UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File No. 1-11775
AVIATION SALES COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 65-0665658
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
623 Radar Road 27410
Greensboro, North Carolina (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (336) 668-4410 (x3004)
Indicate by checkmark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report(s), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 15,015,317 shares of common
stock, $.001 par value per share, were outstanding as of September 7, 2001.
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31, June 30,
2000 2001
--------------------- ---------------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 67,558 38,942
Inventories 53,115 46,904
Other current assets 10,784 6,044
--------------------- ---------------------
Total current assets 131,457 91,890
--------------------- ---------------------
Equipment on lease, net 5,749 407
Fixed assets, net 65,770 56,973
Amounts due from related parties 1,792 --
Other Assets:
Goodwill, net 41,390 26,904
Deferred financing costs, net 5,928 8,516
Notes receivable from KAV Inventory, LLC 29,400 --
Net assets of discontinued operations 3,479 --
Other 15,646 14,957
--------------------- ---------------------
Total other assets 95,843 50,377
--------------------- ---------------------
Total assets $ 300,611 $ 199,647
===================== =====================
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
1
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Continued)
December 31, June 30,
2000 2001
--------------------- ---------------------
(Unaudited)
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 30,214 $ 21,377
Accrued expenses 27,725 24,006
Current maturities of notes payable 29 12,029
Current maturities of capital lease obligations 178 178
Senior subordinated notes (See Note 7) -- 164,391
Revolving loan 35,959 4,911
Customer deposits 7,559 14,948
Other 5,120 2,782
-------------------- -------------------
Total current liabilities 106,784 244,622
-------------------- -------------------
Senior subordinated notes (See Note 7) 164,345 -
Notes payable, net of current portion 16,498 10,000
Capital lease obligations, net of current portion 3,852 3,786
Deferred income 36 36
Net liabilities of discontinued operations -- 658
Other long-term liabilities 2,204 --
-------------------- -------------------
Total long-term liabilities 186,935 14,480
-------------------- -------------------
Commitments and Contingencies (See Notes)
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value, 1,000,000 shares authorized, none
outstanding, 15,000 shares designated Series A Junior
Participating -- --
Common stock, $.001 par value, 30,000,000 shares authorized,
15,015,317 shares issued and outstanding at December 31,
2000 and June 30, 2001, respectively 15 15
Additional paid-in capital 150,288 153,226
Accumulated deficit (143,411) (212,696)
-------------------- -------------------
Total stockholders' equity (deficit) 6,892 (59,455)
-------------------- -------------------
Total liabilities and stockholders' equity (deficit) $ 300,611 $ 199,647
==================== ===================
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
2
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
For the Six Months Ended
June 30,
----------------------------------------
2000 2001
---------------- ------------------
Operating revenues:
Sales $ 206,232 $ 146,847
Other 3,109 5,615
---------------- ------------------
209,341 152,462
Cost of sales 188,972 152,542
---------------- ------------------
Gross profit (loss) 20,369 (80)
Operating expenses 22,777 29,217
---------------- ------------------
Loss from operations (2,408) (29,297)
Interest expense 10,765 13,116
Charge to reserve notes receivable from
KAV Inventory, LLC - 29,400
Other expense (income) 1,036 (6,918)
---------------- ------------------
Loss before income taxes, equity
income of affiliate and discontinued
operations (14,209) (64,895)
Income tax expense 2,627 48
---------------- ------------------
Loss before equity income of affiliate
and discontinued operations (16,836) (64,943)
Equity income of affiliate 93 -
---------------- ------------------
Loss from continuing operations (16,743) (64,943)
Discontinued operations:
Operations, net of income taxes (6,920) -
Loss on disposal, net of income taxes (9,218) (4,342)
---------------- ------------------
Net loss ($32,881) ($69,285)
================ ==================
Basic loss per share:
Loss from continuing operations ($1.12) ($4.33)
Loss from discontinued operations (1.07) (0.28)
---------------- ------------------
Net loss ($2.19) ($4.61)
================ ==================
Diluted loss per share:
Loss from continuing operations ($1.12) ($4.33)
Loss from discontinued operations (1.07) (0.28)
---------------- ------------------
Net loss ($2.19) ($4.61)
================ ==================
Weighted average shares of common stock and
common stock equivalents
used to calculate earnings per share,
basic and diluted 15,015 15,015
================ ==================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
For the Three Months
Ended June 30,
-----------------------------------
2000 2001
--------------- --------------
Operating revenues:
Sales $ 106,545 $ 69,146
Other 1,005 1,729
--------------- --------------
107,550 70,875
Cost of sales 105,519 70,377
--------------- --------------
Gross profit 2,031 498
Operating expenses 11,477 20,805
--------------- --------------
Loss from operations (9,446) (20,307)
Interest expense 5,486 6,625
Charge to reserve notes receivable from
KAV Inventory, LLC. - 29,400
Other expense (income) 1,052 (6,913)
--------------- --------------
Loss before income taxes, equity
income of affiliate and discontinued operations (15,984) (49,419)
Income tax expense 1,900 11
--------------- --------------
Loss before equity income of affiliate
and discontinued operations (17,884) (49,430)
Equity income of affiliate - -
--------------- --------------
Loss from continuing operations (17,884) (49,430)
Discontinued operations:
Operations, net of income taxes (4,173) -
Loss on disposal, net of income taxes (9,218) (4,638)
--------------- --------------
Net loss ($31,275) ($54,068)
=============== ==============
Basic loss per share:
Loss from continuing operations ($1.19) ($3.29)
Loss from discontinued operations (0.89) (0.31)
--------------- --------------
Net loss ($2.08) ($3.60)
=============== ==============
Diluted loss per share:
Loss from continuing operations ($1.19) ($3.29)
Loss from discontinued operations (0.89) (0.31)
--------------- --------------
Net loss ($2.08) ($3.60)
=============== ==============
Weighted average shares of common stock and common
stock equivalents used to calculate earnings
per share, basic and diluted 15,015 15,015
=============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
For the Six Months Ended
June 30,
----------------------------------------
2000 2001
----------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (32,881) $ (69,285)
Adjustments to reconcile net loss to cash provided by operating
activities:
Depreciation and amortization 5,787 8,341
Loss from discontinued operations 16,138 4,342
Charge to reserve notes receivable from KAV Inventory, LLC. - 29,400
Write down of long lived assets - 9,886
Proceeds from sale of equipment on lease, net of gain 1,704 3,282
Provision for doubtful accounts 1,011 3,684
Loss on sale of affiliate 859 -
Equity in earnings of affiliate, net of taxes (43) -
Gain on sale of subsidiary - (5,664)
Income on non-refundable lease deposit - (2,204)
Expense from warrants issued to third parties - 402
Deferred income taxes 2,292 -
(Increase) decrease in accounts receivable (21,786) 22,492
Decrease in inventories 3,274 1,042
Decrease in other current assets 12,504 5,472
Decrease (increase) in other assets 24,706 (928)
Increase (decrease) in accounts payable 2,792 (6,639)
(Decrease) increase in accrued expenses (3,423) 1,423
Decrease in deferred income (175) -
Decrease in other liabilities (3,659) -
------------------ ------------------
Net cash provided by operating activities 9,100 5,046
------------------ ------------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of fixed assets (5,547) (1,350)
Payments from related parties 47 1,792
Investment in limited liability company (2,000) -
Proceeds from sale of affiliate 1,455 -
Proceeds from sale of subsidiary - 21,290
------------------ ------------------
Net cash (used in) provided by investing activities (6,045) 21,732
------------------ ------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing under senior debt facilities 183,156 184,383
Payments under senior debt facilities (212,425) (215,430)
Proceeds of term loans 15,500 12,000
Payments on equipment loans (95) (998)
Payments on notes payable (3,578) (5,500)
Payments on capital leases (255) (66)
Payments of deferred financing costs (5,303) (1,540)
------------------ ------------------
Net cash used in financing activities (23,000) (27,151)
------------------ ------------------
Net cash (used in) provided by discontinued operations (183) 373
------------------ ------------------
Net decrease in cash and cash equivalents (20,128) -
Cash and cash equivalents, beginning of period 21,431 -
------------------ ------------------
Cash and cash equivalents, end of period $ 1,303 $ -
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 20,505 $ 10,181
================= =================
Income taxes paid $ 954 $ -
================= =================
5
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Aviation Sales Company ("ASC" or the "Company") is a Delaware corporation,
which through its subsidiaries provides aircraft maintenance, repair and
overhaul services to commercial passenger airlines, air cargo carriers, aircraft
leasing companies, maintenance and repair facilities and aircraft parts
redistributors throughout the world. During 2000, the Company sold
substantially all of the assets of its parts redistribution operation, its new
parts distribution operation and its manufacturing operations. The results of
operations for these businesses are included in the accompanying condensed
consolidated statements of operations as discontinued operations. See Note 2
for further discussion.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such
rules and regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. The accompanying unaudited interim condensed consolidated financial
statements should be read in conjunction with the Company's December 31, 2000
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the 2000 fiscal year (File No.
001-11775).
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements of the Company contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of June 30, 2001 and the results of its
operations for the three and six month periods ended June 30, 2000 and 2001 and
cash flows for the six month periods ended June 30, 2000 and 2001. The results
of operations and cash flows for the six month period ended June 30, 2001 are
not necessarily indicative of the results of operations or cash flows which may
be reported for the year ending December 31, 2001.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Principal estimates made by the Company include the estimated losses on disposal
of discontinued operations, the allowance to reduce inventory to the lower of
cost or net realizable value, the estimated profit recognized as aircraft
maintenance, design and construction services are performed, the allowance for
doubtful accounts and notes receivable, the realizability of its investment in
affiliates, future cash flows in support of its long lived assets, medical
benefit accruals, the estimated fair value of the facilities under operating
lease, and the allowances for litigation and environmental costs. A principal
assumption made by the Company is that inventory will be utilized and realized
in the normal course of business and may be held for a number of years.
6
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 eliminates the pooling-of-interests method of accounting for business
combinations and modifies the application of the purchase accounting method.
The elimination of the pooling-of-interest method is effective for transactions
initiated after June 30, 2001. The remaining provision of SFAS No. 141 will be
effective for transactions accounted for using the purchase method that are
completed after June 30, 2001. The Company does not believe that the adoption
of SFAS No. 141 will have a significant impact on its financial statements.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Intangible
Assets." SFAS No. 142 eliminates the current requirement to amortize goodwill
and indefinite-lived intangible assets, addresses the amortization of intangible
assets with defined lives and addresses the impairment testing and recognition
for goodwill and intangible assets. SFAS No. 142 will apply to goodwill and
intangible assets arising from transactions completed before and after the
Statement's effective date of January 1, 2002. At June 30, 2001, the Company has
net goodwill of $26,904 and a 50% interest in a limited liability corporation
that has a net intangible asset of $13,234 (See Note 3). These assets will be
subject to the new impairment tests prescribed under the statement. These new
requirements will impact future period net income equal to the amount of
discontinued goodwill amortization offset by goodwill impairment charges, if
any, and adjusted for any differences between the old and new rules for defining
goodwill and intangible assets on future business combinations. An initial
impairment test must be performed in 2002 as of January 1, 2002. Any resulting
impairment charge from this initial test will be reported as a change in
accounting principle, net of tax. The Company is currently reviewing the
provisions of these Standards to determine any impact that might result from
adoption, and has not yet made a determination of the impact that adoption of
SFAS No. 142 will have on the consolidated financial statements.
COMPREHENSIVE INCOME
For all periods presented comprehensive loss is equal to net loss.
REVENUE RECOGNITION
During the three months ended June 30, 2001, the Company changed its method
of accounting for revenue recognition at its engine overhaul facility. Revenues
related to engine overhaul services are recognized upon shipment of the
overhauled engine. Prior to this change, revenue was recognized as services were
performed. The change in the method of accounting for revenue recognition at the
Company's engine overhaul facility did not have a material impact on the
Company's financial position or current or prior periods consolidated results of
operations.
LIQUIDITY
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company was
not in compliance at March 31, 2000 with certain of the financial covenants
contained in the Company's credit agreement with its senior lenders and certain
of the lease agreements to which the Company is a party. On May 31, 2000, the
Company amended and restated its senior credit facility and amended certain of
its lease agreements. These agreements were further amended on June 25, 2000,
September 30, 2000, November 28, 2000, February 14, 2001, April 17, 2001 and May
21, 2001. The Company was not in compliance at June 30, 2001 with certain
covenants contained in the credit agreement and the Company's senior lenders
have waived the covenant violations.
As discussed in Note 2, during 2000 and 2001 the Company sold substantially
all of the assets of its parts redistribution operation, new parts distribution
operation, manufacturing operations and one of its component overhaul
operations. The proceeds from these sales were used to repay senior indebtedness
and, with respect to the sale of the component overhaul operations, to repay
senior indebtedness and for working capital. In addition: (i) in February 2000
the Company borrowed $15,500 under a supplemental term loan with the financial
institution that is the agent for the revolving credit facility, and (ii) in
February 2001 the Company borrowed $10,000 under a term loan from a second
financial institution. The proceeds from these loans were used to repay senior
indebtedness and for working capital. The revolving credit facility and the
remaining balance on the $15,500 term loan mature in July 2002 and the $10,000
term loan matures in August 2002. As a result of the above transactions, the
outstanding balance on the revolving credit facility was reduced from $268,013
as of March 31, 2000 to $4,911 as of June 30, 2001.
As of September 6, 2001, the Company has $2,698 of availability for
borrowing under its revolving credit facility. The Company has also recently
closed (one of which is on a temporary basis) two of its maintenance, repair and
overhaul ("MR&O") facilities, consolidated the operations of one of its
component overhaul businesses from two facilities to one, reduced its headcount
at certain of its other MR&O facilities and implemented salary and benefit
reductions that affected virtually all employees in order to lower its operating
expenses. The Company is also seeking to obtain additional working capital to
allow it to bring its trade accounts payable back into a more normalized status.
Further, the Company was obligated to make $6,704 in interest payments on its 8
1/8% senior subordinated notes on August 15, 2001, however, the Company did not
make the payments due to the agreement which it has reached with the holders of
73.02% of its outstanding senior notes. See Note 7. Although the Company expects
to be able to meet its working capital requirements from its available resources
and from other sources, including sales of assets and further equity and/or debt
infusions, there can be no assurance that the Company will have sufficient
working capital to meet its obligations. The Company incurred net losses for the
years ended December 31,
7
1999 and 2000 and for the six months ended June 30, 2001 and required cash to
fund its operating activities for the years ended December 31, 1998, 1999 and
2000. As a result of these matters, the Company's auditors have issued their
opinion on the December 31, 2000 consolidated financial statements with a going
concern modification. The accompanying condensed consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
RECLASSIFICATIONS
Certain prior year account balances within the statement of cash flows have
been reclassified as a result of discontinued operations to conform with current
year presentation.
2. DISCONTINUED OPERATIONS
In September 2000, the Company completed the sale of substantially all of
the assets of its manufacturing operations for $40,299, after post-closing
adjustments and excluding transaction expenses. The cash proceeds of the sale
were used to repay senior indebtedness.
In December 2000, the Company completed the sale to Kellstrom Industries,
Inc. (the "Purchaser") of substantially all of the assets and business of its
redistribution operation in a series of transactions intended to constitute a
single transaction (the "Transaction"). The aggregate purchase price received in
the Transaction was $156,400, approximately $127,000 of which was paid in cash
($122,000 after payment of transaction expenses). The net proceeds of the
Transaction were used to repay senior indebtedness. As part of the Transaction,
the Company acquired a 50% interest in a limited liability company, KAV
Inventory, LLC ("KAV") organized by the Purchaser and the Company. Substantially
all of the aircraft and engine spare parts inventory and the engine inventory of
the Company's redistribution operation, as well as certain rotable parts
inventories from two of the Company's MR&O operations, were sold to KAV for 89%
of the closing date book value of such inventory ($148,600, subject to post-
closing adjustments). Consideration for the sale of inventory was comprised of
cash of approximately $105,500, two senior subordinated notes, each in the
principal amount of $13,700 (one of which was sold to Kellstrom in the second
component of the transaction for $13,700 in cash), and one junior subordinated
note in the principal amount of $15,700.
The notes bear interest at 14% per annum and are subordinated in all
respects to KAV's institutional financing. In addition, the Company issued an
$8,500 letter of credit to secure, in part, KAV's institutional financing.
Further, the Company and the Purchaser each advanced $2,300 to KAV to allow it
to pay fees and costs relating to its institutional financing. The Company and
the Purchaser are entitled to receive reimbursement of these advances after
payment of the institutional financing and prior to repayment of the senior
subordinated notes.
KAV's sole business is the liquidation of the inventory it acquired from
the Company. KAV entered into an agreement to consign all of its inventories to
the Purchaser. The Transaction agreement specifies that all of the proceeds from
sales of the inventory, less a consignment commission to the Purchaser of 20%,
will be used to pay interest and principal on KAV's institutional debt. After
the institutional debt is paid in full, proceeds from the sale of inventory
would be used to reimburse the Company and the Purchaser for advances made to
KAV to allow it to pay fees and costs relating to its institutional financing,
to pay adjustment notes, if any, resulting from post closing adjustments to the
closing date book value of the inventory and thereafter to pay interest and
principal on the two $13,700 senior notes. Interest and principal on the $15,700
junior note would be paid from the remaining proceeds from the sale of
inventory, less a 35% consignment commission to the Purchaser. Under the
Transaction agreement, the Company has approval rights relating to the sale
price of certain inventory. Because of the uncertainty regarding the collection
of the notes, interest income on the notes is not being recognized. The
projections of cash distributions to the Company are highly dependent upon the
timing of the sales and the sale prices obtained by the Purchaser for KAV's
inventory.
8
The second component of the Transaction consisted of a sale of certain non-
inventory assets of the redistribution operation, including one of the $13,700
senior subordinated notes described above, net of certain payables assumed by
the Purchaser, for approximately $21,500, all of which was paid in cash. Under
the terms of the Transaction, the Purchaser has the right after one year from
the date of the Transaction to require the Company to repurchase receivables
sold in accordance with the Transaction to the extent they remain uncollected.
As of July 31, 2001, $6,621 of receivables sold pursuant to the Transaction had
not been collected by the Purchaser. In addition, the purchase price for the
sale of inventory and non-inventory assets is subject to post-closing
adjustments as set forth in the agreements. The Purchaser has indicated that
post-closing adjustments would result in a reduction in the aggregate
consideration received pursuant to the Transaction of approximately $4,500. The
Company has disputed the Purchaser's calculation of post-closing adjustments and
the proposed reduction in consideration. There can be no assurance as to the
outcome of these matters.
In addition, as part of the sale of the redistribution operation as
described above, the Purchaser leased from the Company a facility and certain
furniture, fixtures and equipment used in the redistribution operations for a
one-year period. The Purchaser has an option to acquire these assets during the
term of the lease and after one year the Company has an option to require the
Purchaser to acquire the assets, which can be extended by the Purchaser for six
months under certain circumstances. The Company has also entered into a sublease
agreement relating to the redistribution operation's warehouse and corporate
headquarters facility for a five-year period, with the right to renew for five
consecutive five-year periods at a market rental rate. The Company also entered
into a non-competition agreement whereby the Company is restricted from engaging
in the redistribution business for a period of up to five years. In addition,
the Company entered into a cooperation agreement under which it agreed to
provide repair services for the KAV parts inventory and the Purchaser's parts
inventory and the Purchaser agreed to supply parts to the Company's MR&O
operations.
In July 2001, KAV's institutional lender advised KAV that it is in default
under its loan agreement and that the lender therefore reserves all of its
rights and remedies under the loan agreement, including among other remedies the
right to draw on the Company's $8,500 letter of credit, call the outstanding
institutional financing and increase the interest rate on the loan. No action
has been taken by the lender to date. Further, during the last few months, the
Purchaser has reported in its filings with the SEC that it is having financial
difficulties. As a result of these matters, and due to current poor economic
conditions in the redistribution industry and the aviation industry as a whole
and lower than projected sales levels by KAV, during the quarter ended June 30,
2001 the Company recorded a full reserve against both the $13,700 senior note
and the $15,700 junior note due from KAV which it holds. For the same reasons,
during the 2001 second quarter, the Company recorded reserves totaling $5,081
relating to net assets of discontinued operations whose realizability is
impacted by the operations of the Purchaser and KAV. In total, aggregate charges
relating to these matters were $34,481 for the three and six months ended June
30, 2001. Further, in the event that the Purchaser's financial difficulties as
discussed above adversely impact its ability to make payments under its lease
obligations and/or its obligation to purchase certain property and equipment,
additional write downs and accruals may be necessary. Finally, the Purchaser's
financial condition may adversely impact its ability to satisfy its obligations
under the above-described ancillary agreements.
In December 2000, the Company completed the sale of the stock of its
subsidiary, Aviation Sales Bearings Company, which operates the Company's Dixie
Aerospace Bearings new parts distribution operation. In the transaction, the
Company received net aggregate consideration of $17,700 inclusive of debt
assumed by the purchaser. The net cash proceeds from the sale, which
approximated $13,500, were used to reduce outstanding senior indebtedness. Also,
as part of the transaction, the Company retained certain accounts receivable and
inventories. Such retained assets are being sold and collected pursuant to
consignment and collection agreements executed with the purchaser. The Company
anticipates that the liquidation of these assets will provide additional
consideration as these receivables are collected and inventory is sold.
The net income (loss) of these operations prior to their respective
disposal dates net of income taxes is included in the accompanying condensed
consolidated statements of operations under "discontinued operations".
Previously issued financial statements have been changed to reflect those
operations as discontinued operations. Revenues from such operations were
$80,892 and $165,084 for the three and six months ended June 30, 2000,
respectively.
3. INVESTMENTS IN AFFILIATES
During 1994, Whitehall obtained a 40% ownership in a joint venture involved
in the development of aircraft-related technology for an initial investment of
$1. The Company accounts for its investment in the joint venture under the
equity method. In 1994, Whitehall loaned $2,000 to the joint venture, which was
evidenced by a promissory note, which accrued interest at a maximum rate of 5%
per annum. Principal and accrued interest became due on January 5, 1999.
During February 2000, management elected to convert the then outstanding note
and accrued interest payable balance into a capital contribution. During May
2000, the Company liquidated its investment in the joint venture and recorded a
charge of $859 to other expense.
9
In August 1999, the Company obtained a 50% interest in a limited liability
corporation that designs, manufactures and installs an FAA approved conversion
kit that converts certain Boeing 727 aircraft from passenger configuration to
cargo configuration. The initial investment was $2,500. During 2000 and
through June 30, 2001, the Company invested an additional $3,734 and $339,
respectively, in the form of cash advances and services. The Company accounts
for this investment under the equity method. The limited liability corporation
is in the early development of the conversion kit and sales to date have been
minimal and the Company has incurred losses to date in fulfilling these sales.
Realizability of this investment will be dependent on the ability of the limited
liability corporation to attract new business during future periods at rates
sufficient to cover its costs.
4. NOTES PAYABLE AND REVOLVING LOAN
Prior to May 31, 2000, the Company had a revolving loan and letter of
credit facility of $300,000 with a group of financial institutions. Effective
May 31, 2000, the credit facility was amended and restated and the commitment
was reduced to $285,000. Following the sales of businesses described in Note 2,
the commitment was reduced to $57,737. The Credit Facility has been amended on
several occasions since May 31, 2000. The Credit Facility, as amended to date
(the "Credit Facility") expires in July 2002. Interest under the Credit Facility
is, at the option of the Company, (a) prime plus 3.0%, or (b) LIBOR plus 4.5%.
Borrowings under the Credit Facility are secured by a lien on substantially all
of the Company's assets and the borrowing base consists primarily of certain of
the Company's receivables and inventory.
The Credit Facility contains certain financial covenants regarding the
Company's financial performance and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the suspension of borrowing and repayment of
all debt in the event of a material adverse change in the business of the
Company or a change in control as defined. A default under the Credit Facility
could potentially result in a default under other agreements to which the
Company is a party, including its lease agreements. In addition, the Credit
Facility requires mandatory repayments and a reduction in the total commitment
under the Credit Facility from the proceeds of a sale of assets or an issuance
of equity or debt securities or as a result of insufficient collateral to meet
the borrowing base requirements thereunder. The Company was committed to pay a
$1,000 financing fee on June 30, 2001 which was accrued as of that date and
subsequently paid on July 2, 2001 and paid additional financing fees of $154 in
August 2001. To the extent the Credit Facility remains outstanding as of certain
dates, the Company is committed to pay incremental financing fees as follows:
November 14, 2001 - 2% of outstanding commitment and February 14, 2002 - 2% of
outstanding commitment. As of September 6, 2001, $2,698 was available for
borrowing under the Credit Facility and outstanding letters of credit aggregated
$29,612.
In February 2000, the Company executed a $15,500 term loan with the
financial institution that is the agent under the Credit Facility. The term loan
is senior secured debt; bears interest at 12% per annum, contains financial
covenants that are consistent with the Credit Facility, and matures in July
2002. As discussed in Note 8, the Company repaid $3,500 of the term loan from
the proceeds of the sale of Caribe. Remaining principal payments of $500 per
month are due beginning in January 2002 with a final principal payment of $8,500
due in July 2002. Under the term loan agreement, the Company also granted the
lender common stock purchase warrants to purchase 129,000 shares of the
Company's common stock exercisable for nominal consideration at any time until
December 31, 2005. If the term loan is not repaid in full, the warrants entitle
the holder to require the Company to repurchase the warrants or common shares
issued upon prior exercise of the warrants at $8.50 per share. The lender has
not required the Company to repurchase any warrants through August 29, 2001. The
Company has recorded the value of these warrants ($1,079) as additional deferred
financing costs and accrued expenses and is amortizing this amount to interest
expense over the term of the loan.
As discussed in Note 7, the Company's senior lenders have agreed to forbear
until December 31, 2001 in regard to the default which existed in the senior
credit facilities resulting from the failure to make the August 15, 2001
subordinated note interest payment. This forbearance effectively cures the
cross-default under the term loan through the end of the forbearance period.
Subsequent to the end of the forbearance period (if the restructuring is not
completed by that date or if the forbearance period is not otherwise extended)
the holder of the term loan will have the ability to accelerate payment of the
outstanding term loan balance. As a result, the entire $12,000 balance of the
term loan as of June 30, 2001 has been classified as a current liability in the
accompanying condensed consolidated balance sheet.
In February 2001, the Company obtained a $10,000 term loan from a financial
institution. The term loan is senior secured debt, bears interest at LIBOR plus
2% and matures in August 2002. The proceeds of the term loan were used to pay
the semi-annual interest payment on the senior subordinated notes in February
2001 of $6,704 and for working capital purposes. In connection with the term
loan, the Company issued warrants to purchase 250,000 shares of its unissued
common stock at an exercise price of $4.00 per share to each of four
individuals, one of whom is an officer and director of the Company and one of
whom is a principal stockholder of the Company. Each of these individuals
provided credit support to the financial institution which advanced the loan
proceeds. The Company has recorded the value of these warrants ($2,536) as
additional deferred financing costs and is amortizing this amount to expense
over the term of the loan. In May 2001, the Company obtained a short-term
increase of up to $3,000 in the term loan. The Company borrowed $2,000 under the
increased term loan in May 2001, and thereafter repaid the additional borrowing
from the proceeds of the Caribe sale. One of the Company's principal
stockholders provided credit support for the increased amount of the term loan.
In return for providing credit support, the stockholder received a cash fee of
$67 and warrants to purchase 333,334 shares of the Company's common stock at an
exercise price of $1.40 per share. The value of these warrants ($356) and the
cash fee of $67 were charged to results of operations during the quarter ended
June 30, 2001.
10
SENIOR SUBORDINATED NOTES
In February 1998, the Company sold $165,000 of senior subordinated notes
with a coupon rate of 8.125% at a price of 99.395%. The senior subordinated
notes mature on February 15, 2008. Interest is payable on February 15 and August
15 of each year. The senior subordinated notes are general unsecured obligations
of the Company, subordinated in right of payment to all existing and future
senior debt, including indebtedness outstanding under the Credit Facility and
under facilities, which may replace the Credit Facility in the future. In
addition, the senior subordinated notes are effectively subordinated to all
secured obligations to the extent of the assets securing such obligations,
including the Credit Facility.
The indenture pursuant to which the senior subordinated notes have been
issued permits the Company and its subsidiaries to incur additional
indebtedness, including additional senior debt. Under the indenture, the Company
may borrow unlimited additional amounts so long as after incurring such debt it
meets a fixed charge coverage ratio for the most recent four fiscal quarters.
Additionally, the indenture allows the Company to borrow and have outstanding
additional amounts of indebtedness (even if it does not meet the required fixed
charge coverage ratios), up to enumerated limits. The Company did not meet the
fixed charge coverage ratio for the one-year period ended June 30, 2001.
Accordingly, its ability to incur additional debt is currently limited under its
indenture. The senior subordinated notes are also effectively subordinated in
right of payment to all existing and future liabilities of any of its
subsidiaries that do not guarantee the senior subordinated notes.
The senior subordinated notes are fully and unconditionally guaranteed, on
a senior subordinated basis, by substantially all of the Company's existing
subsidiaries and each subsidiary that will be organized in the future by the
Company unless such subsidiary is designated as an unrestricted subsidiary.
Subsidiary guarantees are joint and several, full and unconditional, general
unsecured obligations of the subsidiary guarantors. Subsidiary guarantees are
subordinated in right of payment to all existing and future senior debt of
subsidiary guarantors, including the Credit Facility, and are also effectively
subordinated to all secured obligations of subsidiary guarantors to the extent
of the assets securing their obligations, including the Credit Facility.
Furthermore, the indenture permits subsidiary guarantors to incur additional
indebtedness, including senior debt, subject to certain limitations. The Company
has not presented separate financial statements and other disclosures concerning
each of the subsidiary guarantors because management has determined that such
information is not material to investors.
The senior subordinated notes are redeemable, at the Company's option, in
whole or in part, at any time after February 15, 2003, at the following
redemption prices, plus accrued and unpaid interest and liquidated damages, if
any, to the redemption date: (i) 2003--104.063%; (ii) 2004--102.708%; (iii)
2005--101.354%; and (iv) 2006 and thereafter - 100%. Upon the occurrence of a
change in control, the Company will be required to make an offer to repurchase
all or any part of each holder's senior subordinated notes at a repurchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
and liquidated damages, if any, thereon to the repurchase date. There can be no
assurance that the Company will have the financial resources necessary to
purchase the senior subordinated notes upon a change in control or that such
repurchase will then be permitted under the Credit Facility.
Under the indenture, if the Company sells assets (other than inventory in
the ordinary course of business or leases or assets subject to leases in the
ordinary course of business) with a fair market value in excess of $2,000 or for
net proceeds in excess of $2,000, the Company must comply with certain
requirements. Additionally, the Company must use the proceeds from such asset
sales, within 270 days after completion of the sales, to either permanently
repay senior debt or to acquire other businesses or assets (or, if such proceeds
are not used for these purposes, then such proceeds must be used to repurchase
senior subordinated notes). Further, if the value of the assets sold exceeds
$15,000, the Board of Directors must determine that the Company is receiving
fair market value for the assets sold.
The indenture contains certain other covenants that, among other things,
limit the Company's ability and that of its subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, make investments, issue capital stock of subsidiaries, create
certain liens securing indebtedness, enter into certain transactions with
affiliates, sell assets or enter into certain mergers and consolidations or sell
all or substantially all of the Company's assets.
On August 14, 2001, the Company entered into an agreement with the holders
of 73.02% of its outstanding 8 1/8% senior subordinated notes to restructure
these notes. See Note 7.
OTHER LOANS
In connection with the Company's acquisition of Kratz-Wilde Machine Company
in October 1997, a subsidiary of the Company delivered a non-interest-bearing
promissory note (guaranteed by the Company) to the
11
sellers in the original principal amount of $2,500 (discounted to $2,200). A
payment of $1,250 was made during January 1999 and the final payment of $1,250
was made during January 2000. Interest on this note was imputed at 8%.
In connection with the acquisition of Caribe and AIDI, a subsidiary of the
Company delivered to the sellers a promissory note in the original principal
amount of $5,000, which was guaranteed by the Company. The note was payable over
a two year period with an interest rate of 8% per annum. The first payment of
$2,500 was made during March 1999 and the second payment of $2,500 was made
during March 2000.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
Several lawsuits have been filed against the Company and certain of its
officers and directors, and its auditors, in the United States District Court
for the Southern District of Florida, which have now been consolidated into a
single lawsuit. The consolidated complaint, as amended in March 2000 and in
September 2000, alleges violations of Sections 11 and 15 of the Securities Act
of 1933 ("Securities Act") and Sections 10(b) and 20(a) of, and Rule 10b-5
under, the Securities Exchange Act of 1934 ("Exchange Act"). Among other
matters, the amended consolidated complaint alleges that the Company's reported
financial results were materially misleading and violated generally accepted
accounting principles. The amended consolidated complaint seeks damages and
certification of two classes, one consisting of purchasers of the Company's
common stock in the June 1999 public offering and one consisting of purchasers
of the Company's common stock during the period between April 30, 1997 and April
14, 2000. On August 22, 2001, the District Court granted the Company's motion to
dismiss the pending claims under the Exchange Act, with leave to amend, but
denied the Company's motion to dismiss the pending claims under the Securities
Act. The Company believes that the allegations contained in the amended
consolidated complaint are without merit and intends to vigorously defend these
and any related actions. Nevertheless, unfavorable resolution of these lawsuits
could have a material adverse effect on the Company's financial position and
results of operations.
The U.S. Securities and Exchange Commission is conducting an inquiry into
the Company's accounting for certain prior year transactions. The Company is
cooperating with the SEC in its inquiry.
The Company is also involved in various lawsuits and other contingencies
arising out of its operations in the normal course of business. In the opinion
of management, the ultimate resolution of these claims and lawsuits will not
have a material adverse effect upon the financial position or results of
operations of the Company.
ENVIRONMENTAL MATTERS
The Company is taking remedial action pursuant to Environmental Protection
Agency and Florida Department of Environmental Protection ("FDEP") regulations
at TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact and magnitude of the required
remediation efforts on the Company. Based upon the most recent cost estimates
provided by environmental consultants, the Company believes that the total
testing, remediation and compliance costs for this facility will be
approximately $1,400. Testing and evaluation for all known sites on TIMCO-Lake
City's property is substantially complete and the Company has commenced a
remediation program. The Company is currently monitoring the remediation, which
will extend into the future. Subsequently, the Company's accruals were increased
because of this monitoring, which indicated a need for new equipment and
additional monitoring. Based on current testing, technology, environmental law
and clean-up experience to date, the Company believes that it has established an
accrual for a reasonable estimate of the costs associated with its current
remediation strategies. To comply with the financial assurances required by the
FDEP, the Company has issued a $1,400 standby letter of credit in favor of the
FDEP.
Additionally, there are other areas adjacent to TIMCO-Lake City's facility
that could also require remediation. The Company does not believe that it is
responsible for these areas; however, it may be asserted that the Company and
other parties are jointly and severally liable and are responsible for the
remediation of those properties. No estimate of any such costs to the Company is
available at this time.
The Company owns a parcel of real estate on which the Company previously
operated an electronics business. The Company is currently assessing
environmental issues with respect to this property. When the Company acquired
Whitehall, its environmental consultants estimated that remediation costs
relating to this property could be up to $1,000.
12
Accrued expenses in the accompanying December 31, 2000 and June 30, 2001
condensed consolidated balance sheets includes $1,702 and $1,386, respectively,
related to obligations to remediate the environmental matters described above.
Future information and developments will require the Company to continually
reassess the expected impact of the environmental matters discussed above.
Actual costs to be incurred in future periods may vary from the estimates, given
the inherent uncertainties in evaluating environmental exposures. These
uncertainties include the extent of required remediation based on testing and
evaluation not yet completed and the varying costs and effectiveness of
remediation methods.
OTHER MATTERS
The Company has employment agreements with certain of its officers and key
employees. The employment agreements provide that such officers and key
employees may earn bonuses, based upon a sliding percentage scale of their base
salaries, provided the Company achieves certain financial operating results, as
defined. Further, certain of these employment agreements provide for certain
severance benefits in the event of a change of control.
In January 2001, the Company sold a loan related to its former corporate
headquarters to a principal stockholder of the Company for 90% of the then
outstanding principal balance of $2,006. In conjunction with the transaction,
the Company granted to the stockholder warrants to purchase 25,000 shares of
common stock at an exercise price of $3.63 per share. The value of the warrants
of $46 was charged to operating results and credited to additional paid-in
capital.
The Company has a commitment with a vendor to convert one Airbus aircraft
from passenger configuration to cargo configuration. The terms of the agreement
specify that the Company has the right to terminate the agreement; however, the
Company could be subject to a termination fee. The termination fee would be
calculated as the unused costs incurred by the vendor plus a fee equal to 10% of
such unused costs.
On December 17, 1998, the Company entered into an operating lease for its
build-to-suit corporate headquarters and warehouse facility with Wells Fargo, as
successor to First Security Bank, National Association, as trustee of a newly
created trust, as lessor. The lease has an initial term of five years and is a
triple net lease with annual rent as provided in the lease. The lease contains
financial covenants regarding the Company's financial performance and certain
other affirmative and negative covenants, which it will be obligated to comply
with during the term of the lease.
Substantially all of the Company's subsidiaries have guaranteed the
Company's obligations under the lease. Additionally, the Company has an option
to acquire the new facility at the end of the lease for an option price as
determined in the lease. Alternatively, if the Company does not purchase the new
facility at the end of the lease, it will be obligated to pay certain amounts as
provided in the lease. Management estimates that the current fair value of the
facility exceeds the Company's purchase option. Accordingly, no accrual for
the obligation has been recorded by the Company.
Lease payments are currently at a rate of LIBOR plus 4.50% and the Company
is responsible for all property taxes, insurance and maintenance of the
property. The Company has subleased a portion of the facility to the purchaser
of the Company's redistribution operation (see Note 2). The sublease is for an
initial term of five years with an additional option to renew for five
consecutive five-year terms at market rates. Payments during the initial term
are the lesser of $384 per month or the actual amount paid by the Company
relating to the premises subleased, less $26 per month relating to certain space
which the Company occupies in the building.
The development of the new facility was financed by the trust through a
$43,000 loan facility provided by a financial institution. Pursuant to the
agreements entered into in connection with this financing, the Company was
obligated to develop the new facility on behalf of the trust and was responsible
for the timely completion thereof within an established construction budget. As
discussed in Note 8, in conjunction with the sale of Caribe, the purchaser of
this business also acquired the real estate and facility used by the Caribe
business for $8,500. These proceeds were used to repay a portion of the
financing utilized to develop this facility. The Company and substantially all
of its subsidiaries have guaranteed the repayment of $29,340 of the trust's
obligations under these agreements. The trust's obligations under these
agreements are secured by a lien on the real property and improvements
comprising the facilities and on the fixtures therein. Further, the Company has
issued an irrevocable letter of credit in the amount of $9,000 to secure both
its obligations under the lease and certain of the trust's obligations under the
loan agreement.
The lease agreement has been amended on several occasions. Under the terms
of the April 19, 2001 amendment, two shareholders of the Company provided a
guarantee in an amount up to $1.0 million. In exchange for providing their
guarantee, the shareholders each received warrants to purchase 50,000 shares of
the Company's commmon stock at an exercise price of $1.75 per share the value of
which was charged to results of operations during the period. Such guarantee has
been released in conjunction with the sale of Caribe and repayment of proceeds
relating to the sale of the real estate and facility as discussed above. As part
of the April 19, 2001 amendment, the lessor also agreed to waive non-compliance
with financial covenants, if any, through the period ended December 31, 2001.
Further, under a September 10, 2001 agreement, the Company has agreed that
the lender may draw down in full, at any time, the $9,000 letter of credit which
the Company has posted as security for this loan and to apply the proceeds from
such letter of credit draw against balances outstanding under this loan
agreement.
13
6. EARNINGS PER SHARE
The computation of weighted average common and common equivalent shares
used in the calculation of basic and diluted earnings per share is as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- ----------------------------
2000 2001 2000 2001
----------- --------- ----------- ---------
Weighted average common and common
equivalent shares outstanding used in
calculating basic and diluted earnings per share 15,015 15,015 15,015 15,015
======== ======== ======== =========
Options and warrants outstanding which are not
included in the calculation of diluted
earnings per share because their impact is
antidilutive 1,773 4,285 1,773 4,285
======== ======== ======== =========
7. CONTEMPLATED SENIOR SUBORDINATED NOTE RESTRUCTURING AND RIGHTS OFFERING
In August 2001, the Company entered into an agreement with the holders of
73.02% of its outstanding senior subordinated notes to restructure those notes.
Under the agreement, the note holders will exchange their existing notes for up
to $10,000 in cash, $100,000 of new five-year notes with paid-in-kind interest
of 8% per annum and 15% of the equity of the reorganized company. The new notes
will be redeemable at the Company's option at the following percentages of par
plus accrued interest through the date of redemption: 2002-70.0%, 2003-72.5%,
2004-73.0%, 2005-75.625% and 2006-77.5%. If the new notes are not redeemed prior
to their maturity, they will convert into common stock representing 90%
ownership of the reorganized company. The new notes will also provide that the
holders will receive additional shares of common stock representing 15% of the
reorganized company if the notes are redeemed in 2002 or 2003 and 10% of the
reorganized company if the notes are redeemed in 2004, 2005 or 2006. As a result
of the contemplated note restructuring and agreement entered into with holders
of the existing notes, the Company has classified the existing senior
subordinated notes as a current liability in the accompanying condensed
consolidated balance sheet as of June 30, 2001.
In connection with the restructuring, the Company intends to conduct a
rights offering of shares of its common stock to all existing stockholders to
raise $20,000. A principal stockholder of the Company has agreed to provide the
Company with a standby commitment to purchase any unsold allotments. Investors
who purchase the $20,000 of shares in the restructured company will receive 80%
of the outstanding common stock of the reorganized company. Under the terms of
the agreement, the Company's existing stockholders will own 5% of the
reorganized company. Additionally, the Company's new note holders and existing
stockholders will each as a group be granted warrants at a fixed price to
purchase an additional 10% of the reorganized company.
Approval of the note restructuring and the sale of common shares in the
rights offering will require approval of a majority of the Company's
stockholders. Completion of the note restructuring will also be subject to the
requirements that 80% of the holders of the Company's existing notes tender
their notes in the exchange and consent to the removal of all covenants
contained in the indenture relating to the existing notes (other than the
obligation to pay principal and interest), approval by the Company's senior
lenders and other customary conditions. Although there can be no assurances, the
restructuring is expected to be completed by the end of 2001.
Under the agreement, the holders of more than a majority of the Company's
outstanding notes have agreed to waive the default arising as a result of the
failure to pay the interest payment on its notes due on August 15, 2001. Also,
the Company's senior lenders have agreed to forbear on the default in the senior
loan agreements resulting from the failure to make the August 15, 2001 note
interest payment until December 31, 2001. The Company intends to file
registration statements relating to the note exchange offer and rights offering
in the near future.
In the event that the note exchange offer and rights offering fails to
close, such failure is likely to have a material adverse effect on the Company.
If the Company is unable to close the note exchange offer and rights offering,
it will seek alternate financing to meet its working capital obligations.
However, there can be no assurance such funding will be available.
14
8. OTHER EVENTS
Due to the current economic environment and the depressed status of the
aviation industry including the market for overhaul services relating to JT8D
engines and the results of operations relating to the Company's engine overhaul
operation, during the quarter ended June 30, 2001 the Company recognized non-
cash charges totaling $10,886 relating to an impairment of goodwill,
leasehold improvements and fixed assets and inventory reserves relating to this
operation. Of this amount, $9,886 and $1,000 are recorded in operating
expenses and cost of sales, respectively, in the accompanying condensed
consolidated statements of income.
In May 2001, the Company completed the sale of the assets of its Caribe
Aviation component repair operation. The purchase price was $22,500, of which
$21,750 was received in cash at the closing and the balance will be received
within one year, subject to post closing adjustments. The Company used $10,000
of the proceeds from the sale to repay its revolving credit facility and $5,500
to repay borrowings under its term loans (see Note 4). The balance, net of
expenses, was used for working capital. In addition, the purchaser acquired the
real estate and facility on which the Caribe operation was located for an
aggregate purchase price of $8,500. The proceeds from the sale of the real
estate and facility were used to reduce the Company's outstanding tax retention
operating lease financing (see Note 5).
During the quarter ended June 30, 2001, the Company recognized a gain on
the sale of Caribe Aviation and income on a non-refundable lease deposit that
had previously been recorded as a long-term liability totaling $7,868 in the
aggregate. These amounts are recorded in other (income) expense in the
accompanying condensed consolidated statements of income. In addition, during
the quarter ended June 30, 2001 the Company received settlements on accounts
receivable of the former redistribution operation that had been previously fully
reserved. These collections, totaling $2,645, are recorded as part of loss from
discontinued operations in the accompanying condensed consolidated statements of
income.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES TO "AVIATION SALES," "WE,"
"OUR" AND "US" IN THIS QUARTERLY REPORT ON FORM 10-Q INCLUDES AVIATION SALES
COMPANY AND ITS SUBSIDIARIES. THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS OR MAY
CONTAIN FORWARD-LOOKING STATEMENTS, SUCH AS STATEMENTS REGARDING OUR STRATEGY
AND ANTICIPATED TRENDS IN THE INDUSTRY IN WHICH WE OPERATE. THESE FORWARD-
LOOKING STATEMENTS ARE BASED ON OUR CURRENT EXPECTATIONS AND ARE SUBJECT TO A
NUMBER OF RISKS, UNCERTAINTIES AND ASSUMPTIONS RELATING TO OUR OPERATIONS AND
RESULTS OF OPERATIONS, COMPETITIVE FACTORS, SHIFTS IN MARKET DEMAND, AND OTHER
RISKS AND UNCERTAINTIES, INCLUDING, IN ADDITION TO THOSE DESCRIBED BELOW AND
ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q, OUR ABILITY TO SUCCESSFULLY
COMPLETE THE CONTEMPLATED RESTRUCTURING OF OUR SENIOR SUBORDINATED NOTES, OUR
ABILITY TO CONTINUE TO GENERATE SUFFICIENT WORKING CAPITAL TO MEET OUR OPERATING
REQUIREMENTS, OUR MAINTAINING GOOD WORKING RELATIONSHIPS WITH OUR VENDORS AND
CUSTOMERS, COMPETITIVE PRICING FOR OUR PRODUCTS AND SERVICES, OUR ABILITY TO
ACHIEVE GROSS PROFIT MARGINS AT WHICH WE CAN BE PROFITABLE, INCLUDING MARGINS ON
SERVICES WE PERFORM ON A FIXED PRICE BASIS, COMPETITION IN THE AIRCRAFT MR&O
MARKET, OUR ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL IN OUR BUSINESSES,
UTILIZATION RATES FOR OUR MR&O FACILITIES, OUR ABILITY TO EFFECTIVELY MANAGE OUR
BUSINESS, ECONOMIC FACTORS WHICH AFFECT THE AIRLINE INDUSTRY AND CHANGES IN
GOVERNMENT REGULATIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES
MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM RESULTS EXPRESSED OR IMPLIED IN ANY
FORWARD-LOOKING STATEMENTS MADE BY US IN THIS QUARTERLY REPORT ON FORM 10-Q. WE
DO NOT UNDERTAKE ANY OBLIGATION TO REVISE THESE FORWARD-LOOKING STATEMENTS TO
REFLECT FUTURE EVENTS OR CIRCUMSTANCES.
The following discussion and analysis should be read in conjunction with
the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in our Annual Report on Form 10-
K, as amended, for the year ended December 31, 2000 (the "Form 10-K").
CONTEMPLATED SENIOR SUBORDINATED NOTE RESTRUCTURING AND RIGHTS OFFERING
On August 14, 2001, we entered into agreement with the holders of 73.02% of
our senior subordinated notes to restructure those notes. Under the agreement,
the note holders will exchange their existing $165 million in notes for up to
$10.0 million in cash, $100.0 million of new five-year notes with paid-in-kind
interest of 8% per annum and 15% of the equity of the reorganized company. The
new notes will be redeemable at our option at the following percentages of par
plus accrued interest through the date of redemption: 2002 - 70.0%, 2003-72.5%,
2004 -73.0%, 2005- 75.625% and 2006 -77.5%. If the new notes are not redeemed
prior to their maturity, they will convert into common stock representing 90%
of the reorganized company. The new notes will also provide that the holders
will receive additional shares of common stock representing 15% of the
reorganized company if the notes are redeemed in 2002 or 2003 and 10% of the
reorganized company if the notes are redeemed in 2004, 2005 or 2006.
In connection with the restructuring, we intend to conduct a rights
offering of shares of our common stock to all existing stockholders to raise
$20.0 million. One of our principal stockholders has agreed to provide us with a
standby commitment to purchase any unsold allotments. Investors who purchase the
$20.0 million of shares in the reorganized company will receive 80% of the
outstanding common stock of the reorganized company. Under the terms of the
agreement, our existing stockholders will own 5% of the restructured company.
Additionally, the new note holders and our existing stockholders will each as a
group be granted warrants at a fixed price to purchase an additional 10% of the
reorganized company.
Approval of the note restructuring and the sale of common stock in the
rights offering will require approval of a majority of our stockholders.
Completion of the note restructuring will be subject to the requirement that 80%
of the holders of our existing notes tender their notes in the exchange and
consent to the removal of all covenants contained in the indenture relating to
the existing notes (other than the obligation to pay principal and interest),
approval by senior lenders and other customary conditions. Although there can be
no assurances, we believe that we will be able to complete the restructuring by
the end of 2001.
Under the agreement, the holders of more than a majority of the outstanding
notes have agreed to waive the default arising as a result of the failure to pay
the interest payment due August 15, 2001. Also, the senior lenders have agreed
to waive the default in the senior loan agreements resulting from the failure
to make the August 15, 2001 note interest payment until December 31, 2001. We
intend to file registration statements relating to the note exchange offer and
rights offering in the near future.
In the event that the note exchange offer and rights offering fails to
close, such failure is likely to have a material adverse effect on us. If we are
unable to close the note exchange offer and rights offering, we will seek
alternate financing to meet our working capital obligations. However, there can
be no assurance such funding will be available.
RECENT DEVELOPMENTS CONCERNING OUR OPERATIONS
We believe that we will meet our working capital requirements during 2001
from funds available under our revolving credit agreement, from our operations,
from sales of individual assets or our equity securities, and from debt
infusions and other sources. However, there can be no assurance that we will
have sufficient working capital to meet our requirements. Because of our current
financial situation, our auditors have included a going concern modification in
their audit report regarding our 2000 financial statements.
16
In December 2000, we completed the sale of our Dixie Aerospace Bearings new
parts distribution operation and our redistribution operation and in September
2000 we completed the sale of our manufacturing operation and three of the A-300
aircraft which we owned. For the terms of these transactions, see Note 2 to
Condensed Consolidated Financial Statements and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Form 10-K.
In May 2001, we completed the sale of the assets of Caribe Aviation, one of
our component repair operations. The gross purchase price was $22.5 million, of
which $21.8 million was received in cash at the closing and the balance will be
received within one year, subject to post closing adjustments. We used $10.0
million of the proceeds from the sale to repay our revolving credit facility and
$5.5 million to repay borrowings under our term loans. The balance, net of
expenses, was used for working capital. In addition, the purchaser acquired the
real estate and facility on which the Caribe business is operated for an
aggregate purchase price of $8.5 million. The proceeds from the sale of the real
estate and facility were used to reduce our outstanding tax retention operating
lease financing.
As a result, in part, of the anticipated reduced volume of services to be
provided to a customer which filed for bankruptcy and in an effort to reduce
operating expenses, in March 2001 we temporarily closed our Oscoda, Michigan
heavy airframe maintenance facility and reduced headcount at certain of our
other MR&O facilities. We also consolidated our Aircraft Interior Design
operation into a single facility in Dallas, Texas and consolidated our Winston
Salem, North Carolina heavy airframe maintenance operation into our Greensboro,
North Carolina facility. In addition, in April 2001, we implemented salary and
benefit reductions that affected virtually all employees. These initiatives,
which reduced our total headcount by approximately 400, are expected to reduce
our operating expenses by approximately $22.0 million to $25.0 million on an
annual basis. During the second quarter of 2001, we implemented further
headcount reductions. In total, the employee headcount for our remaining MR&O
operations has been reduced by 19% since the beginning of 2001 to approximately
2,900 employees as of June 30, 2001.
The Company currently holds $29.4 million of notes receivable from KAV
Inventory, LLC ("KAV"), the joint venture formed as part of the sale of our
redistribution operation (see Note 2 to the Condensed Consolidated Financial
Statements). In addition, the Company currently has recorded assets including
inventory on consignment with the purchaser of that operation, potential
additional notes receivable from KAV and accounts receivable sold as part of the
transaction which the Company may be required to repurchase, which are included
in net assets of discontinued operations. The realizability of these assets is
highly dependent upon the timing of sales from the inventory of KAV and prices
obtained by the purchaser pursuant to its consignment agreement with KAV as well
as the financial condition of the purchaser and general economic and industry
conditions. During the quarter ended June 30, 2001, as a result of the default
of KAV under its credit agreement with the financial institution that provided
funding for the purchase of the inventory and the weakened economic conditions
being experienced by the purchaser of that business (as reported in its filings
with the SEC) and in the aviation industry, the Company recorded non-cash
reserves totaling $34.5 million, including a full reserve on the notes
receivable due from KAV.
RESULTS OF OPERATIONS
Operating revenues consist primarily of service revenues and sales of
materials consumed while providing services, net of allowances for returns. Cost
of sales consists primarily of labor, materials, freight charges and commissions
to outside sales representatives.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future. Many factors affect our operating results,
including:
. decisions made regarding sales of our assets to reduce our debt,
. timing of repair orders and payments from large customers,
. competition from other third party MR&O service providers,
. the number of airline customers seeking repair services at any time,
. the impact of fixed pricing on gross margins and our ability to
accurately project our costs in a dynamic environment,
. our ability to fully utilize our hangar space dedicated to maintenance
and repair services,
. the volume and timing for 727 cargo conversions and the impact during
future periods on airline use of both the 727 fleet type and JT8D
engines (both of which are older models) as a result of increased fuel
costs and other factors,
. our ability to attract and retain a sufficient number of mechanics to
perform the maintenance, overhaul and repair services requested by our
customers, and
. the timeliness of customer aircraft arriving for scheduled
maintenance.
Large portions of our operating expenses are relatively fixed. Since we
17
typically do not obtain long-term commitments from our customers, we must
anticipate the future volume of orders based upon the historic patterns of our
customers and upon discussions with our customers as to their future
18
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers could have a material adverse effect on our business,
financial condition and results of operations.
Operating revenues for the six months ended June 30, 2001 decreased $56.8
million or 27.1% to $152.5 million, from $209.3 million for the six months ended
June 30, 2000. The decrease in revenues is primarily attributable to decreased
revenues from our heavy airframe maintenance operations. This decrease was
generally caused by a reduction in market opportunities due to adverse market
conditions, which have caused many of our customers to delay maintenance on
their aircraft or park older aircraft maintained by us due to rising fuel prices
and economic conditions. Our market has also been adversely impacted during 2001
by increased competition that has spread outsourced available heavy airframe
maintenance among a larger group of providers. In addition, revenues decreased
due to the temporary closure of our Oscoda, Michigan facility and the
consolidation of our Winston Salem, North Carolina heavy aircraft maintenance
facility into our Greensboro, North Carolina operations, impacts of fixed
pricing and a change in the timing of revenue recognition in relation to the
design and construction of specialized parts effective December 31, 2000. In
addition, revenue for one of our aircraft component MR&O operations declined
$6.6 million, due to a reduction in market opportunities and the effects of
reduced working capital availability. Also, revenues for Caribe Aviation
declined $3.6 million due primarily to the sale of that business in May 2001.
For the same reasons, operating revenues for the three months ended June 30,
2001 decreased $36.7 million, or 34.1%, to $70.9 million, from $107.6 million
for the three months ended June 30, 2000.
Gross profit decreased $20.5 million, or 100.5% to ($0.1) million for the
six months ended June 30, 2001, compared with $20.4 million for the six months
ended June 30, 2000. Gross profit decreased $1.5 million, or 75.0% to $0.5
million for the three months ended June 30, 2001, compared with gross profit of
$2.0 million for the three months ended June 30, 2000. Gross profit for the
three and six months ended June 30, 2000 was negatively impacted by a charge
recorded in the second quarter of 2000 of $6.6 million relating to the
disposition of the three A-300 aircraft that were sold during August and
September 2000. In addition, we incurred losses of $1.3 million during the
beginning of the first quarter of 2001 associated with the start-up of
operations at one of our heavy airframe maintenance facilities for a new program
that began at the end of 2000. Additionally, due to adverse economic conditions
as described above, we provided for an additional $2.0 million in inventory and
other reserves during the three and six months ended June 30, 2001. The
remaining decrease in gross profit during these periods is primarily
attributable to the reduction in revenue described above relative to our
primarily fixed cost structure and the impact of price competition and fixed
pricing on certain of our heavy airframe maintenance operations. As a result of
reduced revenues and market opportunities, as described above, during the first
six months of 2001 we closed and consolidated certain facilities and reduced
headcount at each of our operations, resulting in an aggregate reduction of
approximately 19% of our workforce. In addition, in April 2001 we implemented
salary and benefit reductions that affected virtually all employees. These
initiatives are expected to reduce our operating expenses by approximately $22.0
million to $25.0 million on an annual basis. Gross profit as a percentage of
operating revenues decreased to less than 0.1% for the six months ended June 30,
2001, from 9.7% for the six months ended June 30, 2000. Gross profit as a
percentage of operating revenues decreased to 0.7% for the three months ended
June 30, 2001, from 1.9% for the three months ended June 30, 2000.
Operating expenses increased $6.4 million or 28.1% to $29.2 million for the
six months ended June 30, 2001, compared with $22.8 million for the six months
ended June 30, 2000. Operating expenses as a percentage of operating revenues
were 19.2% for the six months ended June 30, 2001, compared to 10.9% for the six
months ended June 30, 2000. Operating expenses increased $9.3 million or 80.9%
to $20.8 million for the three months ended June 30, 2001, compared with $11.5
million for the three months ended June 30, 2000. Operating expenses as a
percentage of operating revenues were 29.3% for the three months ended June 30,
2001 compared to 10.7% for the three months ended June 30, 2000. Included in
operating expenses for the six months ended June 30, 2001 are an aggregate of
$12.0 million in non-cash charges ($11.0 million during the quarter ended June
30, 2001), including the write off of goodwill and certain leasehold
improvements associated with the closure of the Oscoda, Michigan heavy airframe
maintenence facility and an impairment relating to the Oscoda, Michigan engine
overhaul operation, an allowance relating to a receivable from one airframe
customer which has experienced significant financial difficulty and
consolidation of the operations of Aircraft Interior Design into a single
facility in Dallas, Texas.
Interest expense for the six months ended June 30, 2001 increased by $2.3
million or 21.3% to $13.1 million, from $10.8 million for the six months ended
June 30, 2000. Interest expense for the three months ended June 30, 2001
increased by $1.1 million or 20.0% to $6.6 million, from $5.5 million for the
three months ended June 30, 2000. These increases were primarily attributable to
increased amortization of bank fees due to the significant bank fees paid during
2000 and the beginning of 2001 and amortization relating to the sale of Caribe
during the second quarter.
As described above, during the quarter ended June 30, 2001, we recorded a
charge to fully reserve against the notes receivable due from KAV Inventory, LLC
in the amount of $29.4 million. See further discussion above.
19
Other expense (income) decreased $7.9 million from expense of $1.0 million
for the six months ended June 30, 2000 to income of $6.9 million for the six
months ended June 30, 2001. Other expense (income) decreased $7.9 million from
expense of $1.0 million for the three months ended June 30, 2000 to income of
$6.9 million for the three months ended June 30, 2001. Other expense (income)
for the three and six months ended June 30, 2000 includes our recording a loss
of $0.9 million in connection with the disposition of the AvAero joint venture.
Included in other income for the three and six months ended June 30, 2001 is the
gain on the sale of Caribe and the recognition of income on a lease deposit,
totaling $7.9 million in the aggregate.
As a result of the above factors, loss before income taxes, equity income
of affiliate and discontinued operations for the six months ended June 30, 2001
was a loss of $64.9 million, compared to a loss of $14.2 million for the six
months ended June 30, 2000. As a result of the above factors, loss before income
taxes, equity income of affiliate and discontinued operations for the three
months ended June 30, 2001 was a loss of $49.4 million, compared to a loss of
$16.0 million for the three months ended June 30, 2000.
Equity income of affiliate, net of income taxes, decreased $0.1 million for
the six months ended June 30, 2001 to zero from $0.1 million for the same period
in 2000. The decrease was attributable to the winding down in the operations of
the affiliate. During the second quarter of 2000, our remaining investment in
the affiliate was liquidated resulting in a charge of $0.9 million, which is
included in interest expense and other.
For the reasons set forth above, loss from continuing operations for the
six months ended June 30, 2001 was $64.9 million or $4.33 per diluted share,
compared to $16.7 million, or $1.12 per diluted share for the six months ended
June 30, 2000. Loss from continuing operations for the three months ended June
30, 2001 was $49.4 million or $3.29 per diluted share, compared to $17.9
million, or $1.19 per diluted share for the three months ended June 30, 2000.
Weighted average common and common equivalent shares outstanding (diluted) were
15.0 million during the three and six months ended June 30, 2001 and 2000.
Loss from discontinued operations for the six months ended June 30, 2001
was $4.3 million, or $0.28 per diluted share, compared to $16.1 million or $1.07
per diluted share for the six months ended June 30, 2000. Loss from discontinued
operations for the three months ended June 30, 2001 was $4.6 million or $0.31
per diluted share compared to $13.4 million or $0.89 per diluted share for the
three months ended June 30, 2000. Loss from discontinued operations for the
three and six months ended June 30, 2001 is primarily comprised of collections
on receivables retained from the sale of the redistribution operation that had
been fully reserved offset by the reserving of certain other assets including
$5.1 million of reserves relating to assets whose realization is impacted by KAV
and the financial condition of the purchaser of the redistribution operation.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of June 30, 2001, we had outstanding indebtedness of approximately
$195.3 million (excluding letters of credit), of which $26.9 million was senior
debt and $168.4 million was other indebtedness. As of June 30, 2000, we had
$425.4 million of outstanding indebtedness. Our ability to make payments of
principal and interest on outstanding debt will depend upon our future operating
performance, which will be subject to economic, financial, competitive and other
factors beyond our control. The level of our indebtedness is also important due
to:
. our vulnerability to adverse general economic and industry conditions,
. our ability to obtain additional financing for future working capital
expenditures, general corporate and other purposes, and
. the dedication of a substantial portion of our future cash flow from
operations to the payment of principal and interest on indebtedness,
thereby reducing the funds available for operations and future business
opportunities.
In prior years, we relied primarily upon significant borrowings under our
credit facility, and sales of our securities, including our senior subordinated
notes, to satisfy our funding requirements relating to acquisitions of several
businesses and to finance the growth of our business. During 2000 and 2001 to
date, we have relied upon borrowings under our credit facility and the proceeds
of term loans obtained, along with the proceeds from our asset sales, to meet
our working capital requirements. We cannot assure you that financing
alternatives will be available to us in the future to support our existing
operations' working capital requirements.
20
CASH
Net cash provided by continuing operating activities during the six months
ended June 30, 2001 and 2000 was $5.0 million and $9.1 million, respectively.
Cash provided by (used in) investing activities during the six months ended June
30, 2001 and 2000 was $21.7 million and $(6.0) million, respectively. The cash
provided by investing activities for the six months ended June 30, 2001
primarily related to the sale of a note receivable to an affiliate and a
subsidiary coupled with an initiative to reduce capital expenditures associated
with tooling investments in our MR&O operations and equipment purchases. Cash
used in financing activities for the six months ended June 30, 2001 and 2000
was $27.2 million and $23.0 million, respectively. Cash used in financing
activities for the six months ended June 30, 2001 is primarily comprised of the
proceeds of a $10.0 million term loan executed in February 2001, net of payments
of deferred financing costs offset by continued reductions in our revolving loan
made possible by the sale of Caribe Aviation.
SENIOR CREDIT FACILITIES
Prior to May 31, 2000, we had a revolving loan and letter of credit
facility of $300.0 million with a group of financial institutions. Effective May
31, 2000, the Credit Facility was amended and restated and the commitment was
reduced to $285.0 million. Following the asset sales described above, the
commitment was reduced to $57.7 million. The Credit Facility has been amended on
several occasions since May 31, 2000. The credit facility, as amended to date
(the "Credit Facility") expires in July 2002. Interest under the Credit Facility
is, at our option, (a) prime plus 3.0%, or (b) LIBOR plus 4.5%. As of June 30,
2000 and June 30, 2001, the outstanding balance on the Credit Facility was
$268.0 million and $4.9 million, respectively. Borrowings under the Credit
Facility are secured by a lien on substantially all of our assets and the
borrowing base primarily consists of certain of our receivables and inventory.
The Credit Facility contains certain financial covenants regarding our
financial performance and certain other covenants, including limitations on the
amount of annual capital expenditures and the incurrence of additional debt, and
provides for the suspension of the Credit Facility and repayment of all debt in
the event of a material adverse change in the business or a change in control.
In addition, the Credit Facility requires mandatory repayments from the proceeds
of a sale of assets or an issuance of equity or debt securities or as a result
of insufficient collateral to meet the borrowing base requirements there under.
We were committed to pay a $1.0 million financing fee on June 30, 2001, which we
paid on July 2, 2001, and we paid an additional $0.2 million in financing fees
in August 2001. To the extent the Credit Facility remains outstanding as of
certain dates, we are committed to pay incremental financing fees as follows:
November 14, 2001 - 2% of outstanding commitment and February 14, 2002 - 2% of
outstanding commitment.
In February 2000, we obtained a $15.5 million senior term loan with the
financial institution that is agent for the Credit Facility. The proceeds from
the term loan were used to repay debt outstanding under the Credit Facility. The
term loan, as amended, bears interest at 12%, contains financial covenants that
are consistent with the Credit Facility and matures in July 2002. We repaid $3.5
million of the term loan from the proceeds of the sale of Caribe. Remaining
principal payments of $0.5 million per month are due beginning in January 2002
with a final principal payment of $8.5 million due in July 2002. Under the term
loan agreement, we also granted warrants to the lender to purchase 129,000
shares of our common stock exercisable for nominal consideration at any time
until December 31, 2005. The warrants entitle the holder to require us to
repurchase the warrants or common shares issued upon prior exercise of the
warrants at $8.50 per share.
Our senior lenders have agreed to forbear until December 31, 2001 in regard
to the default which existed in the senior credit facilities resulting from our
failure to make the August 15, 2001 subordinated note interest payment. This
forbearance effectively cures the cross-default under the term loan through the
end of the forbearance period. Subsequent to the end of the forbearance period
(if the restructuring is not completed by that date or if the forbearance period
is not otherwise extended) the holder of the term loan will have the ability to
accelerate payment of the outstanding term loan balance. As a result, the entire
$12.0 million balance of the term loan as of June 30, 2001 has been classified
as a current liability in the our June 30, 2001 condensed consolidated balance
sheet.
In February 2001, we obtained a $10.0 million senior term loan from a
financial institution. The term loan bears interest at LIBOR plus 2% and matures
in August 2002. The proceeds of the term loan were used to pay the semi-annual
interest payment on the senior subordinated notes in February 2001 of $6.7
million and for working capital purposes. In connection with the term loan, we
issued warrants to purchase 250,000 shares of our unissued common stock at an
exercise price of $4.00 per share to each of four individuals. Of these
individuals, one of them is one of our officers and directors and a second is
one of our principal stockholders. Each of these four individuals provided
credit support to the financial institution which advanced the term loan
proceeds. In May 2001, we obtained a short-term increase of up to $3.0 million
in the term loan. We borrowed $2.0 million under the increased term loan in May
2001 and thereafter repaid the additional borrowing from the proceeds of the
Caribe sale. One of our principal stockholders provided credit support for the
increased amount of the term loan. In return for providing credit support, the
stockholder received a cash fee of $0.1 million and warrants to purchase 333,334
shares of our common stock at an exercise price of $1.40 per share.
21
SENIOR SUBORDINATED NOTES
In February 1998, we sold $165.0 million in senior subordinated notes (the
"Notes") due in 2008 with a coupon rate of 8.125% at a price of 99.395%. The
Notes mature on February 15, 2008. Interest is payable on February 15 and August
15 of each year. The Notes are general unsecured obligations, subordinated in
right of payment to all existing and future senior debt, including indebtedness
outstanding under the Credit Facility and under facilities, which may replace
the Credit Facility in the future. In addition, the Notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including the Credit Facility.
The indenture pursuant to which the Notes have been issued (the
"Indenture") permits us and our subsidiaries to incur substantial additional
indebtedness, including senior debt. Under the Indenture, we may borrow
unlimited additional amounts so long as after incurring such debt we meet a
fixed charge coverage ratio for the most recent four fiscal quarters.
Additionally, the Indenture allows us to borrow and have outstanding additional
amounts of indebtedness (even if we do not meet the required fixed charge
coverage ratios), up to enumerated limits. We did not meet the fixed charge
coverage ratio for the one-year period ended June 30, 2001. Accordingly, our
ability to incur additional debt is currently limited under the Indenture. The
Notes are also effectively subordinated in right of payment to all existing and
future liabilities of any of our subsidiaries that do not guarantee the Notes.
The Notes are unconditionally guaranteed, on a senior subordinated basis,
by substantially all of our existing subsidiaries and each subsidiary that we
organize in the future, unless such subsidiary is designated as an unrestricted
subsidiary (the "Subsidiary Guarantors"). Subsidiary Guarantees are joint and
several, full and unconditional, general unsecured obligations of the Subsidiary
Guarantors. Subsidiary Guarantees are subordinated in right of payment to all
existing and future senior debt of Subsidiary Guarantors, including the Credit
Facility, and are also effectively subordinated to all secured obligations of
Subsidiary Guarantors to the extent of the assets securing such obligations,
including the Credit Facility. Furthermore, the Indenture permits Subsidiary
Guarantors to incur additional indebtedness, including senior debt, subject to
certain limitations.
The Notes are redeemable, at our option, in whole or in part, at any time
after February 15, 2003, at the following redemption prices, plus accrued and
unpaid interest and liquidated damages, if any, to the redemption date: (i)
2003--104.063%; (ii) 2004--102.708%; (iii) 2005--101.354%; and (iv) 2006 and
thereafter--100%.
Upon the occurrence of a change of control, we will be required to make an
offer to repurchase all or any part of holder's Notes at a repurchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
and liquidated damages, if any, thereon to the repurchase date. There can be no
assurance that we will have the financial resources necessary to purchase the
Notes upon a change of control or that such repurchase will be permitted under
the Credit Facility.
Under the Indenture, if we sell assets (other than inventory in the
ordinary course of business or leases or assets subject to leases in the
ordinary course of business) with a fair market value in excess of $2.0 million
or for net proceeds in excess of $2.0 million, we must comply with certain
requirements. First, the sales price must be at least equal to the fair market
value of the assets and at least 80% of the sales price must be paid in cash.
Second, we must use the proceeds from such asset sales, within 270 days after
completion of the sales, to either permanently repay senior debt or acquire
other businesses or assets (or, if the proceeds are not used for these purposes,
then such proceeds must be used to repurchase senior subordinated notes).
Proceeds from the asset sales described above have been used to permanently
repay senior debt. Further, if the value of the assets sold exceeds $15.0
million, our Board of Directors must determine that we are receiving fair market
value for the assets sold.
The Indenture contains certain other covenants that, among other things,
limit (as described above) our ability and the ability of our subsidiaries to
incur additional indebtedness and issue preferred stock, pay dividends or make
other distributions, make investments, issue capital stock of subsidiaries,
create certain liens securing indebtedness, enter into certain transactions with
affiliates, sell assets or enter into certain mergers and consolidations or sell
all or substantially all of our assets.
As described above, we have entered into an agreement to restructure these
notes. See "Contemplated Senior Subordinated Note Restructuring" above.
OTHER NOTES
In connection with the acquisition of Kratz-Wilde Machine Company, one of
our subsidiaries delivered a non-interest-bearing promissory note (guaranteed by
us) to the sellers in the original principal amount of $2.5
22
million (discounted to $2.2 million). A payment of $1.2 million was made during
January 1999 and the remaining principal balance of $1.3 million was paid in
January 2000. Interest on this note has been imputed at 8%.
In connection with the acquisition of Caribe and AIDI, one of our
subsidiaries delivered to the sellers a promissory note in the original
principal amount of $5.0 million, which was guaranteed by us. The note was
payable over a two-year period with an interest rate of 8% per annum. The first
payment of $2.5 million was made during March 1999 and the final payment was
paid in March 2000.
LEASE FOR MIRAMAR FACILITIES
During 1998, we decided to move our redistribution operation and one of our
MR&O operations to new facilities in Miramar, Florida. On December 17, 1998, we
entered into an operating lease for the new facility with Wells Fargo, as
successor to First Security Bank, National Association, as trustee of a newly
created trust, as lessor. The lease has an initial term of five years and is a
triple net lease. The lease contains financial covenants regarding our financial
performance and other affirmative and negative covenants. Substantially all of
our subsidiaries have guaranteed our obligations under the lease. Additionally,
we have an option to acquire the new facility at the end of the lease and, if we
do not purchase the new facility at the end of the lease, we will be obligated
to pay a fee. Management estimates that the current fair value of the facilities
exceeds the Company's purchase option. Accordingly, no fee has been accrued by
the Company. We moved our corporate headquarters and redistribution operations
into one of the new facilities in April 2000 and one of our MR&O operations,
Caribe Aviation, into another building adjacent to the redistribution operations
facility during October 2000. In conjunction with the sale of our redistribution
operation (see "Recent Developments Concerning Our Operations" above), we
subleased the corporate headquarters and redistribution operation facility to
the purchaser of our redistribution operation for a period of five years with
the right to renew for five consecutive five-year periods at a market rental
rate. Further, in May 2001 the purchaser of the Caribe business acquired the
land and building on which that business operates.
The lessor has financed the development of the new facility through a $43.0
million loan from a financial institution. In conjunction with the sale of
Caribe, the purchaser of that business also acquired the real estate and
facility in which Caribe operates for $8.5 million. These proceeds were used to
repay a portion of the financing provided to develop the facility. We and
substantially all of our subsidiaries have guaranteed the repayment of $29.3
million of the lessor's obligations under its loan agreement. The lessor's
obligations under the agreement are secured by a lien on the real property and
on the new facility. Further, we have posted an irrevocable letter of credit in
the amount of $9.0 million to secure both our obligations under the lease and
certain of the lessor's obligations under the related loan agreement.
The lease agreement has been amended on several occasions. Under the terms
of an April 19, 2001 amendment, two shareholders of the Company provided a
guarantee in an amount up to $1.0 million. Such guarantee was released in
conjunction with the sale of Caribe and repayment of proceeds relating to the
sale of the real estate and facility as discussed above. As part of the April
19, 2001 amendment, the lessor has agreed to waive non-compliance with financial
covenants, if any, through the period ended December 31, 2001.
Further, under a September 10, 2001 agreement, we have agreed that the
lender may draw down in full, at any time, the $9.0 million letter of credit
which we have posted as security for this loan and apply the proceeds from such
letter of credit draw against balances outstanding under the loan agreement.
23
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
See Note 6 to the Company's Unaudited Condensed Consolidated Financial
Statements included in this filing.
Item 2. CHANGES IN SECURITIES
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
See Item 5 below.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On August 21, 2001, the Company held its 2001 annual meeting of
stockholders. At the meeting, the stockholders elected the following
four persons to serve on the Company's Board of Directors for the term
noted or until their successors are elected and qualified: Roy T.
Rimmer, Jr. (term expiring 2004), Philip B. Schwartz and Steven L.
Gerard (term expiring 2003) and Sam Humphreys (term expiring 2002).
Director Ben Quevedo's term will expire 2002.
The shares voted for and against each of the candidates for election
as directors were as follows:
FOR AGAINST
-----------------------
Roy T. Rimmer, Jr. 8,038,186 147,788
Philip B. Schwartz 8,038,952 147,022
Steven L. Gerard 8,049,929 145,045
Sam Humphreys 7,977,427 208,547
Additionally, the stockholders approved a resolution ratifying the
selection of Arthur Andersen as the Company's independent auditor for
the 2001 fiscal year. The vote on that resolution was: 8,011,899 FOR,
7,153 AGAINST and 166,922 ABSTAIN.
Item 5. OTHER INFORMATION
On August 14, 2001, the Company entered into an agreement with the
holders of 73.02% of its outstanding senior subordinated notes to
restructure those notes. For particulars please see Note 7 of Notes to
Condensed Consolidated Financial Statements and Item 2. "Management's
Discussion and Analysis - Contemplated Senior Note Restructuring and
Rights Offering."
Item 6. EXHIBITS AND REPORTS ON FORMS 8-K
(a) EXHIBITS
EXHIBIT DESCRIPTION
10.1 Forbearance Letter dated August 16, 2001 regarding the
Fourth Amended and Restated Credit Agreement dated as of May
31, 2000, as amended
10.2 Consent Letter dated August 13, 2001 regarding the Fourth
Amended and Restated Credit Agreement dated as of May 31,
2000, as amended
10.3 Forbearance Letter dated August 16,2001 regarding the
Participation Agreement dated as of December 17, 1998, as
amended
10.4 Agreement dated August 14, 2001 between Aviation Sales
Company and certain of its subsidiaries, Lacy Harber on
behalf of a group of investors,certain holders of Aviation
Sales Company's common stock, and certain holders of
Aviation Sales Company's Notes
10.5 Waiver and Forbearance extension, dated September 7, 2001,
to Fourth Amended and Restated Credit Agreement
10.6 Note Modification Agreement, dated September 7, 2001, to
Citicorp Term Loan
10.7 Consent, Waiver and Forbearance Agreement No. 11 for Lease
Agreement and Certain Other Operative Agreements, dated as
of September 10, 2001
99.1 Press Release dated August 16, 2001
(b) REPORTS ON FORM 8-K
1. The Company filed on June 8, 2001 a Report on Form 8-K,
dated May 25, 2001, addressing the sale of the assets of
Caribe Aviation, the related amendments to the Credit
Facility and TROL, the amendments to the Company's agreement
with Lacy Harbor and its Stockholders' Rights plan.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AVIATION SALES COMPANY
Dated: September 13, 2001
BY:/S/ MICHAEL C. BRANT
--------------------------------------------
Michael C. Brant
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
25
EXHIBIT INDEX
EXHIBIT DESCRIPTION
10.1 Forbearance Letter dated August 16, 2001 regarding the Fourth Amended
and Restated Credit Agreement dated as of May 31, 2000, as amended
10.2 Consent Letter dated August 13, 2001 regarding the Fourth Amended and
Restated Credit Agreement dated as of May 31, 2000, as amended
10.3 Forbearance Letter dated August 16,2001 regarding the Participation
Agreement dated as of December 17, 1998, as amended
10.4 Agreement dated August 14, 2001 between Aviation Sales Company and
certain of its subsidiaries, Lacy Harber on behalf of a group of
investors,certain holders of Aviation Sales Company's common stock,
and certain holders of Aviation Sales Company's Notes
10.5 Waiver and Forbearance Extension, dated September 7, 2001 to Fourth
Amended and Restated Credit Agreement
10.6 Note Modification Agreement, dated September 7, 2001, to Citicorp Term
Loan
10.7 Consent, Waiver and Forbearance Agreement No. 11 for Lease Agreement
and Certain Other Operative Agreements, dated as of September 10, 2001
99.1 Press Release dated August 16, 2001
26