 2% of the number of shares of Common Stock then outstanding
may be granted to directors of the Company. Pursuant to the 1996 Stock Option
Plan (the "1996 Plan"), options to acquire a maximum of the greater of 650,000
shares of Common Stock or 8% of the number of shares of Common Stock then
outstanding may be granted to executive officers, employees (including employees
who are directors), independent contractors and consultants of the Company.
Options to purchase 196,600 shares at an exercise price equal to $19.00 per
share have been granted under the Plans, 122,200 of which are immediately
exercisable.
F-22
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - STOCK OPTION PLANS (Continued)
The price at which the Company's common stock may be purchased upon the
exercise of options granted under the Plans will be required to be at least
equal to the per share fair market value of the Common Stock on the date the
particular options are granted. Options granted under the Plans may have maximum
terms of not more than ten years.
Generally, options granted under the Plans may remain outstanding and
may be exercised at any time up to three months after the person to whom such
options were granted is no longer employed or retained by the Company or serving
on the Company's Board of Directors.
Pursuant to the Plans, unless otherwise determined by the compensation
committee, one-third of the options granted under the Plans are exercisable upon
grant, one-third are exercisable on the first anniversary of such grant and the
final one-third are exercisable on the second anniversary of such grant.
However, options granted under the Plans shall become immediately exercisable if
the holder of such options is terminated by the Company or is no longer a
director of the Company, as the case may be, subsequent to certain events which
are deemed to be a "change in control" of the Company.
NOTE 12 - QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except earnings per share)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1996:
Operating revenues $35,554 $36,159 $41,181 $49,050
Income from operations 5,426 5,027 5,911 5,920
Net income 3,395 3,904 5,079 3,120
Pro forma income before extraordinary
item per share $0.40 $0.35 $0.37 $0.37
Pro forma net income per share $0.40 $0.35 $0.15 $0.37
1995:
Operating revenues $28,451 $28,749 $28,781 $27,822
Income from operations 6,034 5,165 3,966 3,408
Net income 3,951 3,065 1,872 1,398
Pro forma income before extraordinary
item per share $0.44 $0.35 $0.21 $0.16
Pro forma net income per share $0.44 $0.35 $0.21 $0.16
F-23
SCHEDULE II
AVIATION SALES COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED DECEMBER 31, 1996
ADDITIONS
------------------
BALANCE AT CHARGED TO
BEGINNING COST AND (B) BALANCE AT
DESCRIPTION OF YEAR EXPENSES OTHER DEDUCTIONS END OF YEAR
- ----------- --------- ---------- ----- ---------- -----------
Allowances for Doubtful
Accounts Receivable:
Year Ended December 31-
1994 $1,011,732 $110,000 $1,504,077 (A) $ - $2,625,809
========== ======== ========== ======== ==========
1995 $2,625,809 $360,000 $ - $1,034,414 $1,951,395
========== ======== ========== ========= ==========
1996 $1,951,395 $1,954,000 $ - $ 125,815 $3,779,580
========== ========== ========== ========= ==========
- -----------
(A) Represents allowances for doubtful accounts receivable purchased from
Aviation Sales Company business unit.
(B) Represents accounts receivable written-off.
F-24
EXHIBIT INDEX
As required under Item 14, Exhibits, Financial Statement Schedules and
Reports on Form 10-K, the exhibits filed as part of this report are provided in
this separate section. The exhibits included in this section are as follows:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.11 1997 EBITDA Incentive Compensation Plan
10.14 Asset Purchase Agreement dated as of November 30, 1996 by and
between AvEng Trading Partners, Inc. and the Company
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule