-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E9Rgh8KyUhrFXIzU444lmF6GnTN0GuwA9l6JTNNMrxGLoi3WZU9SBawiLgjt6144 Apedgi09yLmxFjBz7AlM+g== 0000950117-97-001295.txt : 19970812 0000950117-97-001295.hdr.sgml : 19970812 ACCESSION NUMBER: 0000950117-97-001295 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: KELLSTROM INDUSTRIES INC CENTRAL INDEX KEY: 0000918275 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT ENGINES & ENGINE PARTS [3724] IRS NUMBER: 133753725 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-23764 FILM NUMBER: 97655367 BUSINESS ADDRESS: STREET 1: 14000 NW 4 STREET STREET 2: 11TH FLOOR CITY: SUNRISE STATE: FL ZIP: 33325 BUSINESS PHONE: 9548450427 MAIL ADDRESS: STREET 1: 14000 NW 4TH STREET CITY: SUNRISE STATE: FL ZIP: 33325 FORMER COMPANY: FORMER CONFORMED NAME: ISRAEL TECH ACQUISITION CORP DATE OF NAME CHANGE: 19940301 10QSB 1 KELLSTROM 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (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, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 0-23764 KELLSTROM INDUSTRIES, INC. -------------------------- (Exact name of small business issuer as specified in its charter) DELAWARE 13-3753725 - -------- ------------ (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 14000 N.W. 4TH ST., SUNRISE, FLORIDA 33325 - ------------------------------------- -------- (Address of principal executive offices) Zip Code (954) 845-0427 - -------------- (Issuer's telephone number) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ---- ---- State the number of shares of common stock outstanding as of August 8, 1997: 7,878,774 shares. Transitional Small Business Disclosure Format (check one): YES NO X ---- ---- KELLSTROM INDUSTRIES, INC. QUARTERLY REPORT FORM 10-QSB INDEX Page ---- PART I ------ Item 1 - Financial Statements: Consolidated Condensed Balance Sheets 3 Consolidated Condensed Statements of Earnings 4 Consolidated Condensed Statements of Cash Flows 6 Notes to Consolidated Condensed Financial Statements 8 Pro Forma Consolidated Condensed Statements of Earnings 12 Item 2 - Management's Discussion and Analysis of 17 Financial Condition and Results of Operations PART II ------- Item 6 - Exhibits and Reports on Form 8-K 21 Signatures 21 2 ITEM I FINANCIAL STATEMENTS KELLSTROM INDUSTRIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited) June 30, 1997 December 31, 1996 ------------- ----------------- Assets Current Assets: Cash and cash equivalents $ 3,899,970 $ 154,254 Trade receivables, net of allowances for returns and doubtful accounts of $179.851 and $150.000 in 1997 and 1996 respectively 7,648,486 4,023,298 Inventory 43,904,873 15,723,370 Prepaid expenses and other current assets 1,335,292 588,286 Deferred tax asset 500,351 57,176 Investment in securities 729,286 1,829,532 ------------ ------------ Total current assets $ 58,018,258 $ 22,375,916 Property, plant and equipment, net 3,056,993 2,943,077 Intangible assets, net 17,216,432 3,618,862 Deferred tax asset 170,939 306,079 Other assets 3,050,879 376,791 ------------ ------------ Total Assets $ 81,513,501 $ 29,620,725 ============ ============ Liabilities and Stockholders' Equity Current Liabilities: Short-term notes payable $ 16,137,836 $ 5,157,302 Current maturities of long-term debt 123,402 211,068 Accounts payable 1,605,537 1,651,405 Accrued expenses 2,514,599 1,290,393 Income taxes payable 489,959 157,212 Deferred tax liability 71,990 173,379 ------------ ------------ Total current liabillties $ 20,943,323 $ 8,640,759 Long-term debt, less current maturities 16,015,245 2,819,225 ------------ ------------ Total Liabilities $ 36,958,568 $ 11,459,984 Stockholders' Equity: Preferred stock, $.001 par value; 1,000,000 shares authorized; none issued -- -- Common stock, $.001 par value; 20,000,000 shares authorized; 7,852,081 shares and 3,315,308 shares issued and outstanding in 1997 and 1996 respectively 7,852 3,315 Additional paid-in capital 38,164,973 14,871,559 Retained earnings 6,613,224 3,012,642 Net unrealized gain (loss) on investment securities, net (231,116) 273,225 ------------ ------------ Total Stockholders' Equity $ 44,554,933 $ 18,160,741 ------------ ------------ Total Liabilities and Stockholders' Equity $ 81,513,501 $ 29,620,725 ============ ============
See accompanying notes to consolidated condensed financial statements 3 KELLSTROM INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited)
Three Months Ended June 30, ------------------------------ 1997 1996 ----------- ------------ Net revenues $ 17,949,910 $ 5,917,832 Cost of goods sold (11,807,639) (3,630,968) Selling, general and administrative expenses (1,914,440) (729,330) Depreciation and amortization (351,279) (110,631) ------------ ------------ Operating income $ 3,876,552 $ 1,446,903 Interest expense, net of interest income (791,764) (136,033) ------------ ------------ Income before income taxes $ 3,084,788 $ 1,310,870 Income taxes (1,143,574) (482,461) ------------ ------------ Net income $ 1,941,214 $ 828,409 ============ ============ Net income per share $ 0.22 $ 0.13 ============ ============ Weighted average number of common shares outstanding 9,036,639 8,050,454 ============ ============
See accompanying notes to consolidated condensed financial statements 4 KELLSTROM INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited)
Six Months Ended June 30, ------------------------------ 1997 1996 ------------ ------------ Net Revenues $ 34,415,983 $ 11,188,827 Cost of goods sold (22,534,624) (7,112,983) Selling, general and administrative expenses (3,684,769) (1,477,431) Depreciation and amortization (640,158) (215,496) ------------ ------------ Operating income $ 7,556,432 $ 2,382,917 Interest expense, net of interest income (1,827,622) (252,007) ------------ ------------ Income before income taxes $ 5,728,810 $ 2,130,910 Income tax (2,128,228) (785,794) ------------ ------------ Net income $ 3,600,582 $ 1,345,116 ============ ============ Net income per share $ 0.42 $ 0.23 ============ ============ Weighted average number of common shares outstanding 9,208,297 8,050,454 ============ ============
See accompanying notes to consolidated condensed financial statements 5 KELLSTROM INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended June 30, -------------------------------------- 1997 1996 ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,600,582 $ 1,345,116 ------------ ------------ Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization $ 640,158 $ 203,623 Amortization of deferred financing costs 402,586 11,873 Deferred income taxes (114,519) 23,188 Changes in operating assets and liabilities: (Increase) decrease in trade receivables, net (2,003,524) 1,006,444 Increase in inventory (905,642) (2,422,167) Decrease (increase) in prepaid expenses and other current assets 385,394 (271,574) (Increase) decrease in other assets (212,266) 31,770 Decrease in accounts payable (1,576,654) (618,707) Decrease in accrued expenses (1,126,074) (300,797) Increase (decrease) in income taxes payable 332,747 (359,894) ------------ ------------ Net cash used in operating activities $ (577,212) $ (1,351,125) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of IASI assets $(25,053,141) -- Sale of investment securities 301,000 -- Purchase of property, plant and equipment (220,107) $ (788,844) ------------ ------------ Net cash used in investing activities $(24,972,248) $ (788,844) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net (payments)/borrowings under line of credit agreements $ (3,098,264) $ 2,030,000 Debt proceeds 21,000,000 501,221 Debt repayment, including capital lease obligations (7,891,646) (372,271) Common stock issued 20,794,370 -- Loans to corporate directors (200,000) -- Deferred financing costs (1,309,284) (24,375) ------------ ------------ Net cash provided by financing activities $ 29,295,176 $2,134,575 ------------ ------------ NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS $ 3,745,716 $ (5,394) CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 154,254 210,871 ------------ ------------ CASH & CASH EQUIVALENTS, END OF PERIOD $ 3,899,970 $ 205,477 ============ ============
(continued) See accompanying notes to consolidated condensed financial statements 6 KELLSTROM INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (unaudited) (continued)
Six Months Ended June 30, -------------------------------- 1997 1996 ----------- ----------- Supplemental disclosures of non-cash investing and financing activities: IASI assets acquired for warrants $ 1,173,134 $ -- =========== =========== Deferred financing costs paid through the issuance of warrants $ 1,530,446 $ -- =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 882,061 $ 194,301 =========== =========== Income taxes $ 1,905,285 $ 1,128,500 =========== =========== Supplemental disclosures of purchase of IASI assets, net of liabilities: Cash $ 36,709 Receivables 1,621,664 Inventory 27,275,861 Prepaid expenses and other current assets 1,132,700 Property, plant and equipment 74,865 Goodwill 14,055,172 Other assets 26,177 ----------- Total assets $44,222,848 =========== Accrued expenses $ 2,350,280 Accounts payable 1,530,786 Notes payable 14,078,798 ----------- Total liabilities $17,959,864 =========== Net acquisition cost $26,262,984 Less warrants issued to seller 1,173,134 ----------- Cash paid to seller at closing $25,089,850 Less cash acquired 36,709 ----------- Net cash used in acquisition $25,053,141 ===========
See accompanying notes to consolidated condensed financial statements 7 KELLSTROM INDUSTRIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying consolidated condensed financial statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed balance sheet as of December 31, 1996 has been derived from audited financial statements. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations of the SEC. These consolidated condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-KSB. In the opinion of management of the Company, the consolidated condensed financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the consolidated condensed financial position of Kellstrom Industries, Inc. as of June 30, 1997, and the consolidated condensed results of earnings for the three and six month periods ended June 30, 1997 and 1996 and the consolidated condensed statements of cash flows for the six month periods ended June 30, 1997 and 1996. The results of operations for such interim periods are not necessarily indicative of the results for the full year. NOTE 2 - ACQUISITION On January 15, 1997, the Company through its 100% subsidiary, IASI, Inc., completed the acquisition of substantially all of the assets and assumed certain of the liabilities of International Aircraft Support, L.P. ("IASI"), a California limited partnership, for a cash purchase consideration of $25.1 million and issued warrants, with an expiration date of two years from January 15, 1997, to purchase 500,000 shares of the Company's Common Stock, par value $.001 per share (the "Common Stock") at $9.25 per share. The acquisition was financed through the issuance of $15 million in senior subordinated debt and warrants, along with the proceeds of a $6 million subordinated bridge loan and warrants ("Bridge Loan") with the balance from the Company's working capital. The acquisition was accounted for using the purchase method of accounting for business combinations. The Company also assumed IASI's existing debt including IASI's various credit facilities, which provided for credit up to a maximum of approximately $20 million as of the date of the acquisition. The Bridge Loan matured on April 15, 1997 and was paid in full by the Company. The interest rate on the Bridge Loan was 10% and, additionally, 85,625 warrants that are exercisable at $10 and expire on April 15, 2000 were issued to the Bridge Loan lenders. The interest rate on the $15 million senior subordinated debt is 11.75%, payable semi-annually. Additionally, 305,660 warrants were issued to this lender, such warrants are exercisable at $10 and expire on January 15, 2004. Principal on this debt is payable in three equal annual installments beginning January 15, 2002. NOTE 3 - STOCKHOLDERS' EQUITY The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences as may be determined from time to time by the Board of Directors. The Company is authorized to issue 20,000,000 shares of Common Stock. At June 30, 1997 and December 31, 1996, the Company had 7,852,081 and 3,315,308 shares of Common Stock outstanding respectively. On January 17, 1997, the Company's Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock. Each right entitles the registered holder to purchase from the Company one one-hundredth of a share a Series A Junior Participating Cumulative Preferred Stock ("Series A Preferred Stock") at an exercise price of $80. The Rights are not exercisable, or transferable apart from the Common Stock, until the earlier to occur of (i) ten days following a public announcement that a person or group of affiliated or associated persons have acquired beneficial ownership of more than 19% of the outstanding Common Stock of the Company (such person being referred to as an "Acquiring Person") or (ii) ten business days (or such later date, as defined) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a person or group of 19% or more of the outstanding Common Stock of the Company. In the event that any person or group of affiliated or associated persons 8 becomes an Acquiring Person, each holder of a Right, other than Rights beneficially owned by the Acquiring Person and transferees of the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise such number of one-hundredths of a share of Series A Preferred Stock as shall equal the result obtained by (x) multiplying the then current exercise price by the number of one-hundredths of a share of Series A Preferred Stock for which a Right is then exercisable and dividing that product by (y) 50% of the then current per share market price of the Company's common stock. Furthermore, if the Company enters into a consolidation, merger, or other business combination, as defined, each Right would entitle the holder upon exercise to receive, in lieu of shares of Series A Preferred Stock, that number of shares of common stock of the acquiring company having a value of two times the exercise price of the Right, as defined. The Rights contain antidilutive provisions, are redeemable at the Company's option, subject to certain restrictions, for $.01 per Right, and expire on January 14, 2007. As a result of the Rights dividend, the Board designated 200,000 shares of preferred stock as Series A Preferred Stock. Series A Preferred Stockholders will be entitled to a preferential cumulative quarterly dividend of the greater of $1.00 per share or 100 times the per share dividend declared on the Company's Common Stock. The Series A Preferred Stock has a liquidation preference, as defined. In addition, each share will have 100 votes and will vote together with the shares of Common Stock of the Company. At June 30, 1997 and December 31, 1996, the Company had 1,332,530 and 4,576,510 warrants outstanding respectively. On February 4, 1997 the Company called its publicly traded warrants (the "Public Warrants") pursuant to their terms. There were 4,166,510 Public Warrants outstanding at December 31, 1996. The Company received proceeds of $22,961,950 from the exercise of Public Warrants during the period from October 1, 1996 to March 21, 1997. At June 30, 1997 and December 31, 1996 the Company had 0 and 200,000 unit purchase options outstanding respectively. Each unit purchase option entitled the holder to the purchase of one unit for $7.62 per unit. Each unit consisted of one share of the Company's common stock, $.001 par value, and two warrants (such warrants are exercisable as previously defined). These unit purchase options were exercisable commencing on April 11, 1995 and expiring on April 11, 1999. During the second quarter, pursuant to a negotiated agreement with the Company, 170,000 unit purchase options were exercised for 351,000 common shares and $0 in proceeds. NOTE 4 - EARNINGS PER SHARE Net earnings per common and common equivalent share are computed by dividing net earnings by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares assume the exercise of all dilutive stock options and warrants. Primary and fully diluted earnings per common and common equivalent share are essentially the same. Quarterly and year-to-date computations of per share amounts are made independently; therefore, the sum of per share amounts for the quarters may not equal per share amounts for the year. 9 NOTE 5 - ACCOUNTING PRONOUNCEMENTS In February 1997, Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share" was released and is effective for financial statements for both interim and annual periods ending after December 15, 1997. Early application of this Statement is not permitted. Subsequent to the effective date, all prior-period earnings per share data presented will be restated to conform with the provisions of this Statement. The following presents the pro forma earnings per share amounts computed using this Statement.
Three Months Ended June 30, ----------------------------- 1997 1996 ------------ ------------- Basic EPS $ .26 $ .29 Diluted EPS $ .22 $ .17
For the Three Month Period Ended June 30, 1997 -------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net Income $1,941,214 Basic EPS Income available to common stockholders $1,941,214 7,558,921 $ .26 Effect of Dilutive Securities Warrants 722,155 Options 666,203 Diluted EPS Income available to common stockholders + assumed conversions $1,941,214 8,947,279 $ .22
For the Three Month Period Ended June 30, 1996 ----------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net Income $ 828,409 Basic EPS Income available to common stockholders $ 828,409 2,881,818 $ .29 Effect of Dilutive Securities Warrants 1,688,427 Options 80,811 Unit Purchase Options 137,565 Diluted EPS Income available to common stockholders + assumed conversions $ 828,409 4,788,621 $ .17
10
Six Months Ended June 30, ----------------------------- 1997 1996 ------------ ------------- Basic EPS $ .53 $ .47 Diluted EPS $ .42 $ .31
For the Six Month Period Ended June 30, 1997 ----------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net Income $ 3,600,582 Basic EPS Income available to common stockholders $ 3,600,582 6,758,977 $ .53 Effect of Dilutive Securities Warrants 859,272 Options 793,174 Unit Purchase Options 140,568 Diluted EPS Income available to common stockholders + assumed conversions $ 3,600,582 8,551,991 $ .42
For the Six Month Period Ended June 30, 1996 ----------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- Net Income $ 1,345,116 Basic EPS Income available to common stockholders $ 1,345,116 2,881,818 $ .47 Effect of Dilutive Securities Warrants 1,351,967 Options 64,161 Unit Purchase Options 111,518 Diluted EPS Income available to common stockholders + assumed conversions $ 1,345,116 4,409,464 $ .31 In June 1997, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" were issued and are effective for fiscal periods beginning after December 15, 1997 with early adoption permitted. Currently, the Company is evaluating the effects these Statements will have on its financial reporting and disclosures.
11 PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS - UNAUDITED Set forth herein is the unaudited consolidated condensed statement of earnings, for the six month period ended June 30, 1997, and the unaudited pro forma consolidated condensed statement of earnings, for the six month period ended June 30, 1996, assuming that the acquisition of substantially all of the assets and certain liabilities of IASI had been consummated on January 1, 1996. An unaudited pro forma consolidated condensed statement of earnings for the six month period ended June 30, 1997 was not deemed necessary as the actual results for the six month period adequately reflect the operations of the combined entity for the entire period, since the acquisition was completed on January 15, 1997. 12 KELLSTROM INDUSTRIES, INC. ACTUAL and PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited)
Six Months Ended ------------------------------ June 30, 1997 June 30, 1996 Pro Forma Actual Combined ------------ -------------- Net Revenues $ 34,415,983 $ 23,720,862 Cost of goods sold (22,534,624) (14,799,815) Selling, general and administrative expenses (3,684,769) (2,463,096) Depreciation and amortization (including goodwill) (640,158) (586,530) ------------ ------------ Operating income $ 7,556,432 $ 5,871,421 Interest income (expense) (1,827,622) (1,605,940) ------------ ------------ Income before income taxes $ 5,728,810 $ 4,265,481 Income tax expense (2,128,228) (1,599,554) ------------ ------------ Net income $ 3,600,582 $ 2,665,927 ============ ============ Net income per share $ 0.42 $ 0.33 ============ ============ Weighted average number of common shares outstanding 9,208,297 8,132,370 ============ ============
See accompanying notes to consolidated condensed and pro forma consolidated condensed statements of earnings 13 KELLSTROM INDUSTRIES, INC. PRO FORMA COMBINED CONDENSED STATEMENT OF EARNINGS (Unaudited)
Six Months Ended June 30, 1996 -------------------------------------------------------------------- HISTORICAL PRO FORMA PRO FORMA KELLSTROM IASI ADJUSTMENTS COMBINED ----------------------------- ------------- ---------------- Net Revenues $ 11,188,827 $ 12,854,940 $ (322,905) $ 23,720,862 Cost of goods sold (7,112,983) (7,509,029) 248,588 (14,799,815) (426,391) Selling, general and administrative expenses (1,477,431) (1,332,403) 346,738 (2,463,096) Depreciation and amortization (including goodwill) (215,496) (452,391) (345,034) (586,530) 426,391 ------------ ------------ ------------ ------------ Operating income $ 2,382,917 $ 3,561,117 $ (72,613) $ 5,871,421 Interest income (expense) (252,007) (576,534) (1,309,249) (1,605,940) 531,850 ------------ ------------ ------------ ------------ Income before income taxes $ 2,130,910 $ 2,984,583 $ (850,012) $ 4,265,481 Income tax expense (785,794) 0 (813,760) (1,599,554) ------------ ------------ ------------ ------------ Net income $ 1,345,116 $ 2,984,583 $ (1,663,772) $ 2,665,927 ============ ============ ============ ============ Net income per share $ 0.23 $ 0.33 ============ ============ Weighted average number of common shares outstanding 8,050,454 8,132,370 ============ ============
See accompanying notes to pro forma consolidated condensed statement of earnings 14 KELLSTROM INDUSTRIES, INC. NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (Unaudited) NOTES TO PRO FORMA STATEMENT OF EARNINGS (A) For purposes of presenting the pro forma condensed combined statement of earnings, the following adjustments have been made:
Six Months Ended June 30, 1996 ------------------- Increase (decrease) to income: Decrease in net revenues due to intercompany sales $ (322,905) Decrease in COGS due to intercompany sales 248,588 Reclassification entry to conform with current Kellstrom presentation (426,391) Decrease in IASI selling, general and administrative expenses due to the elimination of pension plan, bonus program and overall consolidation of functions 346,738 Amortization of goodwill related to IASI acquisition (345,034) Reclassification entry to conform with current Kellstrom presentation 426,391 Interest expense on acquisition debt (1,309,249) Reduction of bank interest expense - exercise of warrants 531,850 ----------- $ (850,012) To adjust pro forma tax provision to 37% of income before taxes (813,760) ----------- Net Adjustment $(1,663,772) ===========
15 KELLSTROM INDUSTRIES, INC. NOTES TO PRO FORMA CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS (Unaudited) (B) The following table reconciles net income to the amount used for purposes of determining net income per share under the modified treasury stock method:
Six Months Ended June 30 ================================================================================== Actual Pro Forma 1997 1996 - ---------------------------------------------------------------------------------- Net income $3,600,582 $2,665,927 Adjustments to pro forma net income for proceeds from exercise of common stock equivalents: Elimination of interest expense (net of tax) 259,319 0 - ---------------------------------------------------------------------------------- Adjusted net income $3,859,901 $2,665,927 Weighted average actual common shares outstanding 6,758,977 6,325,487 Weighted average common stock equivalents outstanding 2,449,320 1,806,883 - ---------------------------------------------------------------------------------- Weighted average shares outstanding 9,208,297 8,132,370 - ---------------------------------------------------------------------------------- Earnings per share $ .42 $ .33 ==================================================================================
16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following should be read in conjunction with the Company's financial statements and the related notes thereto included elsewhere herein. This Report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company's business, financial condition and results of operations. The words "estimate," "project," "intend," "expect," and similar expressions are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those contemplated in such forward-looking statements, including those described below. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. On January 15, 1997, the Company, through its wholly-owned subsidiary, IASI, Inc., completed the acquisition of substantially all of the assets and certain liabilities of IASI for $25.1 million in cash and warrants to purchase 500,000 shares of Common Stock at $9.25 per share. The warrants expire in January 1999. On February 4, 1997, the Company called its publicly traded warrants (the "Public Warrants") pursuant to their terms. There were 4,166,510 Public Warrants outstanding at December 31, 1996. The Company received proceeds of $22,961,950 from the exercise of Public Warrants during the period from October 1, 1996 to March 21, 1997. The Company has only a limited operating history upon which an evaluation of the Company and its prospects can be based. Although the Company has historically experienced increasing net sales and operating results, the Company may experience significant fluctuations in its gross margins and operating results in the future, both on an annual and a quarterly basis, caused by various factors, including general economic conditions, specific economic conditions in the commercial aviation industry, the availability and price of surplus aviation material, the size and timing of customer orders, returns by and allowances to customers and the cost of capital to the Company. In a strategic response to a changing, competitive environment, the Company may elect from time to time to make certain pricing, product or marketing decisions, and any such decisions could have a material adverse effect on the Company's periodic results of operations, including net sales and net income from quarter to quarter. Therefore, comparisons of recent net sales and operating results of the Company should not be taken as indicative of the results of operations that can be expected in the future. There can be no assurance that the net sales and operating results of the Company will continue at their current levels or will grow, or that the Company will be able to achieve sustained profitability on a quarterly or annual basis. Results of Operations. The Company reported revenues increased by 203% to $17,949,910 in the second quarter of 1997, compared with $5,917,832 in last year's second quarter. Revenues increased by 208% to $34,415,983 in the first half of 1997, compared with $11,188,827 in the first half of 1996. The increase in net revenues is due primarily to revenues from the IASI operation coupled with internal growth due to additional inventory availability as a result of proceeds received from the exercise of the Public Warrants which were called during the first quarter and increases in working capital made available from the Company's combined bank credit facilities. 17 Also contributing to the increase in net revenues is the expansion of the Company's sales department, which resulted in sales growth to existing customers and expansion of the Company's customer base as a result of the IASI acquisition. Operating income increased by 168% to $3,876,552 in the second quarter of 1997, compared with $1,446,903 in last year's second quarter. Operating income increased by 217% to $7,556,432 in the first half of 1997, compared with $2,382,917 in the first half of 1996. Net income in the second quarter of 1997 increased by 134% to $1,941,214, or $0.22 per common share, compared with $828,409, or $0.13 per common share, in the second quarter of 1996. In the first half of 1997, net income increased by 168% to $3,600,582, or $0.42 per common share, compared with $1,345,116, or $0.23 per common share, in the first half of 1996. Gross margins increased by 169% to $6,142,271 in the second quarter of 1997, compared with $2,286,864 in last year's second quarter. Gross margins increased by 192% to $11,881,359 in the first half of 1997, compared with $4,075,844 in the first half of 1996. Gross margins, as a percentage of net revenue, were slightly lower in 1997 due to unusually high gross margins during the second quarter of 1996, resulting in margins of 34.5% for the first six months of 1997 compared with 36.4% for the corresponding period in 1996. Total selling, general and administrative expenses increased to $1,914,440 and $3,684,769 for the three and six month periods ended June 30, 1997 respectively, from $729,330 and $1,477,431 for the year ago periods, but significantly decreased as a percentage of net revenues for both periods. The increase in these expenses was primarily the result of 1) expenses related to the continuing operations of IASI, 2) continued expansion of the Company's sales and warehouse operations in order to support a higher level of revenue and a corresponding greater number of whole engine and engine component transactions and 3) the addition of marketing and management personnel necessary to achieve and administer the revenue growth opportunities that are available due to the Company's expanded level of inventory investment. Additionally, the integration of the Kellstrom and IASI businesses is complete and the increased synergies from the acquisition should continue and contribute to overhead reduction as a percentage of net revenues for the remainder of 1997. Depreciation and amortization expense increased to $351,279 and $640,158 for the three and six month periods ended June 30, 1997 respectively, from $110,631 and $215,496 for the year ago periods, and remained essentially flat as a percentage of net revenues for both periods. The increase in depreciation and amortization is primarily the result of amortization of goodwill related to the IASI acquisition, as well as purchases of property, plant and equipment since June 30, 1996. Interest expense (net of interest income) increased to $791,764 and $1,827,622 for the three and six month periods ended June 30, 1997 respectively, from $136,033 and $252,007 for the year ago periods due to interest expense and related costs from the $21 million of debt related to the acquisition of IASI, as well as, interest expense related to the existing debt of IASI. Further increases in interest expense can be anticipated during the remainder of 1997 as the Company expects to continue to expand its inventory levels and facilities to support future growth in operations and to the extent the Company expects to complete acquisitions funded by debt. There can be no assurance, however, that the Company's operations will expand or that it will complete any material acquisitions. 18 Net income per share is reported based upon the weighted average of the common shares outstanding along with the inclusion of the effect of the dilutive securities outstanding during the periods using the modified treasury stock method in accordance with generally accepted accounting principles. The effect of this is to increase the weighted average number of common shares outstanding from 7,558,921 to 9,036,639 for the three months ended June 30, 1997, from 6,758,977 to 9,208,297 for the six months ended June 30, 1997, and from 2,881,818 to 8,050,454 shares for the three and six months ended June 30, 1996. This increase to the number of common shares deemed outstanding was due to the Company's outstanding options and warrants to purchase shares of common stock having an exercise price of less than the market price which were, therefore, deemed outstanding. Liquidity and Capital Resources. The Company's working capital was $37,074,935 as of June 30, 1997, an increase of $23,339,778 since December 31, 1996. The principal reasons for the increase in working capital were the increase in inventories stemming from both internal growth and the acquisition of IASI, coupled with the increase in cash resulting from the exercise of the Company's Public Warrants. Total debt at June 30, 1997 was $32,276,483, compared with $8,187,595 at December 31, 1996. The Company had contractual lines of credit totaling $55,000,000 at June 30, 1997, of which $19,150,604 million was unused and available. Cash flow used in operating activities in the first six months of 1997 was $577,212, compared with $1,351,125 in the same period last year. The decrease resulted primarily from higher net income for the period, offset by an increase in cash required for working capital due mainly to an increase in accounts receivable. The primary sources of funds utilized by the Company were from certain debt proceeds and the exercise of the Company's Public Warrants. The primary uses of funds were for the purchase of all assets and certain liabilities of IASI ($25,053,141) and financing costs associated with the acquisition ($1,309,284). The Company's acquisition of IASI was primarily financed through the issuance of $15,000,000 in senior subordinated debt (the "Senior Debt") and warrants, as well as the proceeds of a $6,000,000 subordinated bridge loan ("Bridge Loan") and warrants with the balance from the Company's working capital. The Company also assumed IASI's existing debt, including various credit facilities with Union Bank of California ("Union Bank") secured by IASI's assets, which facilities provided for credit of up to a maximum of approximately $20,000,000 as of the date of the acquisition. The amount of credit outstanding, as of the date of acquisition and June 30, 1997 was $14,078,798 and $0 respectively. Interest on the credit facilities accrued daily and ranged from .50% to 1.00% above Union Bank's prime rate, and was payable monthly. The Senior Debt is held by The Equitable Life Assurance Society of the United States ("Equitable"). The interest rate on the Senior Debt is 11.75% per annum, payable semi-annually. Additionally, warrants to purchase 305,660 shares of Common Stock were issued to Equitable. The warrants are exercisable at $10 per share and expire on January 15, 2004. Principal on this debt is payable in three equal installments beginning January 15, 2002. An advance principal payment of up to $3,750,000 is permitted (along with a prepayment penalty of 1%) prior to December 31, 1998 from the proceeds of the exercise of the Company's Public Warrants. It is management's current intention that such an advance payment will be made during this advance payment period. Moreover, the Company may, at its option, redeem up to $4,500,000 (along with a prepayment penalty of 1%) of principal amount of Senior Debt concurrently or within five days after the occurrence of any public offering of the Company's Common Stock as long as the principal balance of the debt is not reduced below $10,500,000. The balance due at June 30, 1997 on the Senior Debt was $15,000,000. 19 The Bridge Loan was due April 15, 1997 and was paid in full on that date. In connection with the Bridge Loan, the Company issued warrants to purchase 85,625 shares of Common Stock at an exercise price of $10 per share, exercisable until three years from the repayment of the Bridge Loan. On April 24, 1997, in order to modify and consolidate its current credit facilities, the Company entered into a $55 million revolving loan agreement with Barnett Bank, N.A. The loan, which bears interest at .25% below the bank's prime rate (which was 8.25% at April 24, 1997), is due on April 24, 1998. On April 28, 1997, utilizing funds from the new facility, the Company paid $13,640,774 to fully satisfy the existing credit lines outstanding with Union Bank. The new loan agreement is secured by substantially all of the Company's assets. The $1,015,245 first mortgage (including a $750,000 construction/mortgage loan) held by BankAtlantic and secured by the Company's office and warehouse facilities remains in place. The interest on the mortgage is 10.49% per annum. Principal and interest are payable in monthly installments of $20,238. Principal is amortized over a ten-year period with a final payment of $20,238 due May 2005. The Company entered into certain short-term engine leases during 1996 and acquired certain other engines under lease as part of the IASI acquisition. The Company continues to believe this activity should allow it to liquidate the remaining maintenance value of jet engines on a profitable basis by realizing both rental income as well as maintenance reserve fees charged to the Company's engine lease customers for their utilization of such engines. Upon the full consumption of the remaining maintenance value in each engine, the Company will evaluate the engine's condition in order to determine if such engine should be refurbished or should be disassembled into piece parts in support of the Company's parts supply business. These leases are accounted for as operating leases. The Company's management believes that cash flow from operations, and cash that became available as a result of the exercise of the publicly traded warrants, combined with the Company's borrowing facilities should be sufficient for the Company's current level of operations. The Company plans to take advantage of growth opportunities that are consistent with the Company's expansion and profit objectives. These growth opportunities will require the investment of cash into inventories of jet engines and jet engine parts. Greater availability of such inventories will better enable the Company to continue to increase its revenues as well as to encourage the development of strategic relationships with new customers. The Company intends to finance its inventory expansion program through its current credit facilities and through the employment of its cash flows along with the management of trade credits. In the future, the Company may require additional sources of capital to continue to fund its expansion. 20 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. (1) Exhibit 27 -- Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K were filed during the second quarter of 1997. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 11, 1997 KELLSTROM INDUSTRIES, INC. (Registrant) / s / John S. Gleason -------------------------------- John S. Gleason Executive Vice President Chief Financial Officer and Treasurer 21 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE KELLSTROM INDUSTRIES, INC. BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 DEC-31-1997 JAN-01-1997 JUN-30-1997 6-MOS 3,900 729 7,648 0 43,905 58,018 3,462 405 81,514 20,943 0 8 0 0 44,547 81,514 34,416 34,416 22,535 26,860 0 0 1,828 5,729 2,128 3,601 0 0 0 3,601 0.42 0.42
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