-----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, Lg6tpvTNA2zEGMXaHSdkXMUQ+AHZhrKAeLKwqacGfFo3WOfqDY3SP2Bka5XcLLe2 E255Iw6in/2tlRBW3aDiIw== 0000950144-99-005979.txt : 19990517 0000950144-99-005979.hdr.sgml : 19990517 ACCESSION NUMBER: 0000950144-99-005979 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-23764 FILM NUMBER: 99622101 BUSINESS ADDRESS: STREET 1: 1100 INTERNATIONAL PARKWAY CITY: SUNRISE STATE: FL ZIP: 33325 BUSINESS PHONE: 9548450427 MAIL ADDRESS: STREET 1: 1100 INTERNATIONAL PARKWAY CITY: SUNRISE STATE: FL ZIP: 33325 FORMER COMPANY: FORMER CONFORMED NAME: ISRAEL TECH ACQUISITION CORP DATE OF NAME CHANGE: 19940301 10-Q 1 KELLSTROM INDUSTRIES, INC. 10-Q 3/31/99 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 [ ] 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 registrant as specified in its charter) DELAWARE 13-3753725 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1100 INTERNATIONAL PARKWAY, SUNRISE, FLORIDA 33323 - -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (954) 845-0427 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that 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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: 11,784,515 shares of common stock, $.001 par value per share, were outstanding as of April 30, 1999. 1 2 KELLSTROM INDUSTRIES, INC. -------------------------- INDEX -----
PAGE NUMBER ----------- PART I ------ Item 1. Financial Statements: Condensed Consolidated Balance Sheets .................................................. 3 Condensed Consolidated Statements of Earnings .......................................... 4 Condensed Consolidated Statements of Cash Flows ........................................ 5 Notes to Condensed Consolidated Financial Statements ................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................. 14 PART II ------- Item 1. Legal Proceedings........................................................................ 15 Item 2. Changes in Securities and Use of Proceeds .............................................. 15 Item 3. Defaults Upon Senior Securities.......................................................... 15 Item 4. Matters Submitted to a Vote of Security Holders.......................................... 15 Item 5. Other Information........................................................................ 15 Item 6. Exhibits and Reports on Form 8-K......................................................... 19
2 3 Item 1. Financial Statements KELLSTROM INDUSTRIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) March 31, 1999 December 31, 1998 -------------- ----------------- Assets Current Assets: Cash and cash equivalents $ 1,099,761 $ 1,107,102 Trade receivables, net of allowances for returns and doubtful accounts of $5,427,996 and $5,417,996 for 1999 and 1998, respectively 37,966,363 31,367,337 Inventories 157,703,904 149,957,320 Equipment under short-term operating leases 82,999,105 77,201,289 Prepaid expenses 2,816,182 3,166,158 Deferred tax assets 9,432,796 9,730,577 ------------- ------------- Total current assets 292,018,111 272,529,783 Equipment under long-term operating leases, net 66,864,824 63,323,008 Property, plant and equipment, net 18,006,968 16,755,185 Goodwill, net 71,199,188 71,501,153 Other assets 10,844,993 9,941,367 ------------- ------------- Total Assets $ 458,934,084 $ 434,050,496 ============= ============= Liabilities and Stockholders' Equity Current Liabilities: Short-term notes payable $ 2,311,598 $ 2,317,982 Current maturities of long-term debt 200,000 -- Accounts payable 20,969,857 13,333,709 Accrued expenses 19,797,805 25,715,518 Income taxes payable 6,327,179 779,972 ------------- ------------- Total current liabilities 49,606,439 42,147,181 Long-term debt, less current maturities 108,458,339 97,336,821 Convertible subordinated notes 140,250,000 140,250,000 Deferred tax liabilities 3,544,762 4,557,256 ------------- ------------- Total Liabilities 301,859,540 284,291,258 Stockholders' Equity: Common stock, $ .001 par value; 50,000,000 shares authorized; 11,784,515 shares and 11,762,015 shares issued and outstanding in 1999 and 1998, respectively 11,785 11,762 Additional paid-in capital 120,188,185 120,007,268 Retained earnings 38,281,608 31,133,280 Loans receivable from directors and officers (1,374,969) (1,393,072) Foreign currency translation adjustment (32,065) -- ------------- ------------- Total Stockholders' Equity 157,074,544 149,759,238 ------------- ------------- Total Liabilities and Stockholders' Equity $ 458,934,084 $ 434,050,496 ============= =============
See accompanying notes to condensed consolidated financial statements 3 4 KELLSTROM INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
Three Months Ended March 31, ------------------------------- 1999 1998 ------------ ------------ Sales of aircraft and engine parts, net $ 68,712,095 $ 25,335,696 Rental revenues 10,343,914 3,754,875 ------------ ------------ Total revenues 79,056,009 29,090,571 Cost of goods sold (47,383,319) (16,668,164) Depreciation of equipment under operating leases (6,296,419) (2,043,156) Selling, general and administrative expenses (8,495,510) (3,433,955) Depreciation and amortization (1,201,400) (593,223) ------------ ------------ Total operating expenses (63,376,648) (22,738,498) Operating income 15,679,361 6,352,073 Interest expense (4,321,028) (1,714,723) Interest income 163,355 76,769 ------------ ------------ Income before income taxes 11,521,688 4,714,119 Income taxes (4,373,360) (1,772,509) ------------ ------------ Net income $ 7,148,328 $ 2,941,610 ============ ============ Earnings per common share - basic $ 0.61 $ 0.36 ============ ============ Earnings per common share - diluted $ 0.47 $ 0.29 ============ ============ Weighted average number of common shares outstanding - basic 11,773,265 8,118,711 ============ ============ Weighted average number of common shares outstanding - diluted 17,820,915 11,739,791 ============ ============
See accompanying notes to condensed consolidated financial statements 4 5 KELLSTROM INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, ------------------------------- 1999 1998 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,148,328 $ 2,941,610 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,201,400 593,223 Depreciation of equipment under operating leases 6,296,419 2,043,156 Amortization of deferred financing costs 485,619 284,700 Deferred income taxes (2,358,461) (131,712) Loss on sales of investment securities -- 56,934 Changes in operating assets and liabilities: Increase in trade receivables, net (6,099,026) (4,619,038) Increase in inventories (7,020,536) (12,565,413) Increase in equipment under operating leases (15,636,051) (34,283,810) Increase in prepaid expenses and other current assets 349,976 3,876,106 Decrease in income tax receivable -- 531,762 Decrease (increase) in other assets (1,045,092) 53,246 Increase in accounts payable 7,636,148 3,735,854 Decrease in accrued expenses (1,008,263) (1,893,201) Increase in income taxes payable 5,547,207 1,367,922 ------------ ------------ Net cash used in operating activities (4,502,332) (38,008,661) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investment securities -- 692,856 Purchase of property, plant and equipment (1,674,450) (1,234,519) Acquisition earn-out payments (4,932,999) -- Other -- (47,700) ------------ ------------ Net cash used in investing activities (6,607,449) (589,363) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement 11,313,003 41,560,342 Debt repayment, including capital lease obligation (6,385) (2,688,410) Proceeds from the issuance of common stock 180,940 357,613 Proceeds from repayment of loans to directors and officers 18,103 23,104 Payment of deferred financing costs (403,221) (416,753) ------------ ------------ Net cash provided by financing activities 11,102,440 38,835,896 ------------ ------------ NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (7,341) 237,872 CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 1,107,102 462,676 ------------ ------------ CASH & CASH EQUIVALENTS, END OF PERIOD $ 1,099,761 $ 700,548 ============ ============
(continued) See accompanying notes to condensed consolidated financial statements 5 6 KELLSTROM INDUSTRIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
Three Months Ended March 31, ---------------------------- 1999 1998 ---------- ---------- Supplemental disclosures of non-cash investing and financing activities: Unrealized gain/(loss) on investment securities, net $ -- $ 303,593 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $1,822,696 $1,072,093 ========== ========== Income taxes $1,184,614 $ 200,750 ========== ==========
See accompanying notes to condensed consolidated financial statements 6 7 KELLSTROM INDUSTRIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Kellstrom Industries, Inc. and its subsidiaries (the "Company") after elimination of intercompany accounts and transactions. These statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of December 31, 1998 has been derived from audited financial statements. In order to prepare the financial statements in conformity with generally accepted accounting principles, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. 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 condensed consolidated 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-K. In the opinion of management of the Company, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of Kellstrom Industries, Inc. and its subsidiaries as of March 31, 1999, and the condensed consolidated results of earnings for the three month periods ended March 31, 1999 and 1998 and the condensed consolidated statements of cash flows for the three month periods ended March 31, 1999 and 1998. The results of operations for such interim periods are not necessarily indicative of the results for the full year. NOTE 2 - ACQUISITIONS On April 29, 1999, the Company completed the acquisition of privately held Certified Aircraft Parts, Inc. ("Certified"). Certified is a provider of parts, after-market support and logistics for the Lockheed Martin C-130/L100 Hercules aircraft and will complement the activities of the Company's small engine and military segment, which is involved in supplying inventory management for C-130 engines. Kellstrom paid approximately $16 million in cash at closing, and assumed approximately $2.8 million in debt, financed through its credit facility. 7 8 NOTE 3 - EARNINGS PER SHARE Diluted earnings per share for the three month periods ended March 31, 1999 and 1998 were calculated as follows:
Three Months Ended March 31, ---------------------------- 1999 1998 ----------- ----------- Net income $ 7,148,328 $ 2,941,610 Income adjustment relating to reduction of debt based on the if converted method 1,216,557 484,380 ----------- ----------- Net income available to common and common equivalent shares $ 8,364,885 $ 3,425,990 =========== =========== Weighted average number of common shares outstanding - basic 11,773,265 8,118,711 Dilutive common stock equivalents from stock options and warrants based on the treasury stock method 1,430,168 1,657,444 Dilutive convertible subordinated notes based on the if converted method 4,617,482 1,963,636 ----------- ----------- Weighted average number of common shares outstanding - diluted 17,820,915 11,739,791 =========== ===========
NOTE 4 - SEGMENT REPORTING The Company is organized based on the products that it offers. Under this organizational structure, the Company has three reportable segments: commercial engine, small engine and military and avionics and rotables. The commercial engine segment is involved in the business of purchasing, overhauling (primarily through subcontractors), reselling and leasing of aircraft, and engines and engine parts for large turbo-fan engines manufactured by CFM International, General Electric, Pratt & Whitney and Rolls Royce. The small engine and military segment is an after-market reseller of aircraft parts and turbojet engines and engine parts for large transport aircraft and helicopters. The segment's primary focus is on the Lockheed Martin C-130 Hercules aircraft, a widely used military transport aircraft, the Allison (Rolls Royce) T56/501 engine, which powers this aircraft, and the Allison 250, with approximately 16,000 units actively in use by helicopters. The Company entered the small engine and military segment in 1997 with the acquisition of Aero Support USA, Inc. ("Aero Support"). The acquisition of Certified on April 29, 1999 enhanced the company's presence in this market segment. The avionics and rotables segment is engaged in the sale of a wide variety of aircraft rotables and expendable components including flight data recorders, electrical and mechanical equipment and radar and navigation systems. The Company entered the avionics and rotables segment in 1998 with the acquisition of Solair, Inc. ("Solair"). The Company's reportable segments are managed separately because each business requires different technology and marketing strategies. The Company does not allocate selling, general and administrative expenses, depreciation and amortization, interest expense or income taxes to its business segments. Rather, the Company evaluates performance of the business segments based on revenue and gross margins. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The following table sets forth the revenue and margins for each of the Company's business segments for the three months ended March 31, 1999 and 1998: 8 9
1999 1998 ----------- ----------- Revenues Commercial engine $55,179,104 $23,533,177 Small engine and military 9,504,322 5,557,394 Avionics and rotables 14,372,583 -- ----------- ----------- Total revenue $79,056,009 $29,090,571 =========== =========== Gross margin Commercial engine $18,501,024 $ 8,469,838 Small engine and military 3,463,858 1,909,413 Avionics and rotables 3,411,389 -- ----------- ----------- Total gross margin $25,376,271 $10,379,251 =========== ===========
NOTE 5 - Comprehensive Income The Company's total comprehensive income, comprised of unrealized gain on investment securities and foreign currency translation adjustments, for the three months ended March 31, 1999 and 1998 was as follows:
Three Months Ended March 31, -------------------------- 1999 1998 ---------- ---------- Net income $7,148,328 $2,941,610 Unrealized gain on investment securities, net of taxes -- 360,527 Foreign currency translation adjustments (32,065) -- ---------- ---------- Other comprehensive income, net of taxes (32,065) 360,527 ---------- ---------- Total Comprehensive income $7,116,263 $3,302,137 ========== ==========
9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Kellstrom Industries, Inc. (the "Company") unaudited condensed consolidated financial statements and the related notes thereto included elsewhere herein. In addition, reference should be made to the Company's audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's most recent Annual Report on Form 10-K. This quarterly report on Form 10-Q contains or may contain 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. GENERAL The Company is a leader in the airborne equipment segments of the international aviation services after-market. The Company's principal business is the purchasing, overhauling (primarily through subcontractors), reselling and leasing of aircraft, avionics and aircraft rotables, and engines and engine parts. The Company's historical growth has resulted from a number of factors, including the expansion of the Company's product lines, customer base and market share, increases in the Company's internal growth, cost controls and overall operating efficiencies, acquisitions in existing and adjacent markets and significant capital investments. On April 1, 1998, June 17, 1998 and December 31, 1998 the Company acquired Integrated Technology Corporation ("ITC"), Aerocar Aviation Corp. ("Aerocar Aviation") and Aerocar Parts, Inc. ("Aerocar Parts", and together with Aerocar Aviation, "Aerocar") and Solair, respectively. These acquisitions were accounted for using the purchase method of accounting for business combinations and accordingly, those companies' operating results have been included in the Company's results of operations since the date of acquisition. Consequently, the results of operations for the three months ended March 31, 1999 are not comparable to the corresponding period of the prior year in certain material respects. RESULTS OF OPERATIONS For the periods indicated, the following table sets forth the percentage of certain income statement items to total revenues derived from the Company's condensed consolidated statements of earnings. 10 11
Percentage of Total Revenues ---------------------------- Three Months Ended March 31, ---------------------------- 1999 1998 -------------- ----------- Revenues: Sales of aircraft and engine parts, net 86.9% 87.1% Rental revenues 13.1% 12.9% Total revenues 100.0% 100.0% Operating expenses: Cost of goods sold 59.9% 57.3% Depreciation of equipment under operating leases 8.0% 7.0% Selling, general and administrative expenses 10.7% 11.8% Depreciation and amortization expense 1.5% 2.0% Total operating expenses 80.1% 78.1% Interest expense (net of interest income) 5.3% 5.6% Income before income taxes 14.6% 16.3% Income taxes 5.5% 6.1% Net income 9.1% 10.2%
THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Net sales of aircraft and engine parts increased by 171% to $68.7 million for the three months ended March 31, 1999 as compared to $25.3 million for the three months ended March 31, 1998. The increase in net sales of aircraft and engine parts was primarily due to (i) growth of sales of approximately $29.0 million due to additional inventory availability as a result of the Company's increased capital resources as well as the acquisitions of ITC and Aerocar being combined into Kellstrom, and (ii) incremental sales of approximately $14.4 million related to the acquisition of Solair. Rental revenues increased by 175% to $10.3 million for the three months ended March 31, 1999 as compared to $3.8 million for the three months ended March 31, 1998. The increase in rental revenues was primarily due to the Company's continued expansion into the leasing business through purchases of individual assets as well as the acquisitions of ITC and Aerocar being combined into Kellstrom. Cost of goods sold increased by 184% to $47.4 million for the three months ended March 31, 1999 as compared to $16.7 million for the three months ended March 31, 1998; the gross profit margin decreased to 31.0% in 1999 from 34.2% in 1998. The increase in cost of goods sold was primarily due to increased sales volume across all product lines. The decrease in the gross profit margin was primarily due to expected lower margins from the Solair division. Depreciation of equipment under operating leases increased by 208% to $6.3 million for the three months ended March 31, 1999 as compared to $2.0 million for the three months ended March 31, 1998. The increase in depreciation of equipment under operating leases was primarily due to the Company's continued expansion into the leasing business through purchases of individual assets as well as the acquisitions of ITC and Aerocar being combined into Kellstrom. Selling, general and administrative expenses increased by 147% to $8.5 million for the three months ended March 31, 1999 as compared to $3.4 million for the three months ended March 31, 1998; however, as a percentage of total revenues, selling, general and administrative expenses decreased to 10.7% in 1999 from 11.8% in 1998. The increase in selling, general and administrative expenses was primarily due to (i) the acquisitions of ITC, Aerocar and Solair being combined into Kellstrom and (ii) the continued expansion of the Company's sales and warehouse operations to support a higher level of revenue and a corresponding greater number of whole engine and engine component transactions. This expansion has resulted in the continued 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 as well as the acquisitions of ITC, Aerocar and Solair. Selling, general and administrative expenses as a percentage of total revenues decreased during 1999 primarily due to economies of scale and operating efficiencies derived from the consolidation of operations related to completed acquisitions. The Company expects selling, general and 11 12 administrative expenses to continue to increase due to the Company's growth plans and need for additional personnel and facilities to support the Company's operations. Depreciation and amortization expense increased by 103% to $1.2 million for the three months ended March 31, 1999 as compared to $0.6 million for the three months ended March 31, 1998; however, as a percentage of total revenues, depreciation and amortization expense decreased to 1.5% in 1999 from 2.0% in 1998. The increase in depreciation and amortization expense was primarily due to amortization of goodwill related to the ITC, Aerocar and Solair acquisitions. Interest expense (net of interest income) increased by 154% to $4.2 million for the three months ended March 31, 1999 as compared to $1.6 million for the three months ended March 31, 1998. The increase in interest expense was primarily driven by an increase in the Company's average debt levels during 1999, resulting from the acquisitions of ITC and Solair and growth in inventories and equipment under operating leases. The Company expects interest expense to continue to increase as the Company continues to expand its inventory levels and facilities to support future growth in operations and completes 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. Net income increased by 143% to $7.1 million for the three months ended March 31, 1999 as compared to $2.9 million for the three months ended March 31, 1998. Basic earnings per common share increased by 69% to $0.61 for the three months ended March 31, 1999 as compared to $0.36 for the three months ended March 31, 1998. Diluted earnings per common share increased by 62% to $0.47 for the three months ended March 31, 1999 as compared to $0.29 for the three months ended March 31, 1998. LIQUIDITY AND CAPITAL RESOURCES. As of March 31, 1999, the Company's liquidity and capital resources included cash and cash equivalents of $1.1 million and working capital of $242.4 million. At March 31, 1999, total outstanding debt was $251.2 million as compared to $239.9 million as of December 31, 1998. As of March 31, 1999, the outstanding principal balance on the Company's convertible subordinated notes was $140.3 million and the Company had contractual lines of credit totaling $256.7 million of which $95.3 million was outstanding and $52.7 million was available. Cash flows used in operating activities for the three months ended March 31, 1999 was $4.5 million compared with $38.0 million for the three months ended March 31, 1998. The primary uses of cash for operating activities during the three months ended March 31, 1999 was due to increases in inventories and equipment under operating leases of $7.0 million and $15.6 million, respectively, and an increase in accounts receivable of $6.1 million. The primary sources of cash for operating activities for the three months ended March 31, 1999 was due to net income of $7.1 million, coupled with total depreciation and amortization of $7.5 million and increases in accounts payable and income taxes payable of $7.6 million and $5.5 million, respectively. Cash flows used in investing activities for the three months ended March 31, 1999 was $6.6 million compared with $0.6 million for the three months ended March 31, 1998. The primary uses of cash for investing activities for the three months ended March 31, 1999 was related to earnout payments in connection with the acquisitions of Aero Support and ITC of $4.9 million in the aggregate and purchases of property, plant and equipment for $1.7 million. Cash flows provided by financing activities for the three months ended March 31, 1999 was $11.1 million compared with $38.8 million for the three months ended March 31, 1998. The primary sources of cash for financing activities for the three months ended March 31, 1999 related to an increase in borrowings under line of credit agreements of $11.3 million offset by payment of deferred financing costs of $0.4 million. The increase in borrowings under line of credit agreements includes the $6.7 million letter of credit component of the $256.7 million syndicated credit facility, which was specifically committed to the permanent financing of the Company's new world headquarters. 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 aircraft and aircraft parts, engines and engine parts and avionics and rotables. 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 syndicated credit 12 13 facility, and through the employment of its cash flows. In the future, the Company may require additional sources of capital to continue to fund its expansion. The Company's management believes that free cash flow (net income plus depreciation of property, plant and equipment and amortization of goodwill), combined with the Company's syndicated credit facility should be sufficient for the Company's current level of operations. However, the Company may elect to seek equity capital or other debt financing in the future depending upon market conditions and the capital needs of the Company. YEAR 2000 ISSUE The Year 2000 problem is primarily the result of computer programs being written using two digits rather than four to define the applicable year. Such programs will be unable to interpret dates beyond the year 1999, which could cause a system failure or other computer errors, including possible miscalculations, and a disruption in the operation of such systems. This is commonly referred to as the Year 2000 issue. The Company and each of its operating subsidiaries are executing a plan to identify and address any possible business issues related to the impact of the Year 2000 problem on both its information technology ("IT") and non-IT systems (e.g., embedded technology). This plan addresses the Year 2000 issue in multiple phases, including (i) determining an initial inventory of the Company's systems, equipment (including embedded technology in the Company's aircraft, engine and parts inventory as well as leased equipment), vendors, customers and third party administrators that may be vulnerable to system failures or processing errors as a result of Year 2000 issues, (ii) assessment and prioritization of inventoried items to determine risks associated with their failure to be Year 2000 compliant, (iii) testing of systems and equipment to determine Year 2000 compliance, (iv) remediation and implementation of systems and equipment, and (v) contingency planning to assess reasonably likely worst-case scenarios. As part of the Company's plan, the Company has retained a third party Year 2000 solution provider to assist with a risk analysis of the Company's Year 2000 issue and assist with project office management. For those systems which the Company determines are not currently Year 2000 compliant, implementation of the required changes is expected to be completed by September 1999. Incremental costs, which include consulting costs and costs associated with internal resources to modify existing systems in order to achieve Year 2000 compliance are charged to expense as incurred. The Company does not expect the cost of making the required system changes to exceed $500,000. The anticipated costs of the project and the dates on which the Company believes it will complete the Year 2000 modifications and assessments are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area and the ability to locate and correct all relevant systems. With respect to the Company's customers, suppliers and vendors, the Company is in the process of contacting customers, suppliers and vendors to assess the potential impact on operations if such third parties are not successful in ensuring that their systems and operations are Year 2000 compliant in a timely manner. The Company's Year 2000 issues and any potential business interruptions, costs, damages or losses related thereto, are also dependent upon the Year 2000 compliance of other third parties such as governmental agencies (e.g., Federal Aviation Administration and foreign equivalents). To date, the Company is unable to determine whether it will be materially affected by the failure of any of its customers, suppliers, vendors or other third parties to be Year 2000 compliant. The Company believes that its compliance efforts have and will reduce the impact on the Company of any such failures. Failure of any third parties with which the Company interacts to achieve Year 2000 compliance could have a material adverse effect on the Company's business, financial condition and results of operations. Risk assessment, readiness evaluation, action plans and contingency plans related to the Company's suppliers, vendors and other third parties are expected to be completed by September 1999. The Company's risk management program includes emergency backup and recovery procedures to be followed in the event of failure of a business critical system. These procedures will be expanded to include specific procedures for the potential Year 2000 issue. Contingency plans to protect the Company from Year 2000-related interruptions are also being developed and are expected to be completed by September 1999. These plans will include development of backup procedures, identification of alternate suppliers, possible increases in inventory levels and other appropriate measures. 13 14 RECENT ACCOUNTING PRONOUNCEMENTS In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which became effective for the Company beginning January 1, 1999. SOP 98-1 outlines the accounting treatment for certain costs related to the development or purchase of software to be used internally and requires that costs incurred during the preliminary project and post-implementation/operation stages be expensed, and costs incurred during the application development stage be capitalized and amortized over the estimated useful life of the software. Adoption of this statement did not have a material impact on the Company's results of operations or financial position. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5, which became effective for the Company beginning January 1, 1999, requires that all costs of start-up activities, including organization costs, be expensed as incurred. Adoption of this statement did not have a material impact on the Company's results of operations or financial position. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. Management does not anticipate a significant impact of the adoption of SFAS No. 133 on the Company's consolidated financial position, results of operations or cash flows. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk is limited primarily to the fluctuating interest rates associated with variable rate indebtedness outstanding under the Company's $256.7 million bank credit facility. The bank credit facility, which expires in 2003, bears interest at the bank's prime rate plus 0-50 basis points or, at the Company's option, LIBOR plus 150-250 basis points. These variable interest rates are subject to interest rate changes in the United States and Eurodollar markets. The Company does not currently use, and has not historically used, derivative financial instruments to hedge against such market interest rate risk. At March 31, 1999, the Company had approximately $95.3 million in variable rate indebtedness outstanding under the credit facility, representing approximately, 38% of the Company's total debt outstanding, at an average interest rate of 6.95%. An increase in interest rates by 1% would not have a material impact on the financial condition, results of operations or cash flows of the Company. 14 15 PART II ITEM 1. LEGAL PROCEEDINGS See Item 3 of the Company's Form 10-K for the year ended December 31, 1998. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS - UNAUDITED The condensed consolidated statement of earnings of the Company for the three months ended March 31, 1999 are the Company's actual results, as they reflect the operations of ITC, Aerocar and Solair for the entire period being presented. The pro forma condensed consolidated statement of earnings of the Company for the three months ended March 31, 1998 are based on historical financial statements of the Company and have been adjusted to reflect the acquisitions of ITC, Aerocar and Solair as though the companies had combined at the beginning of the period being reported. Also, the pro forma condensed consolidated statement of earnings for the three months ended March 31, 1998 reflect the effect of the Company's secondary public offering of common stock and convertible subordinated notes as though they had occurred at the beginning of the period being reported. The pro forma condensed consolidated statement of earnings does not purport to be indicative of results that would have occurred had the acquisition been in effect for the period presented, nor does it purport to be indicative of the results that will be obtained in the future. The pro forma condensed consolidated financial information is based on certain assumptions and adjustments described in the notes hereto and should be read in conjunction therewith. 15 16 KELLSTROM INDUSTRIES, INC. Pro Forma Condensed Consolidated Statements of Earnings (Unaudited)
Three Months Ended March 31, ------------------------------- 1999 1998 ------------ ------------ Pro Forma Actual Combined ------------ ------------ Sales of aircraft and engine parts, net $ 68,712,095 $ 57,831,030 Rental revenues 10,343,914 6,178,897 ------------ ------------ Total revenues 79,056,009 64,009,927 Cost of goods sold (47,383,319) (41,979,818) Depreciation of equipment under operating leases (6,296,419) (2,791,080) Selling, general and administrative expenses (8,495,510) (8,211,575) Depreciation and amortization (1,201,400) (1,046,467) ------------ ------------ Total operating expenses (63,376,648) (54,028,940) Operating income 15,679,361 9,980,987 Interest expense, net of interest income (4,157,673) (4,093,177) ------------ ------------ Income before income taxes 11,521,688 5,887,810 Income taxes (4,373,360) (2,205,411) ------------ ------------ Net income $ 7,148,328 $ 3,682,399 ============ ============ Earnings per common share - basic $ 0.61 $ 0.33 ============ ============ Earnings per common share - diluted $ 0.47 $ 0.28 ============ ============ Weighted average number of common shares outstanding - basic 11,773,265 11,281,211 ============ ============ Weighted average number of common shares outstanding - diluted 17,820,915 17,556,136 ============ ============
Unaudited - See accompanying notes to pro forma condensed consolidated statements of earnings. 16 17 KELLSTROM INDUSTRIES, INC. Pro Forma Condensed Consolidated Statements of Earnings Three Months Ended March 31, 1998 (Unaudited)
----------------------------------------------------------------- HISTORICAL ----------------------------------------------------------------- KELLSTROM ITC AEROCAR SOLAIR ------------ ------------ ----------- ------------ Sales of aircraft and engine parts, net $ 25,335,696 $ 8,036,576 $ 2,508,565 $ 21,950,193 Rental revenues 3,754,875 538,306 1,885,716 -- ------------ ------------ ----------- ------------ Total revenues 29,090,571 8,574,882 4,394,281 21,950,193 Cost of goods sold (16,668,164) (4,997,742) (626,097) (19,687,815) Depreciation of equipment under operating leases (2,043,156) (289,317) (458,607) -- Selling, general and administrative expenses (3,433,955) (640,591) (616,605) (3,757,927) Depreciation and amortization (593,223) (3,498) (8,799) (137,807) ------------ ------------ ----------- ------------ Total operating expenses (22,738,498) (5,931,148) (1,710,108) (23,583,549) Operating income 6,352,073 2,643,734 2,684,173 (1,633,356) Interest expense, net of interest income (1,637,954) (160,492) (28,711) (1,195,321) ------------ ------------ ----------- ------------ Income before income taxes 4,714,119 2,483,242 2,655,462 (2,828,677) Income taxes (1,772,509) -- -- -- ------------ ------------ ----------- ------------ Net income $ 2,941,610 $ 2,483,242 $ 2,655,462 $ (2,828,677) ============ ============ =========== ============ Earnings per common share - basic $ 0.36 ============ Earnings per common share - diluted $ 0.29 ============ Weighted average number of common shares outstanding - basic 8,118,711 ============ Weighted average number of common shares outstanding - diluted 11,739,791 ============
---------------------------------------------------------------- PRO FORMA ADJUSTMENTS --------------------------------------------- PRO FORMA (A) (B) (C) COMBINED ----------- ----------- ----------- ------------ Sales of aircraft and engine parts, net $ -- $ -- $ 57,831,030 Rental revenues -- -- 6,178,897 ----------- ----------- ----------- ------------ Total revenues -- -- -- 64,009,927 Cost of goods sold -- -- (41,979,818) Depreciation of equipment under operating leases -- -- (2,791,080) Selling, general and administrative expenses 43,161 59,342 135,000 (8,211,575) Depreciation and amortization (40,785) (215,597) (46,758) (1,046,467) ----------- ----------- ----------- ------------ Total operating expenses 2,376 (156,255) 88,242 (54,028,940) Operating income 2,376 (156,255) 88,242 9,980,987 Interest expense, net of interest income 160,492 (1,030,765) 1,219,985 (4,093,177) (548,851) 125,607 (997,167) ----------- ----------- ----------- ------------ Income before income taxes (385,983) (1,061,413) 311,060 5,887,810 Income taxes (781,758) (597,768) 946,624 (2,205,411) ----------- ----------- ----------- ------------ Net income $(1,167,741) $(1,659,181) $ 1,257,684 $ 3,682,399 =========== =========== =========== ============ Earnings per common share - basic $ 0.33 =========== Earnings per common share - diluted $ 0.28 =========== Weighted average number of common shares outstanding - basic 11,281,211 =========== Weighted average number of common shares outstanding - diluted 17,556,136 ===========
Unaudited - See accompanying notes to pro forma condensed consolidated statement of earnings. 17 18 KELLSTROM INDUSTRIES, INC. Notes to Pro Forma Condensed Consolidated Statements of Earnings (Unaudited) (A) For the purpose of presenting the pro forma consolidated statements of earnings, the following adjustments have been made for the ITC acquisition:
Three Months Ended March 31, 1998 -------------- Increase (decrease) in income: Reduction in selling, general and administrative expense due to elimination of pension expense $ 43,161 Amortization of goodwill and non-compete agreement related to ITC acquisition (40,785) Reduction in interest expense due to pay-off of debt on ITC line of credit 160,492 Interest expense on acquisition debt and debt incurred on ITC's line of credit (548,851) ----------- (385,983) Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (781,758) ----------- Net adjustment $(1,167,741) ===========
(B) For the purpose of presenting the pro forma consolidated statements of earnings, the following adjustments have been made for the Aerocar Aviation and Aerocar Parts acquisitions:
Three Months Ended March 31, 1998 -------------- Increase (decrease) in income: Elimination of Aerocar Aviation and Aerocar Parts officer's salary and bonus $ 59,342 Amortization of goodwill and non-compete related to Aerocar Aviation and Aerocar Parts acquisition Increase in interest expense from acquisition debt (215,597) Reduction in interest expense due to pay-off of debt on Aerocar Aviation and Aerocar Parts line of credit (1,030,765) 125,607 ----------- (1,061,413) Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (597,768) ----------- Net adjustments $(1,659,181) ===========
(C) For the purpose of presenting the pro forma consolidated statements of earnings, the following adjustments have been made for the Solair acquisition:
Three Months Ended March 31, 1998 -------------- Increase (decrease) in income: Reduction in selling, general and administrative expenses for elimination of Banner management fees $ 135,000 Amortization of goodwill related to Solair acquisition (46,758) Reduction in interest expense due to pay-off of Solair debt 1,219,985 Increase in interest expense from acquisition debt (997,167) ----------- 311,060 Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes 946,624 ----------- Net adjustment $ 1,257,684 ===========
18 19 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 27 - Financial Data Schedule (for SEC use only). (b) Reports on Form 8-K. The Company filed a Report on Form 8-K dated January 14, 1999, which included a copy of a press release regarding the purchase of all of the issued and outstanding shares of capital stock of Solair, Inc. The Company filed a Report on Form 8-K/A dated March 16, 1999, which announced the completion of the purchase of all of the issued and outstanding shares of capital stock of Solair, Inc. 19 20 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. May 14, 1999 KELLSTROM INDUSTRIES, INC. (Registrant) /s/ Michael W. Wallace ----------------------- Michael W. Wallace Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 20 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE KELLSTROM INDUSTRIES, INC. BALANCE SHEET AND STATEMENT OF EARNINGS FOR THE PERIOD ENDED MARHC 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1,100 0 37,966 5,428 157,704 292,018 18,007 3,427 458,934 49,606 140,250 0 0 12 157,063 458,934 79,056 79,056 53,680 63,377 0 0 4,158 11,522 4,373 7,148 0 0 0 7,148 0.61 0.47
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