Document/Exhibit Description Pages Size
1: 10KSB Kellstrom 10KSB 94 405K
13: EX-10 Exhibit 10-19 16 71K
6: EX-10 Exhibit 10.10 2 12K
7: EX-10 Exhibit 10.12 12 50K
8: EX-10 Exhibit 10.14 83 392K
9: EX-10 Exhibit 10.15 3 15K
10: EX-10 Exhibit 10.16 32 121K
11: EX-10 Exhibit 10.17 23 94K
12: EX-10 Exhibit 10.18 5 20K
14: EX-10 Exhibit 10.20 64 191K
15: EX-10 Exhibit 10.21 9 41K
16: EX-10 Exhibit 10.24 11 50K
2: EX-10 Exhibit 10.4 15 66K
3: EX-10 Exhibit 10.5 12 54K
4: EX-10 Exhibit 10.6 12 57K
5: EX-10 Exhibit-10.8 4 19K
17: EX-23 Exhibit 23.1 2 9K
18: EX-23 Exhibit 23.2 2 11K
19: EX-27 Exhibit 27.1 1 10K
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
[] 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.
(Name of Small Business Issuer in its Charter)
Delaware 13-3753725
-------- ----------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
14000 N.W. 4 St., Sunrise, Florida 33325
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(Address of Principal Executive Offices) Zip Code
(954) 845-0427
---------------
(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of
the Exchange Act:
Title of Each Class
-------------------
Common Stock, $.001 par value (NASDAQ SmallCap Market)
Preferred Stock Purchase Rights (NASDAQ SmallCap Market)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the preceding 12 months (or for such
shorter periods 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
-- --
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this Form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for the fiscal year ending December 31, 1996 were: $24,921,587
As of March 25, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $97,590,261 based on the
closing price on that date of $14 1/8. As of that date, there were 7,495,583
shares of the registrant's Common Stock outstanding.
Transitional Small Business Disclosure Format. Yes No X
-- --
This report contains forward-looking statements, under the captions
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." These forward-looking statements are based
on many assumptions and factors, and are subject to many conditions, including
the Company's continuing ability to acquire adequate inventory and to obtain
favorable pricing for such inventory, the ability to arrange for the repair of
aircraft engines by third-party contractors prior to resale or lease,
competitive pricing for the Company's products, customer concentration, demand
for the Company's products which depends upon the condition of the airline
industry, ability to collect receivables and government regulation, and the
effects of increased indebtedness as a result of the acquisition of the business
of International Aircraft Support, L.P.
PART I
Item 1. Description of Business.
General
Kellstrom Industries, Inc. ("Kellstrom" or, together with its
subsidiaries, the "Company") engages in the purchasing, refurbishing (through
subcontractors), leasing, marketing and selling of commercial jet engines and
jet engine parts. The Company's customers include major domestic and
international airlines, engine manufacturers, engine part distributors and
dealers and overhaul service suppliers throughout the world. The Company enables
customers to reduce their engine maintenance costs by providing Federal Aviation
Administration ("FAA")-approved engines and engine parts on a timely basis and
at competitive prices. On January 15, 1997, Kellstrom completed the acquisition
of the business of International Aircraft Support, L.P. ("IASI"), a
California-based worldwide seller of new and used aircraft engine parts. (See
"History of the Company -- Recent Developments"). The Company previously
conducted business under the name "Westco International" and "International
Aircraft Support," and changed the operational name of both business units to
"Kellstrom Industries" on January 30, 1997.
The Company's principal executive office is located at Sawgrass
International Corporate Park, 14000 N.W. Fourth Street, Sunrise, Florida 33325.
Its telephone number is (954) 845-0427.
History of the Company
KST Acquisition.
Kellstrom, formerly Israel Tech Acquisition Corp., was formed in
December 1993 as a Specified Purpose Acquisition Company ("SPAC"), the objective
of which was to consummate an initial public offering and then to enter into a
business combination with an operating business. In April 1994, Kellstrom
consummated the initial public offering, from which it derived net proceeds of
$11,321,197 after expenses. On February 15, 1995, Kellstrom entered into an
Asset Purchase Agreement (the "Acquisition Agreement") with Rada Electronic
Industries, Inc., an Israeli corporation
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("Rada"), Tasco Electronics Inc. (a wholly owned subsidiary of Rada), and
Kellstrom Industries, Inc. ("KST"), which was an indirect, wholly-owned
subsidiary of Rada, to acquire from KST substantially all of the assets,
liabilities and operations of its commercial jet aircraft engine part
distribution business (the "Business"). This acquisition is hereinafter referred
to as the "KST Acquisition." In connection with the closing (the "Closing"),
which took place on June 22, 1995, Kellstrom changed its name from Israel Tech
Acquisition Corp. to Kellstrom Industries, Inc.
In consideration for the Business, Kellstrom paid $9,000,000, of which
$6,000,000 was paid in cash at the Closing. The remaining $3,000,000 was paid in
the form of an unsecured, non-interest bearing promissory note of Kellstrom of
which $1,000,000 is to be paid in eight equal installments over four years from
the Closing and $2,000,000 is to be paid as a balloon payment (the "Balloon
Payment") on the fourth anniversary of the Closing. The Balloon Payment is
payable by Kellstrom in cash or, under certain circumstances, in whole or in
part by issuance of shares of Kellstrom's common stock, par value $.001 per
share (the "Common Stock"), which for such purpose shall be valued at the higher
of the market price per share at such time or $5.00 per share. Subsequent to
December 31, 1996, the promissory note of Kellstrom was paid in full.
In addition, (i) Rada issued to Kellstrom a five-year warrant (the
"Rada Warrant") to purchase 400,000 shares of common stock of Rada (which
represented approximately 7% of the then-issued and outstanding stock of Rada)
at $3.00 per share; (ii) Kellstrom and Rada entered into a five-year marketing,
management and consulting agreement which provided for: (A) the nomination of
Mr. Joram Rosenfeld and Mr. Yoav Stern, then-current Co-Chairmen of the Board of
Directors of Kellstrom (the "Board") for election to Rada's Board of Directors
and (B) the payment by Rada to Kellstrom of an annual $200,000 consulting fee
for five years; and (iii) Kellstrom was granted a right of first refusal to
purchase any additional securities which may be privately offered by Rada during
the five year period following the Closing. In order to maintain a long-term
strategic relationship between the Company and Rada, on December 26, 1996,
Kellstrom exercised the Rada Warrant upon payment of $1,200,000. As a result of
certain antidilution provisions contained in the Rada Warrant, upon payment of
the $1,200,000 exercise price, Kellstrom received 464,643 shares of Rada common
stock, representing 5.6% of the outstanding shares of Rada at the time of
exercise.
Recent Developments.
On January 15, 1997, Kellstrom, through a wholly owned subsidiary,
completed the acquisition of substantially all the assets and certain
liabilities of IASI for $26.5 million in cash and warrants to acquire 500,000
shares of Common Stock at $9.25 per share, expiring January 15, 1999.
IASI is a worldwide seller of new and used aircraft engine parts to
maintenance and overhaul facilities, major commercial airlines and other
redistributors. Along with its engine parts sales (which includes the sale of
consignment parts), IASI is a lessor of jet engines and offers engine repair
management programs through its technical
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services business. The technical services and engine leasing businesses
represented only 0.3% and 8.2%, respectively of 1996 revenues, but both support
the resale of engine spare parts. Technical services allow IASI to supply parts
for engines during engine shop visits managed by IASI and for those engines for
which it has developed maintenance programs. IASI's mix of business and its
purchasing activities ultimately contribute to its position as a "market-maker"
in redistributed engines and/or various engine spare parts.
IASI's current product lines power aircraft which constitute 65% of the
world aircraft fleet. Its customers include major airlines, engine overhaul
facilities including those operated by airlines, independent overhaul and
maintenance organizations and aircraft engine manufacturers.
Industry Overview
The demand for after-market engine parts is driven primarily by flying
hours or cycles; a cycle is defined as a take-off or landing. Regardless of the
profitability of the airline industry, regulations require that parts be
serviced and/or replaced at scheduled intervals; often after specified flight
hours or cycles. As such, the demand for after-market parts is a function of
demand for world air travel. The airline industry has experienced rapid growth
in business and leisure air travel since 1993, primarily due to a world economic
recovery. The high demand for airline capacity has increased the utilization of
aircraft which in turn has significantly increased the demand for spare engine
parts. The Company's business remains dependent upon the overall economic
condition of the airline industry, however, which has historically been
volatile.
According to an industry report by the Canaan Group, a consulting firm
that tracks the aviation market, the total size of the market for commercial
spare engine parts (new and used) is approximately $3 billion. The $3 billion
spare parts market is divided between new and after-market parts. The $2.5
billion new parts market includes parts manufactured by original equipment
manufacturers ("OEMs") and third party manufacturers. The $500 million engine
parts after-market includes parts refurbished by third party manufacturers and
overhaul facilities. In addition to this $3 billion spare parts market, the
whole engine market is estimated to be $7 billion and includes the sale and
leasing of new and overhauled engines. With the addition of IASI, the Company
competes in the entire $10 billion market for engines and engine parts. The
Company competes in the after-market for engine parts, the new engine spare
parts market, and the market for whole engines through its leasing and engine
resale businesses.
The engine parts industry is being affected by the following trends:
Increasing emphasis on documentation and traceability. As safety
requirements have become more stringent, regulatory authorities have increased
the level of documentation required of aircraft operators. This requirement has
in turn been extended by operators to independent dealers. The expense and
sophistication required
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to track the history of inventory consisting of thousands of components is
considerable and provides a barrier to entry into the aircraft engine parts
resale market. In addition to the barriers created by documentation
requirements, management believes that tighter regulations regarding the
operating procedures of resellers may eliminate smaller participants and create
additional barriers to entry.
Outsourcing of inventory management function. Some airlines have
attempted to streamline their operations by outsourcing the entire inventory
management function to independent third parties. This improves the airline's
profitability, as measured by return on assets by removing parts inventories
from the balance sheet. Outsourcing allows third party inventory managers to
achieve economies of scale unavailable to individual airlines. Under consignment
agreements, the supplier is granted the right to sell spare parts from the
airlines' inventory, with the proceeds divided between the supplier and the
airline itself.
Leasing. Similar to outsourcing, leasing aircraft jet engines or parts
is an attempt by airlines to lower their overhead and/or working capital
requirements. Short-term leases, often 30-90 days in duration, are used by some
carriers that do not wish to maintain a pool of spare engines. Intermediate and
long-term leases (up to 10 years) are used by many larger carriers as they
upgrade their fleets. Almost all of the new aircraft flown by the major carriers
are leased. These carriers prefer to lease rather than purchase spare engines
for their fleet. In addition, many of the new entrant jet carriers are capital
constrained and thereby prefer to lease rather than own engines.
Reduction in number of approved suppliers and consolidation of the
engine part after-market. In order to reduce their administrative costs,
airlines are increasingly limited to a small number of approved suppliers with
whom they do business. To remain an approved supplier to the airlines, dealers
must maintain very high standards of quality control, enabling customers to
trace the complete history of any part. This move to limit the number of
approved suppliers is causing a realignment among independent dealers. A small
number of dealers continue to do business directly with airlines, and a new tier
of dealers sell to these approved suppliers. This reduction in supplier base
will continue to lead to consolidation in the market for aircraft spare parts.
Increased importance of capital. Suppliers need ready access to capital
in order to take advantage of various profitable opportunities including
outsourcing and leasing. Larger inventories, sophisticated information
technology systems and more expensive jet engines require increased access to
capital.
The Aero Engine After-Market.
Airlines maintain inventories of engines and spare parts, with
inventory levels determined by the expected usage for the particular part. These
inventories are stored primarily at the airline's maintenance centers, although
limited quantities of certain
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parts are also kept at each airport serviced by the operator in order to avoid
revenue-damaging AOG (aircraft on ground) situations.
For the first few years after a new engine is introduced, most parts
are supplied by the engine manufacturer itself. After about five years, engine
parts tend to become available on the surplus market. This availability is the
result of three primary factors.
When aircraft and engines are sold, supporting inventories may be sold
to third parties.
The development of repair scenarios provides a supply of overhauled
and serviceable parts.
With experience, operators become better able to forecast their need
for a particular engine part, enabling them to declare excess new part
inventory as surplus.
Three types of engine parts are available in the after-market: new
parts; serviceable parts (i.e. used parts that were removed from aircraft and
were inspected and designated airworthy by the airline or by an FAA-approved
repair station or that were overhauled by an FAA-approved entity); and
unserviceable parts (i.e. used parts that were removed from aircraft that may or
may not be repairable). The decision as to which type of part to purchase is
made based upon the relative price and availability of parts, the condition of
the specific part, the repair facilities that have been used during the life of
the part, the previous owners of the part, the life remaining on the part (if
applicable), the maintenance policy of the airline which will use the part and
other considerations.
Commercial aircraft engine parts are available from a variety of
sources, including OEMs, third party dealers, brokers (who maintain no
inventory), overhaul and repair facilities, lessors and airline operators.
Relationships in the engine parts market are complex; at different times
participants may act as both buyers and sellers, suppliers and clients. The
Company, for example, both buys from and sells to airlines, OEMs, lessors,
operators of refurbishment facilities and other independent dealers.
Sources for surplus aircraft engines do not exist as an organized
market, and the Company must rely on field representatives and personnel,
advertisements and its reputation as a buyer of surplus aircraft engines and
components in order to generate opportunities to purchase these materials. The
market for bulk sales of surplus aircraft engines and components is highly
competitive, in some instances involving a bidding process. While the Company
has been able to purchase surplus aircraft engines in this manner successfully
in the past, there can be no assurance that such parts will be available on
acceptable terms when needed in the future.
The engine after-market consists of several business segments including
engine sales, leasing, maintenance management, parts distribution, parts repair
and overhauls.
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Kellstrom and IASI are active in most of these segments, either directly through
in-house activity or indirectly, by contracting refurbishment work to third
party suppliers.
Products
Engine spare parts are purchased by customers in both the commercial
and military sectors. The Company is active only in the commercial aircraft
sector, which itself is divided into large jet transports, smaller commercial
aircraft (known as general aviation aircraft) and helicopters. General aviation
includes both jet and propeller-driven planes for business and personal use. The
Company currently specializes in the large jet segment of the business. The
Company has chosen not to get involved in turbojet technology, which is used
mainly in older commercial engines and in military engines. The Company also has
not entered the turboprop market which is typically low-end in terms of cost per
unit.
The Company specializes in providing refurbished, new and as-removed
parts for large fan engines, particularly the Pratt & Whitney JT9D engine and to
a lesser extent the PW 4000 engine, as well as narrow-body engines (through
IASI) such as the Pratt & Whitney JT8D and PW 2000 engines. The JT9D and PW 4000
power the Boeing 747 and 767 aircraft, McDonnell Douglas MD-11 and the Airbus
A300/310/330, and the JT8D and PW2000 engines power the Boeing 727, 737 and 757
aircraft as well as the McDonnell Douglas MD-80 and DC-9 series aircraft.
Moreover, IASI recently entered the CFM-56 engine market which powers the Boeing
737-300, -400 and -500 aircraft as well as the Airbus A320, A321 and A340
aircraft and the McDonnell Douglas DC-8. The Company's growth strategy is based
upon its goal of purchasing inventory at attractive prices, its ability to
identify parts for which there should be strong demand and its concentration on
the Pratt & Whitney engines, which represent the largest segment of the
commercial jet engines and engine parts after-market. The Company's management
has developed a systematic algorithm and management procedures to assess which
parts will be in demand.
Purchasers of engine parts have strict approval processes through which
a company may achieve status as an approved supplier for such purchaser. Some
purchasers maintain a very limited number of, and will do business only with,
those companies who are one of their "Approved Suppliers." Since the Company's
founding in 1990, it has achieved "Approved Supplier" status with over 50
purchasers in six countries that maintain such a limited list of "Approved
Suppliers," including the leading aero engine OEMs, international airlines, and
major aero engine refurbishment and repair facilities. In addition to the
relationships with those clients for whom the Company is an "Approved Supplier,"
the Company also maintains active relationships with many other customers that
utilize a broader list of approved suppliers.
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Several manufacturers dominate the market for large commercial
airplanes, including Boeing, McDonnell Douglas, and Airbus Industries. A small
number of suppliers provide the bulk of engines used to power large jet
aircraft. The suppliers include the Pratt & Whitney division of United
Technologies, General Electric, Rolls Royce and CFM International. Following is
a brief description of the engines for which the Company supplies engine parts:
The JT9D Engine. JT9D engines, introduced by Pratt & Whitney in the
late 1960's are used in Boeing 747 and 767 aircraft, the McDonnell Douglas
DC-10, and Airbus A300/310's. The JT9D was the first commercial turbo fan with a
high bypass ratio, enabling the engine to provide unprecedented thrust with
outstanding fuel efficiency and relatively low noise.
The JT9D engine has flown more than 135 million hours. Three thousand
of these engines were built until production ceased in 1990; 2,800 are still
flying on wide body aircraft operated by over 50 airlines. Kellstrom estimates
that JT9D engines will be widely used for the next ten to fifteen years. Pratt &
Whitney continues to upgrade and improve in-service engines to meet current
noise and emissions requirements, thus increasing the life span of these
engines.
The JT8D Engine. JT8D engines, a derivative military J-52 Turbojet,
were originally developed by Pratt & Whitney for the Boeing 727 airliner in
1963. The engine is the most widely used engine in commercial aviation history.
More than 12,000 of the JT8D family of engines have been produced and the engine
is still in production today. A variant of the basic JT8D, called the 200 Series
was introduced in 1977. More than 13,000 of these engines have been manufactured
to date.
The older, less fuel efficient JT8D engines are used in the Boeing 727
and 737, the McDonnell Douglas DC-9, the Aerospatiale Carvelle, Dassualt
Mercure, and the C-9 and C-22, U.S. military versions of the DC-9 and 727
aircraft. The newer 200 Series JT8D engines are used throughout the McDonnell
Douglas MD-80 range of aircraft models. The Company estimates that the JT8D
engines will be in service for at least ten more years.
The PW 2000 Engine. Pratt & Whitney began development in 1974 of a
series of advanced technology aircraft engines to power the commercial
transports of the mid-1980s and beyond. The PW 2037, the first in the series,
was awarded FAA certification in December 1983. These highly fuel efficient
engines feature high thrust, low noise and reduced emissions. The PW 2000 series
engines are used to power the Boeing 757 and are considered to be current
technology engines that are likely to continue in service for at least
twenty-five more years.
The PW4000 Engine. In 1982, Pratt & Whitney launched development of the
PW 4000 Series turbofan - an all-new commercial jet engine series with improved
fuel efficiency and higher takeoff thrust rating. The PW4000 entered commercial
service in mid 1987. The PW4000 is designed for use on current and advanced
versions of such
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wide-body aircraft as the Airbus A300, A310, A330, the Boeing 747, 767, 777 and
the McDonnell Douglas MD-11. These engines are considered to be current
technology engines and are likely to continue in service for at least
twenty-five more years.
The CFM-56 Engine. IASI has recently added CFM56 parts to its
inventory. The CFM56 is manufactured by CFM International, a joint venture
between General Electric and SNECMA, and is the second most popular engine as
measured by number of aircraft in the worldwide fleet powered by this engine
type. The CFM56 is used to power the Boeing 737 and the Airbus A320/A321/A340,
and the McDonnell Douglas DC-8. These engines are considered to be current
technology engines and are likely to continue in service for at least
twenty-five more years.
The development of a new engine for a commercial aircraft can take five
to fifteen years. Often, an engine becomes the basis for numerous series,
tailored to the needs of particular aircraft. For example, the JT9D and JT8D
engine families for Pratt & Whitney include more than 15 models each.
Quality Control
Engine parts are generally more expensive, flight critical, technically
complex and utilize more specialized heat tolerant metals than other aircraft
parts. A high standard for quality control and documentation is an absolute
necessity. The history of a given part from the date of original manufacture
must be documented and available to regulators and maintenance personnel. The
Company is dependent on third-party FAA certified repair facilities to perform
repair services to bring surplus aircraft engines held for resale and certain
engine components into a condition of airworthiness so that the Company can sell
such equipment.
The Company's management believes that obtaining "Approved Supplier"
status is heavily dependent on quality assurance, and that the Company's
comprehensive quality assurance program is among the best in its industry. The
Company is a member of the Coordinating Agency for Supplier Evaluation (CASE), a
self-governing organization formed by the airlines that evaluates and audits
parts suppliers and repair stations, as well as the Airline Suppliers
Association. In addition, in September 1996, the Company received certification
under ISO 9002. The ISO 9002 designation indicates a quality assurance standard
recognized by leading companies throughout the world. The Company was the first
aftermarket supplier of commercial jet engines and engine parts in North America
to receive such a certification. In addition, the Company is one of the few
vendors in the industry to have invested in a sophisticated optical imaging
system for document storage and retrieval. This system provides a high degree of
traceability by serial number for parts sold by the Company.
Customers
The Company's customers include airlines, OEMs, lessors, operators of
refurbishment facilities and other independent dealers. Five of the Company's
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customers (each individually accounting for over 10% of trade receivables and/or
revenues at December 31, 1995 and December 31, 1996) collectively account for
94% and 96% (1995) and 64% and 55% (1996) of trade receivables and revenues,
respectively. Certain significant customers vary from period to period as a
result of the large unit prices associated with whole aircraft engine sales. The
loss of, or significant curtailments of purchases by, the Company's significant
customers could have a material adverse effect on the Company's business,
financial condition and results of operations.
Competition
The aviation after-market is highly competitive. Competition is based
on product quality, the ability to provide needed parts quickly and price. The
largest segment of the after-market is served by OEM's. However, the relatively
high overhead and slow response times which characterize these large
organizations can present a handicap in a fast-moving, price-sensitive
marketplace. OEMs generally concentrate on selling new parts, leaving the market
in serviceable and refurbished parts to other suppliers. OEM-manufactured new
parts generally do not compete with refurbished parts.
The largest resellers (with annual revenues of approximately $70-$100
million generated from engine spare parts related reselling activity) include
companies such as AAR Corp. and AGES Group. There are approximately 10 midsize
competitors with annual engine and engine parts sales of $10-$30 million.
Midsize resellers include AVTEAM and the Company. A large portion of the market
revenue is generated by over 50 small aftermarket suppliers and brokers with
$1-$10 million in annual sales. As a result of industry consolidation,
management expects that a number of these smaller operators will either be
acquired or will have difficulty competing in this changing market. There can be
no assurance that the Company will continue to compete effectively against
present and future competitors or that competitive pressures will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, the engine parts supply business has been reshaped by the
widespread adoption of ILS - the Inventory Locator Service. The ILS lists the
availability of thousands of types of parts from brokers, distributors, repair
facilities and airlines. The listing includes the quantity of parts available,
the condition of the parts, when the parts are available and a contact for more
information. The ILS has created a much freer flow of information concerning the
supply and demand for particular parts. Dealers now must compete not only on the
basis of their relationships with customers and knowledge regarding a potential
source for products, but also on the quality of the parts available, the
documentation tracing the history of the parts and the price.
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Government Regulation
The aviation industry, including the life and maintenance of engine
parts, is highly regulated in the United States by the FAA and the equivalent
regulatory agencies in other countries. While the Company's business of buying
and selling engine parts is not directly regulated, the aircraft engines, engine
components and airframe materials must be accompanied by documentation which
enable the customers to comply with applicable regulatory requirements. Aircraft
operators must maintain logs concerning the utilization and condition of
aircraft engines, life-limited engine components and airframes.
Management believes that the industry will be subject to continued
regulatory activity. Increased oversight has and will continue to originate with
quality assurance departments at airline operators. The Company has been able to
meet all such requirements to date, and believes that it will meet any
additional requirements that may be imposed. There can be no assurance, however,
that new, more stringent government regulations will not be adopted in the
future or that any such new regulations, if enacted, would not have an adverse
impact on the Company.
Environmental Matters
The Company believes that it is in compliance in all material respects
with applicable environmental laws and regulations and due to the nature of the
Company's business there is little or no direct cost associated with such
compliance.
Employees
At the end of 1996, Kellstrom had 18 full-time employees and 2
part-time employees, and IASI had 16 full-time employees and 2 part-time
employees. None of the Company's or IASI's employees are members of a labor
union.
Item 2. Description of Property.
The Company owns its newly built 31,000 square foot facility located on
its 2.5 acres in the Sawgrass International Corporate Park, Sunrise, Florida
which is near Fort Lauderdale. Kellstrom's address is 14000 N.W. 4 Street,
Sunrise, Florida 33325. The property is subject to a ten-year fixed interest
rate (10.49% per annum) mortgage held by BankAtlantic. The balance of the
mortgage note as of December 31, 1996 was $1,194,277.
The Company leases a facility, assumed in connection with the
acquisition of IASI, located at 821 Industrial Road, San Carlos, California
94070. The property is subject to a lease which expires January 31, 1999 (the
"IASI Lease"). Under the terms of the lease, the current monthly base rental is
$20,903 per month, subject to increases each year based on the consumer price
index.
-11-
In addition, the Company's Board of Directors has approved the
construction of a new facility in the Fort Lauderdale area in anticipation of
the expiration of the IASI Lease and the consolidation of operations in a single
location. The cost and scope of the new facility have not yet been determined,
but management believes that the necessary funds for construction can be
obtained from financial institutions in the area and from the Company's cash
resources. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Item 3. Legal Proceedings.
There are no material legal proceedings pending against the Company or
any of its property.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock was quoted on the OTC Bulletin Board under the symbol
ITAC from April 19, 1994 to August 18, 1995, at which time the Company's Common
Stock was listed on the National Association of Securities Dealers Automated
Quotation System, Inc. ("Nasdaq") SmallCap market under the symbol KELL.
Following the filing of this Report, the Company will apply for listing of the
Common Stock on the Nasdaq National Market.
The following table sets forth the range of high and low bid prices for
the Common Stock for the last two years, as reported by the OTC Bulletin Board
and Nasdaq, as applicable. The quotes represent "Inter-dealer" prices without
retail markups, markdowns or commissions and may not necessarily represent
actual transactions.
[Download Table]
Common Stock
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High Low
Year Ended December 31, 1995:
First Quarter............................................. 4 13/16 3 7/8
Second Quarter............................................ 5 1/2 4 3/4
Third Quarter............................................. 5 3/4 5
Fourth Quarter............................................ 6 3/8 4 7/8
Year Ended December 31, 1996:
First Quarter............................................. 7 1/4 4 3/4
Second Quarter............................................ 8 7/8 6 1/2
Third Quarter............................................. 8 3/8 7
Fourth Quarter............................................ 8 9/16 7 3/8
As of March 25, 1997, there were 7,495,583 shares of Common Stock
outstanding, held by 56 stockholders of record. The Company believes that
certain holders of record hold a substantial number of shares of Common Stock as
nominees for a significant number of beneficial owners. The closing price for
the Company's Common Stock on March 25, 1997 was $14 1/8.
Kellstrom has not paid any cash dividends on its Common Stock to date.
The payment of dividends is within the discretion of the Board of Directors. It
is the present intention of the Board of Directors to retain all earnings for
use in the
-13-
Company's business operations and, accordingly, the Board does not anticipate
declaring any dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following should be read in conjunction with Kellstrom's financial
statements and the related notes thereto included elsewhere herein.
Kellstrom, formerly named Israel Tech Acquisition Corp., was formed in
December 1993 as a SPAC, the objective of which was to consummate an initial
public offering and then to enter into a business combination with an operating
business. In April 1994 Kellstrom consummated the initial public offering. On
June 22, 1995, Kellstrom completed the acquisition of substantially all of the
assets, liabilities and operations of the commercial jet aircraft engine part
distribution business of Kellstrom Industries, Inc., an indirect, wholly-owned
subsidiary of Rada Electronic Industries, Inc. In connection with the Closing,
Kellstrom changed its name from Israel Tech Acquisition Corp. to Kellstrom
Industries, Inc. The operations of the SPAC are no longer pertinent and,
accordingly, this analysis of results of operations will focus upon the pro
forma combined operating results of Kellstrom and the SPAC for the year ended
December 31, 1995 (as set forth in Note 15(b) to Kellstrom's financial
statements included elsewhere herein) and upon actual operating results for
Kellstrom for the year ended December 31, 1996 as reported in Kellstrom's
financial statements included elsewhere herein.
On January 15, 1997, Kellstrom, through a wholly-owned subsidiary,
completed the acquisition of substantially all the assets and certain
liabilities of IASI for $26.5 million in cash and warrants to purchase 500,000
shares of Common Stock at $9.25 per share. The warrants expire in January 1999.
See Note 15(c) to the Kellstrom's financial statements for a pro forma combined
balance sheet of the Company and IASI at December 31, 1996 and a pro forma
combined statement of earnings for 1996. Historical financial statements of IASI
appear as Exhibits to this report. The following discussion does not reflect
IASI's operations.
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, 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
-14-
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.
The Company's inability to collect receivables from a substantial sale
could adversely affect the Company's financial position and results of
operations for a particular period although the Company's policy is to generally
sell whole engines for cash at closing. Although the Company's bad debt loss was
zero for the year ended December 31, 1996, the Company anticipates that it may
incur some bad debt losses in the future as its customer base grows. In
addition, the Company expects to experience greater exposure to its customers as
a result, in part, of the implementation of its program for the short term
leasing of aircraft engines.
Results of Operations.
Net revenues increased 69% from $14,708,178 (pro forma) in 1995 to
$24,921,587 (actual) in 1996. The Company was able to increase its net revenues
in 1996 primarily due to the increased availability of cash resources to acquire
inventory for resale. The Company believes that the availability of inventory is
a critical factor in achieving sales growth in its industry. In addition, the
Company's foreign revenues increased by over $1,000,000 in 1996 due to the
Company's expansion of its product lines to include the PW4000 engine type which
is widely used by the Company's foreign customers.
Gross margins increased 68% from $5,161,784 (pro forma) in 1995 to
$8,686,428 (actual) in 1996, but decreased as a percentage of sales from 35.1%
for 1995 to 34.9% for 1996. The decrease in gross margins as a percentage of
sales in 1996 compared to 1995 resulted primarily from unusually high gross
margins of nearly 40% experienced by the Company during the fourth quarter of
1995 as a result of several large, very profitable engine sales. Management does
not anticipate that the unusually high margins experienced in the fourth quarter
of 1995 will continue on a regular basis.
Total selling, general and administrative expenses increased 47% from
$2,382,172 (pro forma) in 1995 to $3,491,457 (actual) in 1996, but decreased as
a percentage of net revenues from 16.2% to 14.0%. The increase in these expenses
was a result of expanding the Company's office and warehouse facilities along
with its sales, administrative and warehouse personnel levels to efficiently
address the Company's increased inventories and the resultant increased volume
of revenues.
Depreciation and amortization expense increased 26% from $350,904 (pro
forma) in 1995 to $441,854 (actual) in 1996, but decreased from 2.4% of net
revenues in 1995 to 1.8% of net revenues in 1996. The increase in the 1996
expense is attributable
-15-
primarily to the increased depreciation expense resulting from the expansion of
the Company's office and warehouse facilities during 1996.
Interest expense (net of interest income) increased 448% from $117,641
(pro forma) in 1995 to $644,527 (actual) in 1996 due to increased borrowing
levels necessary to expand the Company's inventory levels, as well as financing
of the expansion of the Company's office and warehouse facilities. Further
increases in interest expense can be anticipated in the future as the Company
continues to expand its inventory levels and facilities to support future growth
in operations.
Net income increased 83% from $1,444,417 (pro forma) in 1995 to
$2,646,343 (actual) in 1996. Net income per share increased by 50% from $0.30
per share in 1995 to $0.45 per share in 1996. 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 options and warrants outstanding during the
periods using the modified treasury stock method. The effect of this is to
increase the weighted average number of shares outstanding from 2,764,757
(weighted average actual outstanding) to 7,188,095 for 1995 and from 2,943,902
(weighted average actual outstanding) to 8,147,455 for 1996.
Liquidity And Capital Resources.
The Company's working capital was $13,735,157 as of December 31, 1996,
an increase of $4,064,785 since December 31, 1995. The principal reasons for the
increase in working capital were the increase in inventories and an increase in
cash resulting from the exercise of warrants.
The primary use of funds during the twelve month period ended December
31, 1996 was to purchase inventory ($3,871,351), to construct additional
warehouse and office facilities and provide the necessary furnishing and
fixtures for the new facility ($1,372,244) and for the exercise of the Rada
Warrant ($1,200,000). The source of the funds utilized for these purposes was
from financing activities ($5,106,870) and the remainder was from operations.
The Company intends to use its available funds to acquire inventories
of jet aircraft engines and jet engine parts. Greater availability of
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.
The Company contracted for the expansion of its warehouse and office
facilities during the third quarter of fiscal 1995. This expansion was completed
in September, 1996. These expanded facilities accommodated increased inventory
purchases to enable the Company's anticipated future growth and also allowed the
Company to eliminate the cost of leasing off-site warehouse facilities. The cost
of this expansion was financed principally from a $750,000 construction/mortgage
loan. The Company intends to
-16-
acquire land and construct a new facility to accommodate the consolidated
Kellstrom/IASI businesses. This project is scheduled to be commenced in 1997 and
to be completed by mid-1998. The cost and scope of the new facility have not
been determined, but management believes that the funds necessary for this
project can be obtained from financial institutions in the vicinity of the
facility and from the Company's cash resources.
The Company entered certain short-term engine leases during 1996. The
Company believes 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 the 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.
During May 1996, the Company and its then-lead bank, BankAtlantic,
completed an increase of the Company's working capital line of credit, secured
by substantially all the Company's assets, from $3.0 million to $5.0 million and
also agreed upon a new guidance line of $3.0 million to fund the acquisition of
specific jet engines. The interest rate on these lines was 1% over the bank's
prime rate with the interest payable monthly. Principal on the guidance line was
payable upon the earlier of the disposition of the underlying collateral or the
line maturity date. The working capital line and the guidance line both were to
mature on May 31, 1997.
On December 23, 1996, the Company entered into a Revolving Loan
Agreement with Barnett Bank, N.A. This Revolving Loan Agreement replaced the
working capital line and the guidance line with BankAtlantic, and increased the
Company's bank credit lines from $8.0 million to $15.0 million. This new
arrangement also reduced the interest rate paid by the Company from 1% above
BankAtlantic's prime rate to 1/8% below Barnett's prime rate (which interest
rate payable by the Company was 8.125% at December 31, 1996) or, at the
Company's option, to LIBOR (which was 5.50 at December 31, 1996) plus 275 basis
points. Indebtedness under the Revolving Loan Agreement is secured by
substantially all the Company's assets. The advance rate formulas under this new
bank facility were liberalized to provide for advances against foreign
receivables. This modification is important to the Company as its foreign
business has recently represented a greater percentage of its net revenues.
The $1,194,277 first mortgage (including a $750,000
construction/mortgage loan) held by BankAtlantic and secured by the Company's
office and warehouse facilities continues to remain 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.
During 1996 the Company's highest utilization of its BankAtlantic $5.0
million working capital line was $4,251,000 and the Company's highest
utilization of the
-17-
BankAtlantic guidance line was $3.0 million. The balance due at December 31,
1996 on the Barnett Bank revolving credit facility was approximately $5.2
million.
The acquisition of IASI was completed on January 15, 1997 and was
primarily financed through the issuance of $15 million in senior subordinated
debt (the "Senior Debt") and warrants and from 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 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 was $14,555,826. Interest on
the credit facilities accrues daily and ranges from .50% to 1.0% above Union
Bank's prime rate, and is 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 quarterly. 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 annual installments beginning January 15, 2002. An advance principal
payment of up to $3,750,000 is permitted (along with a premium payment of 1%)
prior to December 31, 1998 from the proceeds of the exercise of the Company's
publicly traded warrants. It is anticipated by the Company that such an advance
payment will be made during this advance payment period. Moreover, the Company
may, at its option, redeem up to $4.5 million principal amount of the 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 $10.5 million.
The Bridge Loan is due April 15, 1997. In connection with the Bridge
Loan, the Company issued warrants to purchase 75,000 shares of Common Stock at
an exercise price of $10 per share, exercisable until three years from the
repayment of the Bridge Loan. A portion of the Bridge Loan, in the amount of
$1,000,000, was repaid on February 12, 1997.
The Company called its publicly traded warrants on February 4, 1997
pursuant to their terms. There were 4,166,510 publicly traded warrants
outstanding at December 31, 1996. Each warrant entitles the holder to purchase
one share of the Company's Common Stock at an exercise price of $5.00 per share.
The Company received total proceeds of $22,961,950 from the exercise of warrants
during the period from October 1, 1996 to March 21, 1997.
The Company's management believes that cash flow from operations,
combined with the Company's borrowing facilities should be sufficient for the
Company's current level of operations. In addition, the Company is seeking to
further increase its bank financing to expand its facility (as described above
and under the caption "Properties") and to increase inventory purchases.
However, the Company may elect to seek equity
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capital in the future depending upon market condition and the capital needs of
the Company.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." As
provided for in Statement No. 123, the Company has elected to continue to apply
the provisions of APB No. 25, "Accounting for Stock Issued to Employees" in
accounting for stock-based compensation and to provide pro forma disclosure of
what the impact on the Company's financial results would have been had it
applied SFAS No. 123. The disclosures required by the new statement are included
in Note 10 to Kellstrom's financial statements.
Item 7. Financial Statements.
Kellstrom's financial statements and IASI's combined financial
statements for 1995 and 1996 and the respective notes thereto are set forth
herein as Exhibits to this report. An index of these financial statements
appears in Item 13.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Executive Officers and Directors
The directors and executive officers of the Company, their ages,
positions in the Company, and the dates of their initial election or appointment
as director or executive officer are as follows:
[Enlarge/Download Table]
Officer or
Name Age Position with the Company Director Since
-----------------------------------------------------------------------------------------------------------------
Yoav Stern (1) 43 Chairman of the Board December 1993
Zivi R. Nedivi 39 Chief Executive Officer, President and Director June 1995
John S. Gleason 47 Chief Financial Officer, Executive Vice President,Treasurer July 1995
Fred von Husen 52 Executive Vice President January 1997
Anthony Motisi 38 Vice President and Secretary June 1995
Donald Reynolds 58 Vice President, Technical Operations January 1997
Paul F. Steele 37 Vice President, Purchasing June 1995
Ian McDonald 45 Vice President, Sales January 1997
Thomas McMillen (1) 44 Director October 1996
David Jan Mitchell (1) 36 Director December 1993
------------------
(1) Member of the Audit Committee.
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Yoav Stern is the Chairman of the Board and a director of the Company.
Mr. Stern is a principal of Helix Capital Corporation, L.L.C., a merchant
banking firm ("Helix"). From the Company's inception until June 22, 1995, Mr.
Stern was the Co-Chief Executive Officer and Co-President of the Company. Mr.
Stern has been a director of the Company since its inception. Mr. Stern was a
Co-CEO of European Gateway Acquisition Corporation ("EGAC") since March 1995.
EGAC acquired Bogen Communications, Inc. and changed its name to Bogen
International, Inc. ("Bogen") in August 1995. Bogen's shares are traded on the
American Stock Exchange. Since that time, Mr. Stern has served as a director and
member of the executive committee of Bogen. From February 1994 to April 1995,
Mr. Stern served as a director of Random Access, Inc., a public company traded
on the Nasdaq National Market, which is engaged in the information technology
business. From January 1993 to September 1993, Mr. Stern was President and a
director of WordStar International, Inc. ("WordStar"), which is engaged in
research and development and worldwide marketing and distribution of software
for business and consumer applications. Mr. Stern structured the business
combination of WordStar with two other public companies, after which WordStar
changed its name to SoftKey International, Inc. ("SoftKey"). SoftKey is traded
on the Nasdaq National Market. Mr. Stern is currently a director of, and a
consultant to, SoftKey. From March 1990 to December 1992, Mr. Stern was Vice
President of Business Development of Elron Electronic Industries Ltd. ("Elron"),
a multinational high-technology public holding company based in Israel with
aggregate annual revenues in excess of $900 million. Elron is engaged in
operating and investing in companies in the technology-led industry, including
medical diagnostic imaging, advanced defense electronics, data communication,
manufacturing automation, semiconductor and software products, and sophisticated
productivity tools. Elron is traded on both the Nasdaq National Market and Tel
Aviv Stock Exchange. From August 1988 to February 1990, Mr. Stern was director
of Business Development at Keter Plastics Ltd., a private company engaged in the
manufacture of injection molded plastic products. From December 1988 to February
1990, he was the President, Chief Executive Officer and a director of Lipski
Ltd., an Israel public company traded on the Tel Aviv Stock Exchange, which is
engaged in the development, production and marketing of injection molded plastic
products. From January 1985 to June 1988, he was founder, President and Chief
Executive Officer of Co/Rent Computer Rentals, a private company based in
Canada, active in the rental of microcomputers. From February 1973 to December
1983, Mr. Stern served in the Israeli Air Force as a fighter pilot, avionic
systems officer, commander of Operational Training Unit and a Deputy Squadron
Commander. Mr. Stern earned a Practical Engineering Diploma in advance mechanics
and automation from ORT Technological College, Israel, graduated from the Israel
Air Force Academy and earned a B.S. degree in Mathematics and Computer Science
from Tel Aviv University.
Zivi R. Nedivi has been the Chief Executive Officer and a director of
the Company since June 22, 1995. Mr. Nedivi was the founder, President and CEO
of Kellstrom Industries, Inc., an indirectly wholly-owned subsidiary of Rada,
from its establishment in 1990 until June 1995. From September 1994 until June
1995, Mr. Nedivi also served as Corporate Vice President of Rada, a public
company traded on the Nasdaq National Market which is engaged in the business of
avionics for the commercial and military aviation industries. From October 1984
to September 1990, Mr. Nedivi was co-founder and General Manager of Maakav Ltd.,
a private aviation management company based in Israel. Maakav represented
certain American companies in Israel, including companies active in the
distribution of aircraft parts. From February 1986 until October 1990 Mr. Nedivi
was also co-founder and director of NBC Aviation Inc., a private company based
in Texas active in the sale of commercial jet engines and related components. A
graduate of the Israel Air Force Academy, Mr. Nedivi served in the Israel Air
Force as an F-15 fighter pilot for seven years and held the rank of Major. He
also served as a Human Engineering Consultant to Israel Aircraft Industries on
the Lavi fighter aircraft program.
John S. Gleason joined the Company in July 1995 as its Chief Financial
Officer and was appointed Treasurer in August 1995 and Executive Vice President
in January 1997. From January 1986 until July 1995, Mr. Gleason served as the
Vice President of Finance of IASI. Mr. Gleason was also responsible for buying,
selling and leasing IASI's commercial jet engines on a worldwide basis, as well
as the
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procurement of jet engine inventory consignment arrangements. Mr. Gleason is a
Florida and California CPA and earned a B.S. degree in accounting from Florida
Atlantic University in 1971.
Fred von Husen joined the Company in January 1997 as its Executive Vice
President. Mr. von Husen was IASI's President and Chief Executive Officer since
1987. Mr. von Husen has 32 years experience in the aviation industry primarily
in engine and aircraft maintenance plus financial and organization management.
Prior to joining IASI, he served as Vice President of Operations and earlier as
Vice President of Technical Services at Aircal, a passenger airline based in
California. Mr. von Husen also spent 17 years at United Airlines in various
positions including engine maintenance, engineering, and corporate planning.
Anthony Motisi has been a Vice President since June 22, 1995. Mr.
Motisi was the Vice President of Operations for Kellstrom Industries, Inc. from
December 1994 until June 22, 1995 and Director of Sales and Marketing from July
1993 until December, 1994. In 1980, Mr. Motisi earned a B.S. degree in finance
from the University of Florida. Prior to joining Kellstrom Industries, Inc., Mr.
Motisi held the position of Manager of Engine Parts Sales at Aviation Sales
Corporation.
Donald Reynolds became Vice President of Technical Operations in
January 1997. Mr. Reynolds served in the same role at IASI since 1985. Mr.
Reynolds is responsible for inventory management, quality control, purchasing,
outside vendor business, shipping and receiving, and all technical services
activities. Mr. Reynolds also spent 24 years with United Airlines in various
positions including commercial airline engine maintenance, production planning,
customer service and contract administration.
Paul F. Steele has been a Vice President of the Company since June 22,
1995. Mr. Steele was the Vice President of Purchasing for Kellstrom Industries,
Inc. from December 1994 until June 22, 1995 and a Director of Operations from
November 1993 until December 1994. Prior to joining Kellstrom Industries, Inc.,
Mr. Steele held the position of Vice President of Technical Sales at AGES Group,
a subsidiary of Volvo Flygmotor and supplier of commercial aircraft engines. Mr.
Steele graduated from Bolton Street College, Dublin.
Thomas McMillen became a director in October 1996. Mr. McMillen served
three consecutive terms in the U.S. House of Representatives from the Fourth
Congressional District of Maryland (1987 to 1993), and is currently Chairman and
CEO of Complete Wellness Centers, Inc., a physician practice management company.
He served as Chief Administrative Officer of CliniCorp., Inc., an owner and
operator of chiropractic clinics, from November 1993 to March 1994. While in
Congress, Mr. McMillen served on the Transportation, Aviation & Materials
Subcommittee of the Science, Space & Technology Committee, as well as on the
Energy and Commerce Committee. Mr. McMillen serves on the Boards of Directors of
a number of public companies, including Integrated Communication Network, Inc.,
C.H.G. Inc., Commodore Applied Technologies, Inc. and Orion Acquisition Corp. I.
He is a member of the Board of Visitors of the University of Maryland School of
Public Affairs and is National Chairman of the University of Maryland
President's Club. He is an Advisory Council Member of the Paul Nitze School of
Advanced International Studies of the Johns Hopkins University and is a member
of the Board of Directors of the International Visitors Center. He also serves
on the Democratic National Committee's Business Council. Since 1993, Mr.
McMillen has, at the request of President Clinton, co-chaired the President's
Council on Physical Fitness and Sports. Mr. McMillen received a B.S., Phi Beta
Kappa, in Chemistry in 1974 from the University of Maryland and was also a
Rhodes Scholar.
Ian McDonald joined the Company in January 1997 as Vice President of
Sales. For ten years prior to joining the Company, Mr. McDonald vas Senior Vice
President of AGES Group. Earlier in his career, Mr. McDonald was with Canadian
Airlines where he was manager of power plant maintenance, the airline's aircraft
engine and overhaul operations. In 1973 he received an Engineering Technician
Certificate from the City and Guilds of London, part of Scotland's Motherwell
Technical College.
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David Jan Mitchell has been a director of the Company since its
inception in December 1993. From the Company's inception until August 21, 1995,
Mr. Mitchell was the Secretary of the Company. Since August 1994, Mr. Mitchell
has served as a director of Holmes Protection Group, a publicly traded security
alarm system company, and, since March 1995 has served as a director of Bogen.
Since January 1991, he has been the President of Mitchell & Company, a New
York-based merchant banking company he founded. Mitchell & Company is engaged in
venture capital investments and financing. Mr. Mitchell serves as a director of
several private companies, including Madah-Com, an Israeli-based company
involved in sound transmission and First Home, a company that markets houses
developed for first time homeowners. Mr. Mitchell also serves as President of
AmeriCash LLC, a national network of Automated Teller Machines in non-bank
locations. Since March 1992, he has been a partner of Petherton Capital
Corporation, a privately held real estate investment company.
The Board is divided into two classes, each of which serves for a term
of two years, with only one class of directors being elected in each year. The
term of office of the first class of directors, presently consisting of David
Jan Mitchell and Thomas McMillen, will expire at the ensuing annual meeting of
stockholders, and the term of office of the second class of directors, presently
consisting of Yoav Stern and Zivi R. Nedivi, will expire at the second
succeeding annual meeting of stockholders. In each case, a director will hold
office until the next annual meeting of stockholders at which his class of
directors is to be elected.
Compliance with Section 16(a) of the Exchange Act
The Securities Exchange Act of 1934, as amended (the "Exchange Act"),
requires the Company's executive officers, directors and beneficial owners of
more than 10% of a class of the Company's stock, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission (the
"Commission") and Nasdaq. Based solely upon a review of Forms 3, 4 and 5, and
amendments thereto, furnished to the Company during its most recent fiscal year,
there were individuals subject to compliance reporting requirements under the
Exchange Act who failed to file on a timely basis. Zivi R. Nedivi, John S.
Gleason, Paul F. Steele, David Jan Mitchell, Yoav Stern and Anthony Motisi
failed to file on a timely basis a Form 5, each reporting one exempt transaction
during fiscal year 1996. Donald Reynolds, Fred von Husen, Ian McDonald and
Thomas McMillen each failed to file on a timely basis a Form 3. Mr. Mitchell
failed to file on a timely basis a Form 4 reporting one transaction.
-22-
PART IV
Item 10. Executive Compensation.
The following table summarizes the compensation for services rendered
to the Company by the Chief Executive Officer and the Company's three most
highly compensated executive officers who earned compensation in excess of
$100,000 in 1996 (the "Named Executives"). No other executive officer earned
compensation in excess of $100,000 in 1996. Prior to the KST Acquisition, none
of the Company's executive officers, including the Chief Executive Officer,
received any compensation from the Company.
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
Annual Compensation Long Term Compensation
----------------------------------------------------------------------- ----------------------------------------------------------
Awards Payouts
------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Name Annual Restricted Under- Other
and Compen- Stock lying LTIP Compen-
Principal Salary Bonus sation Award(s) Options(#) Payouts sation
Position Year ($)(1) ($) ($)(2) ($) ($) ($)
------------------------------------------------------------------------------------------------------------------------------------
Zivi R. Nedivi(3)
Chief Executive
Officer and 1995 97,500 183,809 14,849 0 49,000 0 0
President 1996 180,000 218,047 0 0 100,000 0 9,446(4)
John S. Gleason
Chief Financial
Officer, Executive 1995 68,750 58,061 1,213 0 30,000 0 0
Vice President 1996 150,000 60,557 10,819 0 50,000 0 1,224(5)
and
Treasurer
Paul F. Steele 1995 56,875 55,466 11,234 0 13,500 0 0
Vice President 1996 130,000 60,557 0 0 25,000 0 48,183(6)
Anthony Motisi
Vice President 1995 40,625 55,466 4,507 0 13,500 0 0
and Secretary 1996 78,000 48,466 0 0 25,000 0 4,562(7)
(1) 1995 figures are salaries paid by Kellstrom commencing on June 23, 1995
until December 31, 1995.
(2) Consisting of the use of a company vehicle and a premium allowance paid to a
nonqualified corporate benefit program on behalf of each executive.
(3) Mr. Nedivi owns an interest in Helix Capital Corporation, LLC (together with
related entities, "Helix"). Helix has entered into an engagement letter with the
Company under which it receives a retainer and is entitled to certain
transaction fees under certain circumstances. Mr. Nedivi receives no portion of
the retainer payments to Helix, but it is anticipated that he may receive a
portion of any transaction fees received by Helix from the Company. See "Certain
Relationships and Related Transactions".
(4) Consisting of a $8,095 life insurance premium and a $1,351 holiday bonus.
(5) Consisting of a holiday bonus.
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(6) Consisting of a loan of $35,436 to the employee that was forgiven, a $11,448
life insurance premium and a $1,299 holiday bonus.
(7) Consisting of a $3,360 life insurance premium and a $1,202 holiday bonus.
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The following table sets forth information concerning options granted
in the last fiscal year to the Named Executives.
Option/SAR Grants in Last Fiscal Year
Individual Grants
[Enlarge/Download Table]
(a) (b) (c) (d) (e)
Number of
Securities % of Total
Underlying Options Granted Exercise or
Options to Employees in Base Price Expiration
Name Granted(#) Fiscal Year ($/Sh) Date
-------------------------------------------------------------------------------------------------------
Zivi R. Nedivi 100,000 43.9 7.63 Sept. 2006
John S. Gleason 50,000 21.9 7.63 Sept. 2006
Paul F. Steele 25,000 11 7.63 Sept. 2006
Anthony Motisi 25,000 11 7.63 Sept. 2006
The following table sets forth information concerning the value of
unexercised stock options at the end of the 1996 fiscal year for the Named
Executives.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End
Option/SAR Values
[Enlarge/Download Table]
---------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired FY-End (#) FY-End ($)
on Value
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
---------------------------------------------------------------------------------------------------------------
Zivi R. Nedivi 0 0 16,333/132,667 55,124/185,251
John S. Gleason 0 0 10,000/70,000 33,750/105,000
Paul F. Steele 0 0 4,500/34,000 15,188/49,125
Anthony Motisi 0 0 4,500/34000 15,188/49,125
The Company had no long-term incentive plan awards granted as of December 31,
1996.
-25-
Compensation of Directors
During 1996, the Company paid Yoav Stern and Joram Rosenfeld, and in
each case entities controlled by them, an aggregate of $90,000 each, for
services rendered by Yoav Stern and Joram Rosenfeld as Co-Chairmen of the
Company's Board of Directors.
The Company's Chief Executive Officer receives no additional cash
compensation for service as a Director. All Directors are reimbursed for
out-of-pocket expenses incurred in attending Board meetings. During 1996, (a)
Messrs. Stern and McMillen were granted options to purchase 100,000 and 30,000
shares of Common Stock, respectively, under the Company's 1996 Stock Option
Plan; and (b) Mr. Mitchell was granted options to purchase 2,250 shares of
Common Stock under the Company's 1995 Stock Option Plan. See "1995 Stock Option
Plan" and "1996 Stock Option Plan," below.
Employment Agreements
The Company entered into a seven-year management agreement, effective
January 1, 1997, with East Shore Ventures, Inc. (the "Manager"), of which Mr.
Nedivi is President and sole shareholder. The agreement provides for an annual
base fee of $240,000 and a bonus payable on the following terms: (i) if the
Company achieves a target net income level which may be adjusted each year by
the Board (the "Target"), then the Manager will receive a bonus of $240,000;
(ii) if the actual net income for the Company in any year exceeds the Target for
such year, the Manager's bonus will increase by a corresponding percentage,
provided that the bonus may not exceed $360,000; and (iii) if the actual net
income for the Company in any year is less than the Target for such year, the
Manager's bonus will decrease by twice the corresponding percentage (so that if
the actual net income for the Company is 50% or less of the Target, there will
be no bonus paid). In addition, the management agreement provides that Mr.
Nedivi will be paid severance of four months of the base fee if the Manager's
services are terminated without cause, provided that upon a change of control
Mr. Nedivi will be paid severance equal to twelve months of his base salary. A
change of control is defined in the contract as (i) any transaction which
results in the stockholders of the Company immediately before the transaction
ceasing to own at least 51% of the voting stock or of the entity which results
from the transaction, (ii) a merger, consolidation or other transaction where
the Company is not the surviving entity or (iii) a disposition of all or
substantially all of the assets of the Company. Under the terms of the
management agreement, the Company maintains a life insurance policy on the life
of Mr. Nedivi in the amount of $4 million, which is transferable without
consideration to Mr. Nedivi after January 1, 1999. The management agreement may
be terminated by mutual agreement between the Company and the Manager, or by
either party upon sixty (60) days written notice.
The Company entered into a five-year employment contract with Mr.
Gleason, effective as of May 18, 1995 which was amended on February 14, 1997.
The amended contract provides for an annual base salary of $190,000 and a bonus
payable on the following terms: (i) if the Company achieves a target net income
level which may be adjusted each year by the Board (the "Gleason Target"), then
Mr. Gleason will receive
-26-
a bonus of $90,000; (ii) if the actual net income for the Company in any year
exceeds the Gleason Target for such year, Mr. Gleason's bonus will increase by a
corresponding percentage, provided that the bonus may not exceed $135,000; and
(iii) if the actual net income for the Company in any year is less than the
Gleason Target for such year, Mr. Gleason's bonus will decrease by twice the
corresponding percentage (so that if the actual net income for the Company is
50% or less of the Gleason Target, there will be no bonus paid). In addition,
the amended employment agreement provides for the grant of options (outside of
the Company's 1996 Stock Option Plan) to purchase 100,000 shares of the
Company's Common Stock subject to the approval of the Board of Directors. The
employment agreement provides that Mr. Gleason will be paid severance of four
months of his base salary if employment is terminated without cause, and that
upon a change of control (as previously defined) Mr. Gleason will be paid
severance equal to twelve months of his base salary. Moreover, the amended
agreement provides that the Company will maintain a life insurance policy on the
life of Mr. Gleason in the amount of $2 million which is transferable without
consideration to Mr. Gleason after January 1, 1999. The agreement may be
terminated by mutual agreement between the Company and Mr. Gleason, or by either
party upon sixty (60) days written notice.
The Company entered into a five-year employment contract with Mr.
Steele, effective as of January 1, 1996, providing for an annual base salary of
$130,000. Effective January 1, 1997, Mr. Steele's annual base salary increased
to $160,000. The agreement also provides for a bonus payable on the following
terms: (i) if the Company achieves a target net income level which may be
adjusted each year by the Board (the "Steele Target"), then Mr. Steele will
receive a bonus of $50,000; (ii) if the actual net income for the Company in any
year exceeds the Steele Target for such year, Mr. Steele's bonus will increase
by a corresponding percentage, provided that the bonus may not exceed $75,000;
and (iii) if the actual net income for the Company in any year is less than the
Steele Target for such year, Mr. Steele's bonus will decrease by twice the
corresponding percentage (so that if the actual net income for the Company is
50% or less of the Steele Target, there will be no bonus paid). If Mr. Steele's
employment is terminated without cause, the employment agreement provides that
Mr. Steele will be paid (i) to the extent not already paid, his salary through
the date of such termination, (ii) a cash lump sum for any vacation days accrued
but unused as of the date of termination and (iii) an amount equal to six months
of Mr. Steele's base salary, provided that if termination is due to a change of
control (as previously defined), Mr. Steele will be paid an amount equal to
eight months of his base salary. The agreement may be terminated by mutual
agreement between the Company and Mr. Steele, or by either party upon sixty (60)
days written notice.
The Company entered into an amended and restated five-year employment
contract with Mr. Motisi on January 30, 1996, providing for annual base salary
of $75,000. Effective January 1, 1997, Mr. Motisi's annual base salary increased
to $100,000. The agreement also provides for a bonus payable on the following
terms: (i) if the Company achieves a target net income level which may be
adjusted each year by the Board (the "Motisi Target"), then Mr. Motisi will
receive a bonus of $40,000; (ii) if the actual net income for the Company in any
year exceeds the Motisi Target for such year, Mr. Motisi's bonus will increase
by a corresponding percentage, provided that the
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bonus may not exceed $60,000; and (iii) if the actual net income for the Company
in any year is less than the Motisi Target for such year, Mr. Motisi's bonus
will decrease by twice the corresponding percentage (so that if the actual net
income for the Company is 50% or less of the Motisi Target, there will be no
bonus paid). If Mr. Motisi's employment is terminated without cause, the
employment agreement provides that Mr. Motisi will be paid (i) to the extent not
already paid, his salary through the date of such termination, (ii) a cash lump
sum for any vacation days accrued but unused as of the date of termination and
(iii) an amount equal to six months of Mr. Motisi's base salary, provided that
if termination is due to a change of control (as previously defined), Mr. Motisi
will be paid an amount equal to eight months of Mr. Motisi's base salary. The
agreement may be terminated by mutual agreement between the Company and Mr.
Motisi, or by either party upon sixty (60) days written notice.
1995 Stock Option Plan
On May 10, 1995, the Board adopted the 1995 Stock Option Plan, and on
June 22, 1995, the Company's stockholders approved the 1995 Stock Option Plan.
The purpose of the 1995 Stock Option Plan is to advance the interests of the
Company by providing an additional incentive to attract and retain qualified and
competent key employees, officers, directors and independent contractors for the
Company and its subsidiaries. The 1995 Stock Option Plan provides for the
granting of options to purchase or acquire, in the aggregate, up to 250,000
shares of Common Stock, with no individual to be granted options to purchase
more than 100,000 shares of Common Stock during the ten year period from April
1994 through the tenth anniversary thereof. Options granted pursuant to the 1995
Stock Option Plan may be either incentive stock options ("ISOs") or
non-qualified options ("NQSOs"). Shares of the Common Stock subject to options
may be from shares held in the Company's treasury or from authorized and
unissued shares.
The 1995 Stock Option Plan is administered by either the Board, the
Compensation Committee of the Board or another committee, if any, appointed by
the Board (references in this discussion to the "Committee" include the Board,
the Compensation Committee or another committee appointed by the Board to the
extent any of the foregoing administers the 1995 Stock Option Plan unless the
context otherwise requires). If the 1995 Stock Option Plan is administered by a
Committee (other than the Board or the Compensation Committee), such Committee
will consist of at least two persons, each of whom is a "disinterested person"
within the meaning of Section 16(b) of the Exchange Act, and if the Board so
determines, an "outside director" within the meaning of Section 162(m) of the
Internal Revenue Code. The authority of the Committee will include, among other
things, determining the persons to whom options are granted, the period of
exercisability, the designation of options as ISOs or NQSOs and the other terms
and provisions thereof.
Options may be granted only to key employees, officers, directors and
independent contractors of the Company or any subsidiary corporation of the
Company, whether now existing or subsequently formed or acquired, provided,
however, that ISOs may only be granted to key employees.
The exercise price for each share subject to an option will not be less
than the fair market value of the Common Stock on the date the option is
granted. However,
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the exercise price per share of an ISO granted to any employee who, on the date
of the grant, possesses more than 10% of the total combined voting power of all
classes of stock of the Company (or of any subsidiary or parent corporation),
will not be less than 110% of the fair market value of the shares of Common
Stock on the date the ISO is granted.
1996 Stock Option Plan
The 1996 Stock Option Plan was adopted by the Board on July 10, 1996
and approved by the Company's Stockholders on August 28, 1996. The 1996 Stock
Option Plan is administered by the Board of Directors of the Company. The Board
of Directors determines, among other things, the recipients of grants, whether a
grant will consist of ISOs, NQSO's or stock appreciation rights ("SARs") (in
tandem with an option or free-standing) or a combination thereof, and the number
of shares to be subject to such options. ISOs may be granted only to officers
and key employees of the Company and its subsidiaries. Nonqualified stock
options and SARs may be granted to such officers and employees as well as to
agents and directors of and consultants to the Company, whether or not otherwise
employees of the Company.
The Plan provides for the granting of ISOs to purchase the Company's
Common Stock at not less than the fair market value on the date of the option
grant and the granting of nonqualified options and SARs with any exercise price.
SARs granted in tandem with an option have the same exercise price as the
related option. The total number of shares with respect to which options and
SARs may be granted under the Plan is currently 1,100,000. The Plan contains
certain limitations applicable only to ISOs granted thereunder. To the extent
that the aggregate fair market value, as of the date of grant, of the shares to
which ISOs become exercisable for the first time by an optionee during the
calendar year exceeds $100,000, the option will be treated as a nonqualified
option. In addition, if an optionee owns more than 10% of the total voting power
of all classes of the Company's stock at the time the individual is granted an
ISO, the option price per share cannot be less than 110% of the fair market
value per share and the term of the ISO cannot exceed five years. No option or
SAR may be granted under the Plan after July 9, 2006, and no option or SAR may
be outstanding for more than ten years after its grant.
Upon the exercise of an option, the holder must make payment of the
full exercise price. Such payment may be made in cash, check or, under certain
circumstances, in shares of any class of the Company's Common Stock, or any
combination thereof. SARs, which give the holder the privilege of surrendering
such rights for the appreciation in the Common Stock between the time of the
grant and the surrender, may be settled, in the discretion of the Board or
committee, as the case may be, in cash, Common Stock, or in any combination
thereof. The exercise of an SAR granted in tandem with an option cancels the
option to which it relates with respect to the same number of shares as to which
the SAR was exercised. The exercise of an option cancels any related SAR with
respect to the same number of shares as to which the option was exercised.
Generally, options and SARs may be exercised while the recipient is performing
services for the Company and within three months after termination of such
services.
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The Plan may be terminated at any time by the Board of Directors, which
may also amend the Plan, except that without stockholder approval, it may not
increase the number of shares subject to the Plan or change the class of persons
eligible to receive options under the Plan.
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Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of March 25,
1997 regarding the beneficial ownership of the Company's Common Stock by (i)
each stockholder known to the Company to beneficially own more than five percent
(5%) of such Common Stock, (ii) each director and executive officer and (iii)
all directors and executive officers as a group:
[Download Table]
Percentage
Number of Beneficially
Principal Stockholders Shares Owned(%)
---------------------- ---------- ---------
Yoav Stern(1) 186,250 2.48
98 Battery Street
Suite 600
San Francisco, CA 94111
David Jan Mitchell 75,137 1.00
850 Third Avenue, 10th Floor
New York, NY 10022
Estate of Joram D. Rosenfeld(1) 107,500 1.43
c/o Exodus
360 East 88th Street, #41B
New York, NY 10128
Zivi R. Nedivi(1)(2) 217,651 2.90
14000 N.W. 4 Street
Sunrise, FL 33325
John S. Gleason(3) 31,000 .41
14000 N.W. 4 Street
Sunrise, FL 33325
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[Download Table]
Paul F. Steele(4) 6,600 .09
14000 N.W. 4 Street
Sunrise, FL 33325
Anthony Motisi(4) 7,500 .10
14000 N.W. 4 Street
Sunrise, FL 33325
Delaware Management Company, Inc.(5) 413,900 5.52
2005 Market Street
Philadelphia, PA 19103
Jeffrey Schwartz(6) 435,858 5.81
660 Madison Avenue
20th Floor
New York, NY 10021
Karen Finerman(6) 435,858 5.81
660 Madison Avenue
20th Floor
New York, NY 10021
All Officers and Directors 524,138 6.96
as a Group (10 persons)(7)
(1) Each of Messrs. Stern and Nedivi and the Estate of Joram Rosenfeld may be
deemed to be a member of a group for the purposes of Section 13(d) under
the Exchange Act by virtue of a stockholders' agreement entered into by
Messrs. Stern, Nedivi and Rosenfeld on August 24, 1995. Each party thereto
agreed not to sell, encumber or otherwise dispose of the stock of the
Company beneficially owned by him except in accordance with the terms of
said agreement. As members of a group, each may be deemed to share the
voting power with respect to the shares owned by all three, or 511,401
shares, which represents 6.82% of the shares outstanding. In addition, on
January 15, 1996, Messrs. Nedivi, Rosenfeld and Stern each contributed
capital to Helix Capital Corporation, LLC in the form of promissory notes
secured by (a) in the case of Mr. Nedivi, 181,818 shares of Common Stock,
(b) in the case of Mr. Stern, among other collateral, Mr. Stern's interest
in a certain Stock Escrow Agreement, dated as of April 11, 1994, by and
among the Company, Mr. Stern, Mr. Rosenfeld and certain other parties named
therein (the "Escrow Agreement"), entered into in connection with the
Company's initial public offering, including without limitation 156,250
shares of Common Stock deposited into escrow by Mr. Stern pursuant thereto
and (c) in the case of the Mr. Rosenfeld, among other collateral, Mr.
Rosenfeld's interest (now held by the Estate of Joram Rosenfeld) in the
Escrow Agreement, including without limitation 97,500 shares of Common
Stock deposited in escrow by Mr. Rosenfeld pursuant thereto. The Escrow
Agreement terminates on April 11, 1997. Helix Capital Corporation, LLC is
controlled by Messrs. Nedivi, Stern and the Estate of Joram Rosenfeld.
(2) 16,333 shares are issuable upon the exercise of options to purchase Common
Stock, which options are exercisable within 60 days.
(3) 10,000 shares are issuable upon the exercise of options to purchase Common
Stock, which options are exercisable within 60 days.
(4) 4,500 shares are issuable upon the exercise of options to purchase Common
Stock, which options are exercisable within 60 days.
(5) According to a Schedule 13G filed February 12, 1997 by Delaware Management
Company, Inc. ("Management") and Delaware Management Holdings, Inc.
("Holdings"), Management is an investment advisor, the parent company of
which is Holdings.
(6) Following is information included in a Schedule 13D filed jointly on
January 21, 1997 by Jeffrey Schwarz, Karen Finerman, Bedford Falls
Investors, L.P. ("Bedford"), Metropolitan Capital Advisors, L.P.
("Metropolitan L.P."), Metropolitan Capital Advisors, Inc. ("Metropolitan,
Inc."), Metropolitan Capital Partners II, L.P. ("Metropolitan Partners")
and KJ Advisors, Inc. ("KJ"): Metropolitan Inc. is the sole general partner
of Metropolitan L.P., which is in turn the sole general partner of Bedford.
KJ is the sole general partner of Metropolitan Partners. Bedford is the
beneficial owner of 353,840 shares of Common Stock, 50,625 of which may be
acquired upon exercise of currently exercisable warrants; Metropolitan L.P.
is the beneficial owner of the shares of Common Stock owned by Bedford, as
general partner of Bedford, and has purchased currently exercisable
warrants to purchase 4,375 shares of Common Stock. Metropolitan Inc.
beneficially owns 358,215 shares of Common Stock as general partner of
Metropolitan L.P. KJ Advisors beneficially owns 38,018 shares of Common
Stock, of which 4,375 shares may be acquired upon the exercise of currently
exercisable warrants, as general partner of Metropolitan Partners, which
beneficially owns such shares. Jeffrey Schwarz may be deemed the beneficial
owner of 396,233 shares of Common Stock as a result of his being a
director, executive officer and stockholder of each of Metropolitan, Inc.
and KJ. Mr. Schwarz may also be deemed the beneficial owner of an
additional 39,625 shares of Common Stock by virtue of his position as a
director, executive officer and stockholder of a corporation which, through
an affiliate, may be deemed to have beneficial ownership over securities
held by a foreign investment entity. Accordingly, Mr. Schwarz may be deemed
to be the beneficial owner of a total of 435,858 shares of Common Stock,
70,000 of which may be acquired upon exercise of currently exercisable
warrants. Jeffrey Schwarz does not beneficially own any shares of Common
Stock for his own account. Karen Finerman may be deemed the beneficial
owner of 435,858 shares of Common Stock as a result of her being a
director, executive officer and/or stockholder of each of the entities
described in the Schedule 13D which directly or indirectly serve as general
partners, or investment advisors to the owners of Common Stock. Karen
Finerman does not beneficially own any shares of Common Stock other than
through such positions.
(7) 35,333 shares are issuable upon the exercise of options to purchase Common
Stock, which options are exercisable within 60 days.
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Item 12. Certain Relationships and Related Transactions.
On August 24, 1995, the Company entered into an agreement with Mr.
Nedivi pursuant to which Mr. Nedivi purchased 181,818 shares of Common Stock at
a purchase price of $1,000,000. Mr. Nedivi has agreed not to directly or
indirectly, offer, sell, transfer, assign, hypothecate or otherwise dispose of
any interest in any of the shares (or solicit any offers to buy, purchase, or
otherwise acquire or take a pledge of any of the shares) until April 11, 1997.
During 1996, the Company paid Yoav Stern and Joram Rosenfeld, and in
each case entities controlled by them, an aggregate of $90,000 each, for
services rendered by Yoav Stern and Joram Rosenfeld as Co-Chairmen of the
Company's Board of Directors.
The Company has engaged a Helix entity, in which Messrs. Stern and
Nedivi own a majority interest to act as the Company's exclusive financial
advisor with respect to merger and acquisition transactions and as principal
financial adviser with respect to other transactions for an initial term of
eighteen months. Under the terms of the agreement, the Helix entity will receive
a monthly retainer of $25,000 and a success fee to be determined by the Company
on a per transaction basis, not to fall below 2% of the aggregate consideration
paid in connection with the applicable transaction. In addition, the terms of
the engagement letter will provide for an insurance policy in the amount of $3
million on the life of Mr. Stern which is transferable without consideration to
Mr. Stern after two years. Payments under the engagement letter are in lieu of
fees payable to Mr. Stern as Chairman of the Board. It is expected that a
substantial portion of the retainer will be paid by the Helix entity to Mr.
Stern. As a result of ownership interests held by Messrs. Stern and Nedivi in
the Helix entity, it is anticipated that a substantial portion of the
transaction fees, if any, paid by the Company to the Helix entity will, in turn,
be distributed to Messrs. Stern and Nedivi.
On February 25, 1997 The Board of Directors of the Company approved
loans in the aggregate amount of $530,000, to certain officers and directors of
the Company for the purposes of purchasing shares of Common Stock. The loans
will be unsecured and payable over four years for employees or five years for
directors at an interest rate based on the "Applicable Federal Rate" at the time
of the loan (6.1% per annum at February 25, 1997). Interest will be paid
annually by officers and will accrue and be paid at maturity by directors. The
loans will provide for mandatory prepayment if the officer or director sells any
shares of the Company's Common Stock. As of February 25, 1997, the Board has
approved loans to the following individuals:
Name Principal Amount
---- ----------------
Zivi R. Nedivi $150,000
Yoav Stern $150,000
John Gleason $50,000
Ian McDonald $50,000
Thomas McMillen $50,000
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David Jan Mitchell $50,000
Anthony Motisi $15,000
Fred von Husen $15,000
See also "Employment Agreements."
PART V
Item 13. Exhibits and Reports on Form 8-K.
(a) The following financial statements are filed as part of this Form 10-KSB:
Kellstrom Industries, Inc. Financial Statements:
------------------------------------------------
Independent Auditor's Report
Balance Sheets at December 31, 1996 and December 31, 1995
Statements of Earnings for the years
ended December 31, 1996 and
December 31, 1995
Statements of Stockholders' Equity for
the years ended December 31, 1996 and
December 31, 1995
Statements of Cash Flows for years ended
December 31, 1996 and December 31, 1995
Notes to Financial Statements
International Aircraft Support Combined Financial Statements:
--------------------------------------------------------------
1996
----
Independent Auditor's Report
Combined Balance Sheet at December 31, 1996
Combined Statement of Income and Equity for the
year ended December 31, 1996
Combined Statement of Cash Flows for the year
ended December 31, 1996
Notes to Combined Financial Statements
1995
----
Independent Auditor's Report
Combined Balance Sheet at December 31, 1995
Combined Statement of Income and Equity for the
-34-
year ended December 31, 1995
Combined Statement of Cash Flows for the year
ended December 31, 1995
Notes to Combined Financial Statements
(b) The following exhibits are filed as part of this Form 10-KSB:
Exhibit No. Description
------------------------------
3.1 The Company's Restated Certificate of Incorporation.(1)
3.2 The Company's By-laws.(1)
3.3 Certificate of Designations setting forth the terms of the Series A
Junior Participating Cumulative Preferred Stock, par value $.001 per
share (incorporated by reference to Exhibit 1 to Registration Statement
on Form 8-A filed with the Commission on January 16, 1997).
10.2 Letter Agreement among each of the Stockholders of the Registrant, the
Company, and GKN Securities Corp. (without schedules).(2)
10.3 Asset Purchase Agreement, dated February 15, 1995, among ITAC, Rada
Electronic Industries Limited, Tasco Electronics Inc. and the
Company.(3)
10.4* Management Agreement, dated January 1, 1997, between East Shore
Ventures, Inc. and the Company.
10.5* Employment Agreement, dated January 30, 1996, between Anthony Motisi
and the Company.
10.6* Employment Agreement, dated January 1, 1996, between Paul F. Steele and
the Company.
10.7* Employment Agreement, dated May 18, 1995, between John Gleason and the
Company.(3)
10.8* Amendment No. 1 to Employment Agreement, dated February 14, 1997,
between John Gleason and the Company.
10.9 Stockholders Agreement dated August 24, 1995 among Zivi R. Nedivi,
Joram D. Rosenfeld and Yoav Stern.(4)
10.10 Amendment, dated January 15, 1996, to Stockholders Agreement dated
August 24, 1995, among Zivi R. Nedivi, Joram D. Rosenfeld and Yoav
Stern.
10.11 Stock Purchase Agreement dated August 24, 1995, between the Company and
Zivi R. Nedivi.(4)
10.12* Employment Agreement, dated October 25, 1996, between Fred von Husen
and the Company.
10.13 Asset Purchase Agreement, dated October 28, 1996, by and among the
Company, a wholly owned subsidiary of the Company and IASI.(5)
10.14 Securities Purchase Agreement dated as of January 15, 1997 between the
Company and The Equitable Life Assurance Society of the United States.
10.15 Amendment No. 1 to Securities Purchase Agreement dated February 14,
1997 between the Company and The Equitable Life Assurance Society of
the United States.
10.16 Warrant dated January 15, 1997 between the Company and The Equitable
Life Assurance Society of the United States.
-35-
10.17 Note Purchase Agreement dated as of January 9, 1997 by and among the
Company and the Purchasers listed on Schedule I thereto.
10.18 Amendment No. 1 to the Note Purchase Agreement dated January 15, 1997
by and among the Company and the Purchasers listed on Schedule I
thereto.
10.19 Form of warrant between the Company and the Purchasers listed on
Schedule I to the Note Purchase Agreement.
10.20 Revolving Loan Agreement dated as of December 23, 1996 by and between
the Company and Barnett Bank, N.A.
10.21 Letter Agreement dated December 24, 1996 by and between Helix Capital
Corporation LLC and the Company, as amended.
10.22 Rights Agreement, dated January 14, 1997, by and between the Company
and Continental Stock Transfer and Trust Company.(6)
10.23* 1995 Stock Option Plan of the Company.(7)
10.24* 1996 Stock Option Plan of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consents of KPMG Peat Marwick LLP.
--------
(1) Incorporated by reference to Amendment No. 1 to Registration Statement
on Form S-1, Number 33-75750, filed with the Commission April 1, 1994.
(2) Incorporated by reference to Registration Statement on Form S-1, Number
33- 75750, filed with the Commission February 25, 1994.
(3) Incorporated by reference to the Current Report on Form 8-K/A filed
with the Commission on March 14, 1994.
(4) Incorporated by reference to the Annual Report on Form 10-KSB filed
with the Commission on March 30, 1996.
(5) Incorporated by reference to the Current Report on Form 8-K filed with
the Commission on January 23, 1997.
(6) Incorporated by reference to Registration Statement on Form 8-A filed
with the Commission on January 16, 1997.
(7) Incorporated by reference to the Proxy Statement of the Company filed
with the Commission on May 12, 1995 in connection with the Special
Meeting of Shareholders of Kellstrom Industries, Inc. on June 22, 1995.
* Compensatory plan or agreement.
(b) Reports on Form 8-K:
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No reports on Form 8-K were filed during the last quarter of
the Company's fiscal year ended December 31, 1996.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this reports to be signed
on its behalf by the undersigned thereunto duly authorized.
Date: March 31, 1997 KELLSTROM INDUSTRIES, INC.
(Registrant)
By: /s/ Zivi R. Nedivi
-----------------------------
Title: Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf by the Registrant
and in the capacities and on the dates indicated.
[Download Table]
Signature Title Date
------------------ ---------------------- --------------
/s/ Zivi R. Nedivi Chief Executive Officer March 31, 1997
----------------------- President and Director
Zivi R. Nedivi (principal executive officer)
/s/ Yoav Stern Chairman of the Board March 31, 1997
-----------------------
Yoav Stern
/s/ John S. Gleason Chief Financial Officer, March 31, 1997
----------------------- Executive Vice President
John S. Gleason and Treasurer (principal
financial and accounting officer)
/s/ David Jan Mitchell Director March 31, 1997
-----------------------
David Jan Mitchell
/s/ Thomas McMillen Director March 31, 1997
-----------------------
Thomas McMillen
-38-
The following Financial Statements are attached hereto:
[Enlarge/Download Table]
-------------------------------------------------
Page
----
Kellstrom Industries, Inc. Financial Statements:
Independent Auditor's Report..................................................................................... F-1
Balance Sheets at December 31, 1996 and December 31, 1995........................................................ F-2
Statements of Earnings for the years
ended December 31, 1996 and
December 31, 1995.............................................................................................. F-3
Statement of Stockholders' Equity for
the years ended December 31, 1996 and
December 31, 1995.............................................................................................. F-4
Statements of Cash Flows for years ended
December 31, 1996 and December 31, 1995........................................................................ F-5
Notes to Financial Statements.................................................................................... F-7
International Aircraft Support Combined Financial Statements:
-------------------------------------------------------------
1996
----
Independent Auditor's Report..................................................................................... F-32
Combined Balance Sheet at December 31, 1996...................................................................... F-33
Combined Statement of Income and Equity for the
year ended December 31, 1996................................................................................... F-34
Combined Statement of Cash Flows for the year
ended December 31, 1996........................................................................................ F-35
Notes to Combined Financial Statements........................................................................... F-36
1995
----
Independent Auditor's Report..................................................................................... F-44
Combined Balance Sheet at December 31, 1995..................................................................... F-45
Combined Statement of Income and Equity for the
year ended December 31, 1995................................................................................... F-46
Combined Statement of Cash Flows for the year
ended December 31, 1995........................................................................................ F-47
Notes to Combined Financial Statements........................................................................... F-48
Independent Auditors' Report
The Board of Directors and Stockholders
Kellstrom Industries, Inc.:
We have audited the accompanying balance sheets of Kellstrom Industries, Inc. as
of December 31, 1996 and 1995, and the related statements of earnings,
stockholders' equity, and cash flows for each of the years in the two-year
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kellstrom Industries, Inc. as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Ft. Lauderdale, Florida
March 10, 1997
F-1
ITEM I FINANCIAL STATEMENTS
KELLSTROM INDUSTRIES, INC.
BALANCE SHEETS
[Enlarge/Download Table]
December 31
------------------------------------
1996 1995
-------------- ---------------
Assets
Current Assets:
Cash and cash equivalents $ 154,254 $ 210,871
Trade receivables, net of allowances for returns and
doubtful accounts of $150,000 and $125,531
for 1996 and 1995 respectively 4,023,298 3,319,025
Inventory 15,723,370 11,852,019
Prepaid expenses and other current assets 588,286 236,582
Deferred tax asset (Note 8) 57,176 70,469
Investment in securities (Note 3) 1,829,532 --
------------- -------------
Total current assets $ 22,375,916 $ 15,688,966
Property, plant and equipment, net (Note 4, 6, 7) 2,943,077 1,738,677
Intangible assets, net 3,618,862 3,921,624
Investment in warrants (Note 3) -- 200,000
Deferred tax asset (Note 8) 306,079 288,000
Other assets 376,791 80,296
------------- -------------
Total Assets $ 29,620,725 $ 21,917,563
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Short-term notes payable (Note 6) $ 5,157,302 $ 2,251,000
Current maturities of long-term debt and capital lease obligation (Note 6) 211,068 97,915
Accounts payable 1,651,405 2,167,214
Accrued expenses (Note 5) 1,290,393 858,733
Income taxes payable 157,212 643,732
Deferred tax liability (Note 8) 173,379 --
------------- -------------
Total current liabilities $ 8,640,759 $ 6,018,594
Long-term debt and capital lease obligations, less current maturities 2,819,225 2,760,223
------------- -------------
Total Liabilities $ 11,459,984 $ 8,778,817
Stockholders' Equity (Note 9):
Preferred stock, $ .001 par value; 1,000,000 shares authorized;
none issued -- --
Common stock, $ .001 par value; 20,000,000 shares authorized;
3,315,308 shares and 2,881,818 shares issued and outstanding
in 1996 and 1995 respectively 3,315 2,882
Additional paid-in capital 14,871,559 12,769,565
Retained earnings 3,012,642 366,299
Unrealized gain on investment securities, net 273,225 --
------------- -------------
Total Stockholders' Equity $ 18,160,741 $ 13,138,746
------------- -------------
Total Liabilities and Stockholders' Equity $ 29,620,725 $ 21,917,563
============= =============
See accompanying notes to financial statements
F-2
KELLSTROM INDUSTRIES, INC.
STATEMENTS OF EARNINGS
[Enlarge/Download Table]
Years Ended December 31
---------------------------------
1996 1995
------------- -----------
Net revenues $ 24,921,587 $ 8,579,017
Cost of goods sold (16,235,159) (5,378,053)
Selling, general and administrative expenses (3,491,457) (1,482,048)
Depreciation and amortization (441,854) (202,331)
------------- -----------
Operating income $ 4,753,117 $ 1,516,585
SPAC operating costs and expenses -- (389,361)
Investment advisory expenses -- (720,795)
------------- -----------
Income before interest and income taxes $ 4,753,117 $ 406,429
Interest income 18,001 370,756
Interest expense (662,528) (145,304)
------------- -----------
Income before income taxes $ 4,108,590 $ 631,881
Income taxes (Note 8) (1,462,247) (257,442)
------------- -----------
Net income $ 2,646,343 $ 374,439
============= ===========
Net income per share $ 0.45 $ 0.14
============= ===========
Weighted average number of common shares outstanding 8,147,455 2,741,195
============ ===========
See accompanying notes to financial statements
F-3
KELLSTROM INDUSTRIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
Common Stock Preferred Stock Retained Net unrealized
------------------- ----------------- Additional Earnings gain on Total
Number Number paid-in (accumulated investment stockholders'
of shares Amount of shares Amount capital deficit) securities equity
--------- ------- --------- ------ ------- ------- ---------- ------
Balances, December 31,1994 2,220,215 $ 2,220 -- -- $9,232,814 $ (8,410) -- $ 9,226,894
Reclassify common stock
whose redemption rights
have expired 429,785 430 -- -- 2,155,733 -- -- 2,156,163
Issuance of common stock
and warrants to investment banker
in lieu of fees for financial
advisory services provided
with respect to the Acquisition 50,000 50 -- -- 381,200 -- -- 381,250
Purchase of common stock
by company President
(@ $5.50 per share) 181,818 182 -- -- 999,818 -- -- 1,000,000
Net income -- -- -- -- -- 374,439 -- 374,439
--------------------- ------------------ ----------- ---------- -------------- -------------
Balances, December 31,1995 2,881,818 $2,882 -- -- $12,769,565 $ 366,299 -- $13,138,746
Exercise of warrants 433,490 433 -- -- 2,101,994 -- -- 2,102,427
Unrealized gain on investment
securities, net -- -- -- -- -- -- $ 273,225 273,225
Net income -- -- -- -- -- 2,646,343 -- 2,646,343
--------------------- ------------------ ----------- ---------- -------------- -------------
Balances, December 31,1996 3,315,308 $3,315 -- -- $14,871,559 $3,012,642 $ 273,225 $18,160,741
===================== ================== =========== ========== ============== =============
See accompanying notes to financial statements
F-4
KELLSTROM INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
Years Ended December 31
-----------------------------------
1996 1995
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,646,343 $ 374,439
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation and amortization $ 441,854 $ 202,331
Acquisition expenses paid through issuance of common stock --- 381,250
Amortization of deferred financing costs 30,172 4,132
Deferred income taxes 12,285 (358,469)
Changes in operating assets and liabilities:
Increase in trade receivables, net (704,273) (1,062,397)
Increase in inventory (3,871,351) (7,616,960)
Increase in prepaid expenses and other current assets (351,704) (121,284)
Increase in other assets (255,655) (4,763)
Decrease in accounts payable (515,809) (366,250)
Increase in accrued expenses 431,661 551,457
(Decrease) Increase in income taxes payable (486,519) 540,587
Net cash used in operating activities $ (2,622,996) $ (7,475,927)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
U S Government securities sold $ --- $ 10,786,209
Treasury bills sold --- 594,518
Investment in securities (1,200,000) ---
Purchase of KST assets, net of cash acquired --- (5,790,800)
Purchase of property, plant and equipment (1,372,244) (262,974)
Other 31,753 ---
------------- -------------
Net cash (used in) provided by investing
activities $ (2,540,491) $ 5,326,953
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt proceeds $ 27,577,960 $ 2,250,000
Debt repayment, including capital lease obligations (24,499,503) (943,560)
Common stock issued 2,102,427 1,000,000
Other (74,014) (18,951)
------------- -------------
Net cash provided by financing activities $ 5,106,870 $ 2,287,489
------------- -------------
NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS $ (56,617) $ 138,515
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD 210,871 72,356
------------- -------------
CASH & CASH EQUIVALENTS, END OF PERIOD $ 154,254 $ 210,871
============= =============
(continued)
See accompanying notes to financial statements
F-5
KELLSTROM INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(continued)
[Enlarge/Download Table]
Years Ended December 31
-----------------------------------
1996 1995
------------- -------------
Supplemental disclosures of non-cash investing and financing activities:
KST assets acquired for notes payable -- $ 2,230,000
------------- =============
Issuance of common stock for acquisition expenses -- $ 381,250
------------- =============
Unrealized gain on investment securities, net $ 273,225 $ 0
============= =============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 558,083 $ 155,144
============= =============
Income taxes $ 1,936,481 $ 26,680
============= =============
Supplemental disclosures of purchase of KST assets, net of liabilities:
Cash $ 209,200
Receivables 2,256,628
Warrants 200,000
Inventory 4,235,059
Prepaid expenses 87,146
Property, plant and equipment 1,522,586
Goodwill 4,060,477
Other assets 64,491
--------------
Total assets $ 12,635,587
Accrued expenses $ 310,303
Accounts payable 2,533,464
Notes payable 1,561,820
-------------
Total liabilities $ 4,405,587
=============
Net acquisition cost $ 8,230,000
Less discounted present value of note given to seller 2,230,000
-------------
Cash paid to seller at closing $ 6,000,000
Less cash acquired 209,200
-------------
Net cash used in acquisition $ 5,790,000
=============
See accompanying notes to financial statements
F-6
KELLSTROM INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS - Kellstrom Industries, Inc. (the "Company")
(formerly known as Israel Tech Acquisition Corp.) was incorporated in
Delaware on December 28, 1993 as a Specified Purpose Acquisition
Company ("SPAC"), the objective of which was to consummate an initial
public offering and then enter into a business combination with an
operating business. On June 22, 1995, the Company consummated the
acquisition of all of the assets of Kellstrom Industries, Inc. ("KST")
and immediately changed its name to Kellstrom Industries, Inc. The
Company engages in the purchasing, refurbishing, (through
subcontractors), leasing, marketing and distributing of commercial jet
engines and jet engine parts. The Company's customers include major
domestic and international airlines, engine manufacturers, engine part
distributors and dealers and overhaul service suppliers throughout the
world. The Company enables customers to reduce their engine maintenance
costs by providing Federal Aviation Administration-approved engine
parts on a timely basis and at competitive prices.
REVENUE RECOGNITION - Revenue is recognized upon shipment of the
product to the customer net of an estimated allowance for sales
returns.
CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
INVENTORIES - Inventories are stated at the lower of cost or market.
Cost is determined using the specific identification method.
Inventories is made up primarily of new, refurbished and as removed
engines and engine parts.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are
stated at cost. Machinery and equipment under capital leases are stated
at the lesser of fair value or present value of minimum lease payments.
Depreciation on property, plant and equipment is calculated on the
straight-line method over the following estimated useful lives:
building - 25 years, machinery and equipment - 3 to 10 years and
furniture and fixtures - 7 years. Machinery and equipment held under
capital leases are amortized straight line over the shorter of the
lease term or the estimated useful life indicated above.
F-7
GOODWILL - Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefitted, generally 15 to 20
years. The Company assesses the recoverability of this intangible asset
by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of goodwill
impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of goodwill
will be impacted if estimated future operating cash flows are not
achieved. Accumulated amortization was $409,863 at December 31, 1996
and $138,853 at December 31, 1995.
INCOME TAXES - Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
FINANCIAL INSTRUMENTS - The fair value of financial instruments,
consisting of investments in cash and cash equivalents, trade accounts
receivables, investments, other current assets, trade accounts
payables, notes payable to banks, accrued expenses, and debt
instruments, is based on interest rates available to the Company and
comparisons to quoted prices. At December 31, 1996 and 1995, the
carrying amounts reported in the balance sheet equal or approximate
fair values.
COMMITMENTS AND CONTINGENCIES - During 1996 the Company entered into
two separate agreements to purchase two aircraft engines at a total
purchase price of $4,150,000. The Company is committed to purchasing
the engines upon successful completion of certain inspections. At
December 31, 1996, the purchase had not yet been consummated.
The Company records liabilities for loss contingencies, including those
arising from claims, assessments, litigation, fines and penalties, and
other sources when it is probable that a liability has been incurred
and the amount of the liability can be reasonably estimated.
USE OF ESTIMATES - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial
F-8
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
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.
LONG-LIVED ASSETS TO BE DISPOSED OF - The Company adopted the
provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of on January 1, 1995.
This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. Adoption
of this Statement did not have a material impact on the Company's
financial position, results of operations, or liquidity.
STOCK OPTIONS - Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." As provided for in Statement No. 123, the
Company has elected to continue to apply the provisions of APB No. 25,
"Accounting for Stock Issued to Employees" in accounting for
stock-based compensation. The disclosures required by the new Statement
are included in the "Employee Stock Option Plans" footnote.
RECLASSIFICATIONS - Certain 1995 financial statement amounts have been
reclassified to conform with 1996 presentation.
2. KST ACQUISITION
On June 22, 1995, the Company acquired substantially all of KST's
right, title and interest in and to all of the assets and liabilities
of the commercial jet aircraft engine part distribution and
refurbishing business of KST of every kind, nature and description,
whether real, personal, or mixed, tangible or intangible. In
consideration therefor, the Company paid $9,000,000, of which
$6,000,000 was paid in cash and the remaining $3,000,000 was paid in
the form of an unsecured,
F-9
non-interest bearing note (see Note 6). Additionally, Rada Electronic
Industries, Inc. ("Rada"), the indirect parent of KST prior to the June
22, 1995 acquisition, will pay the Company an annual $200,000
consulting fee for the five years following the closing of such
acquisition. The Company recognized consulting fee income of $182,000
from Rada for 1995 and $200,000 for 1996. The acquisition has been
accounted for using the purchase method. Accordingly, the Company's
Statements of Operations for the twelve months ended December 31, 1995
only reflect the operations of KST from June 22, 1995 to December 31,
1995. A Pro Forma Financial Statement of Operations - Unaudited has
been provided in Note 15(b) to report the results of operations for the
year ended December 31, 1995 as though the acquisition had occurred at
the beginning of the period being reported.
3. INVESTMENTS
Upon consummation of the acquisition of the assets of KST, the Company
received warrants to purchase 400,000 shares of common stock of Rada
(the "Rada Warrants") at $3.00 per share, commencing on July 1, 1995
and expiring on or before July 1, 2000. The Rada Warrants were
originally recorded at their fair value on the date of the acquisition.
The Company classifies these warrants as "available for sale". At
December 31, 1995 the fair value of the warrants approximated their
carrying cost. As a result, there was no unrealized gain or loss
reflected in the statement of shareholder's equity. In December 1996
the Company exercised the Rada Warrants upon payment of $1,200,000. As
a result of certain antidilution provisions contained in the Rada
Warrant, the Company received 464,643 shares of Rada, representing 5.6%
of the outstanding shares of Rada at the time of exercise. The Company
classifies the shares of Rada as "available for sale". At December 31,
1996, the cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for the shares was $1,400,000, $429,532,
$0, and $1,829,532 respectively.
4. PROPERTY, PLANT, AND EQUIPMENT, NET
The components of property, plant, and equipment are summarized below:
[Enlarge/Download Table]
1996 1995
---------------------------------------------------------------------------------------------------
Land $ 422,600 $ 422,600
Building 1,807,192 763,929
Machinery and Equipment 715,038 299,956
Furniture and Fixtures 222,052 158,126
---------------------------------------------------------------------------------------------------
3,166,882 1,644,611
Accumulated Depreciation (223,805) (56,661)
---------------------------------------------------------------------------------------------------
2,943,077 1,587,950
Construction in Progress 0 150,727
---------------------------------------------------------------------------------------------------
$ 2,943,077 $ 1,738,677
============== ==============
F-10
5. ACCRUED EXPENSES
[Enlarge/Download Table]
1996 1995
-----------------------------------------------------------------------------------------------------
Employee bonuses $ 422,000 $ 366,668
Acquisition expenses 122,674 296,197
Accrued Interest 111,147 ----
Customer Deposits 436,500 ----
Other 198,072 195,868
-----------------------------------------------------------------------------------------------------
$ 1,290,393 $ 858,733
================ ==============
6. DEBT AND CAPITAL LEASE OBLIGATIONS
Debt at December 31, 1996 and 1995 consists of the following:
1996 1995
--------------------------------------------------------------------------------
First mortgage note bearing interest at
10.49% payable in monthly installments of
$20,238, including interest, with final
payment of $20,238 due May 2005; secured by
real property with depreciated cost of
$1,167,698 in 1995 and $2,175,265 in 1996. $1,194,277 $ 643,768
Borrowings under revolving line of credit,
interest, at prime+1% (9.5% at December 31,
1995), and at prime-1/8% (8.125% at December
31, 1996) is payable monthly; the revolving
line of credit expires in April 1998. 5,157,302 1,000
Non-interest bearing note payable in
semi-annual installments of $125,000,
including interest, with final payment of
$1,775,000 due June 1999. The note was
discounted using an interest rate of 9% The
note was paid in full subsequent to year end. 1,830,150 2,205,625
F-11
Term loan bearing interest at prime+1% (9.5%
at December 31, 1995) secured by a specific
jet engine. Interest on the note is payable
monthly. Principal is due upon the earlier of
the sale of the acquired jet engine (or its
parts) or November 1996. 0 2,250,000
Capital lease obligations 5,866 8,745
--------------------------------------------------------------------------------
Total long-term debt and capital lease
obligations 8,187,595 5,109,138
Less short-term notes payable (5,157,302) (2,251,000)
Less current installments on long-term debt and
capital lease obligations (211,068) (97,915)
--------------------------------------------------------------------------------
Long-term debt and capital lease obligations,
excluding current installments $2,819,225 $2,760,223
========== ==========
Upon the consummation of the acquisition by the Company of the assets of KST,
the Company assumed the mortgage note in the amount of $666,820. Subsequently, a
$750,000 construction loan was added to this mortgage note in 1996. The mortgage
note is secured by a first mortgage on the Company's land and building.
As part of the purchase of the assets of KST, the Company issued an unsecured
non-interest bearing note in the amount of $3,000,000. The note is payable in
eight equal semi-annual payments of $125,000 with the remaining $2,000,000 to be
paid on the fourth anniversary of the acquisition in cash or, under certain
circumstances, in whole or in part by the issuance of additional shares of
Common Stock which for such purpose shall be valued at the higher of the market
price per share at such time or $5.00 per share. The note is discounted at a
rate of 9%.
On December 23, 1996 the Company entered into a Revolving Loan Agreement with a
total commitment of $15,000,000 with Barnett Bank, N.A. This agreement replaced
the lines of credit the Company had established with BankAtlantic. This
agreement, which bears interest at 1/8% below the bank's prime rate (8.125% at
December 31, 1996), expires in April 1998 and is secured by substantially all
the Company's assets. Interest is payable monthly. No compensatory balances are
required under the agreement. At December 31, 1996, the Company had $9,842,698
available under the agreement.
F-12
Debt maturities (excluding capital lease obligations) for each of the
five years subsequent to December 31, 1996 are as follows: 1997, $5,364,791;
1998, $197,558; 1999, $1,835,227; 2000, $167,856; 2001, $186,336; and thereafter
$429,961.
7. LEASES
The Company is obligated under two capital leases for certain office equipment
that expire in December 1997 and February 1999, respectively. At December 31,
1996 and 1995, the gross amount of office equipment and related accumulated
amortization recorded under capital leases were as follows:
1996 1995
-------------------------------------------------------------------------------
Office Equipment $10,878 $10,878
Less accumulated
amortization (4,998) (2,823)
-------------------------------------------------------------------------------
$ 5,880 $ 8,055
================================================================================
Amortization of assets held under capital leases is included with depreciation
expense.
The Company also has several operating leases, primarily for transportation
equipment and facilities, that expire over the next one to three years. These
leases generally require the Company to pay all executory costs such as
maintenance and insurance and provide for early termination at stipulated
values. Rental payments for the transportation equipment include minimum rentals
plus contingent rentals based on mileage. Rental expense for operating leases
during 1996 and 1995 consisted of the following:
1996 1995
--------------------------------------------------------------------------------
Minimum rentals $66,437 $30,778
Contingent rentals 4,007 0
--------------------------------------------------------------------------------
Rental expense $70,444 $30,778
================================================================================
Future minimum lease payments under operating lease agreements and future
minimum capital lease payments as of December 31, 1996 are:
F-13
[Enlarge/Download Table]
Year ending December 31: Capital Operating
Leases Leases
-------------------------------------------------------------------------------------------------------------------------
1997 4,370 $77,643
1998 2,150 18,813
1999 360 744
-------------------------------------------------------------------------------------------------------------------------
Total minimum lease payments $6,880 $ 97,200
Less amount representing interest (1,014)
-------------------------------------------------------------------------------------------------------------------------
Present value of minimum lease payments 5,866
Less current installments (3,579)
-------------------------------------------------------------------------------------------------------------------------
Obligations under capital leases, excluding current $2,287
installments ======
8. INCOME TAXES
The actual tax expense differs from the "expected" tax expense for the years
ended December 31, 1996 and 1995 (computed by applying the U.S. federal
corporate tax rate of 34% to income before income taxes), as follows:
[Enlarge/Download Table]
1996 1995
---------------------------------------------------------------------------------------------------------
Computed "expected" tax expense $1,396,921 $214,840
State income tax, net of federal benefit 98,411 24,398
Reorganization costs --- 14,705
Other (33,085) 3,499
---------------------------------------------------------------------------------------------------------
Actual tax expense $1,462,247 $257,442
========== ========
Income tax expense for the years ended December 31, 1996 and 1995 is summarized
as follows:
[Enlarge/Download Table]
1996 1995
--------------------------------------------------------------------------------------------------------
Current:
Federal $1,299,550 $525,766
State 150,412 90,145
--------------------------------------------------------------------------------------------------------
1,449,962 615,911
Deferred 12,285 (358,469)
--------------------------------------------------------------------------------------------------------
Total $1,462,247 $257,442
========== ========
F-14
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996 and
1995 are presented below:
[Enlarge/Download Table]
1996 1995
--------------------------------------------------------------------------------------------------------
Deferred tax assets:
Acquisition costs $214,174 $312,064
Bad debts 54,586 47,237
Inventory 90,491 ---
Other 4,004 (832)
--------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 363,255 358,469
Less valuation allowance 0 0
--------------------------------------------------------------------------------------------------------
Deferred tax assets $363,255 $358,469
--------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Inventory $(17,071) $0
Unrealized gain on (156,308) 0
investment securities
--------------------------------------------------------------------------------------------------------
Deferred tax liabilities (173,379) 0
--------------------------------------------------------------------------------------------------------
Net Deferred tax assets $189,876 $358,469
======== ========
The Company's management believes that it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the deferred tax asset.
9. 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, $.001 par
value. At December 31, 1995 and 1996, the Company had 2,881,818 and 3,315,308
shares, respectively, of Common Stock outstanding.
F-15
Upon consummation of the acquisition of the assets of KST, in consideration for
services provided by its investment bankers in connection with the acquisition
of KST, the Company issued 50,000 shares of the Company's Common Stock and a
warrant to purchase an additional 300,000 shares of the Company's Common Stock
at a stated price of $5.00. The expense recognized by the Company as a result of
the issuance of the shares and warrants was determined based on the fair value
of the shares and warrants on the closing date of the acquisition.
At December 31, 1996 and 1995, the Company had 4,576,510 and 4,910,000 warrants,
respectively, outstanding. Each warrant entitles the holder to the purchase of
one share of the Company's common stock at an average stated price of $5.08 and
$5.00 respectively. These warrants are exercisable at various times principally
commencing on June 22, 1995 and expiring on or before April 11, 2001. The
Company has reserved 5,000,000 common shares for the exercise of these warrants.
See Note 14.
At December 31, 1996 and 1995, the Company had 200,000 unit purchase options
outstanding. Each unit purchase option entitles the holder to the purchase of
one Unit for $7.62 per unit. Each unit consists of one share of the Company's
Common Stock and two redeemable common stock purchase warrants. These unit
purchase options are exercisable commencing on April 11, 1995 and expiring on
April 11, 1999. As of December 31, 1996 none of the unit purchase options had
been exercised.
10. EMPLOYEE STOCK OPTION PLANS
The 1995 Stock Option Plan provides for the granting of stock options to
purchase up to 250,000 shares of Common Stock to key employees, with no
individual granted options to purchase more than 100,000 shares of Common Stock
during the ten-year period commencing on June 22, 1995, at a price which will
not be less than the fair market value of Common Stock on the date of grant.
These options will be exercisable at such times, in such amounts and during such
intervals as determined on the date of grant. However, no option will be
exercisable during the first six months after the date of grant or more than 10
years after the date of grant. In 1995 the Company granted 235,000 stock options
at an exercise price of $5.00; all of which provide that such options fully vest
over a period of three years from the date of grant.
The 1996 Stock Option Plan provides for the granting of incentive stock options
to purchase shares of Common Stock at not less than the fair market value on the
date of the option grant and the granting of nonqualified options and stock
appreciation rights ("SARs") with any exercise price. SARs granted in tandem
with an option have the same exercise price as the related option. The total
number of shares with respect to which options and SARs may be granted under the
Plan is currently 1,100,000. No option or SAR may be granted under the Plan
after July 9, 2006, and no option or SAR may be outstanding for more than ten
years after its grant.
F-16
The following table summarizes the status of the company's stock option plans:
[Enlarge/Download Table]
Weighted Average Option
Shares Exercise Price
------- --------------------
Outstanding at January 1, 1996 235,000 $5.000
Granted 373,000 7.625
Exercised - -
Expired or Canceled -
----------------------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 608,000 6.610
At December 31, 1996
Exercisable options 78,333 5.00
Shares Available for Future Grant 742,000
The weighted average per share fair values of options granted under the
Company's stock option plans during 1996 and 1995 were $4.02 and $2.48.
respectively. Had the fair value of the grants under these plans been recognized
as compensation expense over the vesting period of the awards, the Company's net
earnings and earnings per share would have reflected the pro forma amounts shown
below:
[Download Table]
1996 1995
---- ----
Net earnings - as reported $2,646,343 $374,439
- pro forma 2,260,098 284,456
Earnings per share - as reported 0.45 0.14
- pro forma 0.40 0.13
The fair value of each option grant is estimated on the date of grant using the
Black- Scholes option-pricing model with the following weighted average
assumptions for 1996 and 1995: dividend yield of 0%; expected volatility of 20%;
a risk-free interest rate of 6.59%; and an expected holding period 5 years.
Increased pro forma compensation expense in 1996 is the result of the additional
options granted and further vesting of 1995 grants during 1996. Pro forma
expense for 1997 is expected to increase over 1996 for the same reasons.
F-17
11. BUSINESS AND CREDIT CONCENTRATIONS
The Company's business is impacted by the general economic conditions of the
commercial aviation industry. Airlines and other operators recognize the need to
cut costs, shift inventory requirements, and conserve capital to sustain
profitability. The Company's industry is also subject to regulation by various
governmental agencies with responsibilities over civil aviation. Increased
regulations imposed by organizations such as the Federal Aviation Administration
may significantly affect industry operations. Accordingly economic and
regulatory changes in the marketplace may significantly affect management's
estimates and future performance.
Five of the Company's customers (each individually accounting for over 10% of
trade receivables and/or revenues at December 31, 1995 and December 31, 1996)
collectively account for 94% and 96% (1995) and 64% and 55% (1996) of trade
receivables and revenues, respectively.
The Company estimates an allowance for doubtful accounts based on the credit
worthiness of its customers as well as general economic conditions. Consequently
an adverse change in those factors could effect the Company's estimate of its
bad debts.
12. OTHER MATTERS
At December 31, 1996 there were no material legal proceedings pending against
the Company or any of its property. However, the Company may become party to
various claims, legal actions and complaints arising in the ordinary course of
business. While any proceeding or litigation has an element of uncertainty,
management believes that the disposition of any matter that may arise will not
have a material impact on the financial condition, liquidity or results of
operations of the Company.
13. RELATED PARTY TRANSACTIONS
During 1996, the Company paid Yoav Stern and Joram D. Rosenfeld, and in each
case entities controlled by them, an aggregate of $90,000 each for services
rendered by Yoav Stern and Joram D. Rosenfeld as Co-Chairmen of the Company's
Board of Directors.
On December 24, 1996, the Company engaged Helix Capital Corporation, LLC
("Helix"), in which Yoav Stern, Chairman, and Zivi Nedivi, President and Chief
Executive Officer, own a majority interest, to act as the Company's exclusive
financial advisor with respect to merger and acquisition transactions and as
principal financial advisor with respect to other transactions for an initial
term of eighteen months beginning January 1, 1997. Under the terms of the
agreement, Helix will receive a monthly retainer $25,000 and a success fee to be
determined by the Company on a per transaction basis, not to fall below 2% of
the aggregate consideration paid in connection with the applicable transaction.
F-18
14. SUBSEQUENT EVENTS
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., a California limited
partnership, for a cash purchase consideration of $26.5 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 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 will be accounted for using the
purchase method of accounting for business combinations. The Company also
assumed IASI's existing debt including IASI's Union Bank of California various
credit facilities that totaled approximately $20 million as of the date of the
acquisition. The Bridge Loan matures on April 15, 1997. The interest rate on the
Bridge Loan is 10% and, additionally, 75,000 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
quarterly. 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. See Note 15(c) for certain pro forma information.
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 of Series A Junior Participating Cumulative
Preferred Stock ("Series 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 20% or more of the outstanding Common Stock of the Company or (ii)
ten business days (or such later date, as defined) following the commencement
of, or announcement of an intention
F-19
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. 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 defined 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.
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.
On February 25, 1997, the Board of Directors of the Company approved loans in
the aggregate amount of $530,000 to certain officers and directors of the
Company for the purposes of purchasing shares of common stock. The loans will be
unsecured and payable over four years for employees or five years for directors
at an interest rate based on the applicable federal rate, as defined by the
agreement, at the time of the loan. The interest rate at February 25, 1997 was
6.1% per annum. Interest will be paid annually by officers and will accrue and
be paid at maturity by directors.
15. SUPPLEMENTAL FINANCIAL DATA
(a) QUARTERLY DATA - UNAUDITED
[Enlarge/Download Table]
Quarters
---------------------------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------------------------------------------------------------------
Revenue:
1996 $5,270,995 $5,917,832 $6,462,088 $7,270,672
1995 0 153,888 3,286,480 5,138,649
-------------------------------------------------------------------------------------------------------------------------
Earnings from continuing
operations: $ 516,707 $ 828,409 $ 662,133 $ 639,094
1996
1995 (112,323) (479,400) 214,738 751,424
-------------------------------------------------------------------------------------------------------------------------
Net earnings:
1996 $ 516,707 $ 828,409 $ 662,133 $ 639,094
1995 (112,323) (479,400) 214,738 751,424
-------------------------------------------------------------------------------------------------------------------------
F-20
[Enlarge/Download Table]
Quarters
-------------------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------------------------------------------------------------------
Earnings per common share for continuing operations:
1996 $.09 $.13 $.11 $.11
1995 (.04) (.18) .06 .13
-------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) per common share:
1996 $ .09 $ .13 $ .11 $.11
1995 (.04) (.18) .06 .13
=========================================================================================================================
(b) PRO FORMA STATEMENT OF OPERATIONS - UNAUDITED
The Company acquired substantially all of the assets and operations of KST on
June 22, 1995 (see Note 2). Accordingly, the Company's Statement of Earnings for
the year ended December 31, 1995 reflects the operations of the SPAC for the
period of January 1, 1995 through June 22, 1995 along with the operations of the
acquired company from June 22, 1995 ("Acquisition Date") through December 31,
1995.
Subsequent to the Acquisition Date, the operations that were unique to the SPAC
were no longer needed and have accordingly been discontinued. Certain
significant expense items that are directly related to these unique SPAC
activities will not recur in future periods including acquisition expenses, SPAC
operating costs and expenses and SPAC interest expenses. Also, the interest
income that was realized by the trust fund (into which proceeds of the Company's
initial public offering were placed pending the consummation of a business
combination) will no longer occur, although the Company expects to continue to
invest excess cash in interest-bearing accounts and securities.
Pro forma Statements of Earnings have been provided herein to report the results
of operations for the year ended December 31, 1995 as though the companies had
combined at the beginning of the period being reported.
F-21
KELLSTROM INDUSTRIES, INC.
ACTUAL and PRO FORMA STATEMENTS OF EARNINGS
(Unaudited)
[Download Table]
Years Ended December 31
-----------------------------
1996 1995
------------- -------------
Pro Forma
Actual Combined
------------- -------------
Net revenues $ 24,921,587 $ 14,708,178
Cost of goods sold (16,235,159) (9,546,394)
Selling, general and administrative expenses (3,491,457) (2,382,172)
Depreciation and amortization (441,854) (350,904)
------------ ------------
Operating income $ 4,753,117 $ 2,428,708
Interest income 18,001 192,721
Interest expense (662,528) (310,362)
------------ ------------
Income before income taxes $ 4,108,590 $ 2,311,067
Income taxes (1,462,247) (866,650)
------------ ------------
Net income $ 2,646,343 $ 1,444,417
============ ============
Net income per share $ 0.45 $ 0.30
============ ============
Weighted average number of shares outstanding 8,147,455 7,188,095
============ ============
Unaudited--See accompanying notes to financial statements and to
pro forma combined statement of earnings
F-22
KELLSTROM INDUSTRIES, INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS
(Unaudited)
[Enlarge/Download Table]
Year Ended December 31, 1995
-------------------------------------------------------------------
HISTORICAL PRO FORMA PRO FORMA
ITAC KST ADJUSTMENTS(A) COMBINED
------------------------------ -------------- ----------
Net revenues $ 8,579,017 $ 6,111,079 $ 18,082 $ 14,708,178
Cost of goods sold (5,378,053) (4,168,341) (9,546,394)
Selling, general and administrative expenses (1,482,048) (924,478) 4,587 (2,382,172)
(90,000)
109,767
Depreciation and amortization (202,331) (57,054) 33,912 (350,904)
(124,731)
(700)
------------ ------------ ------------ ------------
Operating income $ 1,516,585 $ 961,206 $ (49,083) $ 2,428,708
SPAC operating costs and expenses (389,361) -- 389,361 --
Investment advisory expenses (720,795) (13,823) 734,618 --
------------ ------------ ------------ ------------
Operating income $ 406,429 $ 947,383 $ 1,074,896 $ 2,428,708
Interest income 370,756 23,154 (201,189) 192,721
Interest expense (145,304) (132,609) 61,093 (310,362)
1,584
(95,126)
------------ ------------ ------------ ------------
Income before income taxes $ 631,881 $ 837,928 $ 841,258 $ 2,311,067
Income taxes (257,442) (439,699) (169,509) (866,650)
------------ ------------ ------------ ------------
Net income $ 374,439 $ 398,229 $ 671,749 $ 1,444,417
============ ============ ============ ============
Net income per share $ 0.14 $ 0.30
============ ============
Weighted average number of common shares outstanding 2,741,195 7,188,095
============ ============
Unaudited--See accompanying notes to financial statements and to
pro forma combined statement of earnings
F-23
KELLSTROM INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED STATEMENT OF EARNINGS--UNAUDITED
(A) For purposes of presenting the pro forma combined statement of
earnings, the following adjustments have been made:
[Enlarge/Download Table]
Year Ended
December 31, 1995
-----------------
Increase (decrease) in income:
Increase in consulting income relating to consulting agreement with Rada $ 18,082
Marketing, management and director fees charged to Kellstrom by its former parent and affiliates 4,587
Annual $90,000 payments to the Co-Chairmen of the Board for the period from Jan 1 - June 22 (90,000)
Elimination of 1994 expenses reflected in 1995 selling, general and administrative expenses 109,767
Decrease in amortization expense resulting from write-off of existing goodwill 33,912
Amortization of goodwill (124,731)
Depreciation of building (700)
Elimination of all ITAC S. G. & A. expenses since all business activities will be conducted
by Kellstrom after the Acquisition 389,361
Elimination of all acquisition expense since it is non-recurring 734,618
Decrease in interest income resulting from the sale of U.S. Government securities (201,189)
Elimination of interest charged to Kellstrom by its former parent company 61,093
Elimination of all ITAC interest expenses since all business activities will be conducted
by Kellstrom after the Acquisition 1,584
Imputed interest on $2,230,000 note payable to Rada issued at 9% (95,126)
-----------------
$ 841,258
Tax effect of pro forma adjustments (169,509)
-----------------
Net adjustment $ 671,749
=================
Management and director fees paid by Kellstrom to its former parent have been
eliminated as such fees were allocated to Kellstrom on a basis other than one
deemed reasonable by management.
In the future, these services will be provided by the Co-Chairmen of the Board
and as such, an adjustment to income has been included in the pro forma
adjustments to reflect their compensation of $90,000 each per year.
F-24
(c) PRO FORMA FINANCIAL INFORMATION -- UNAUDITED
Set forth below is the unaudited pro forma combined balance sheet information,
at December 31, 1996, assuming that the acquisition of substantially all of the
assets and certain of the liabilities of International Aircraft Support, L.P.
had been consummated at December 31, 1996 and that the Public Warrants had been
exercised at that date and the unaudited pro forma combined statement of
earnings for the year ended December 31, 1996, assuming that the acquisition of
substantially all of the assets and certain of the liabilities of International
Aircraft Support, L.P. had been consummated at the beginning of the period being
reported and that the proceeds of the exercise of the Public Warrants had been
applied to reduce indebtedness of the Company at January 1, 1996.
F-25
KELLSTROM INDUSTRIES, INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(Unaudited)
Assets
[Download Table]
Current Assets:
Cash and cash equivalents $ 157,854
Trade receivables, net of allowances for returns and
doubtful accounts of $168,622 7,688,538
Inventory 33,310,539
Engines under operating leases, net 8,853,978
Notes receivable 1,124,950
Prepaid expenses and other current assets 679,989
Investment in securities 1,829,532
-----------
Total current assets $53,645,380
Property, plant and equipment, net 3,017,942
Intangible assets, net 17,420,228
Other assets 3,430,100
-----------
Total Assets $77,513,650
===========
Liabilities and Equity
Current Liabilities:
Short-term notes payable $ 5,045,438
Current maturities of long-term debt and capital lease obligations 6,299,344
Accounts payable 3,019,488
Accrued expenses 4,523,193
Income taxes payable 157,212
Deferred tax liability 173,379
-----------
Total current liabilities $19,218,054
Long-term debt and capital lease obligations, less current maturities 16,598,725
-----------
Total Liabilities $35,816,779
Stockholders' Equity:
Preferred stock, $ .001 par value; 1,000,000 shares
authorized; none issued --
Common stock, $ .001 par value; 20,000,000 shares authorized;
7,481,818 shares issued and outstanding 7,482
Additional paid-in capital 38,403,522
Retained earnings 3,012,642
Net unrealized gain on investment securities 273,225
-----------
Total Stockholders' Equity $41,696,871
-----------
Total Liabilities and Stockholders' Equity $77,513,650
===========
Unaudited -- See accompanying notes to pro forma combined balance sheet
F-26
KELLSTROM INDUSTRIES, INC.
PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1996
(Unaudited)
[Enlarge/Download Table]
HISTORICAL PRO FORMA PRO FORMA
KELLSTROM IASI ADJUSTMENTS(A) COMBINED
------------------------- ------------- -------------
Assets
Current Assets:
Cash and cash equivalents $ 154,254 $ 3,600 $ 20,832,550 c $ 157,854
(1,209,784) d
Trade receivables, net of allowances for returns and (19,622,766) e
doubtful accounts of $150,000 for Kellstrom and
$18,622 for IASI 4,023,298 3,711,669 (46,429) a 7,688,538
Inventory 15,723,370 21,969,313 (4,382,144) b 33,310,539
Engines under operating leases, net 0 12,903,284 (4,049,306) b 8,853,978
Notes receivable -- 2,251,847 (1,126,897) b 1,124,950
Prepaid expenses and other current assets 645,462 46,735 (12,208) b 679,989
Investment in securities 1,829,532 -- -- 1,829,532
------------ ------------ ------------ ------------
Total current assets $ 22,375,916 $ 40,886,448 $ (9,616,984) $ 53,645,380
Property, plant and equipment, net 2,943,077 74,865 3,017,942
Intangible assets, net 3,618,862 324,509 13,801,366 b 17,420,228
(324,509) b
Other assets 682,870 7,000 2,740,230 d 3,430,100
------------ ------------ ------------ ------------
Total Assets $ 29,620,725 $ 41,292,822 $ 6,600,103 $ 77,513,650
============ ============ ============ ============
Liabilities and Equity
Current Liabilities:
Short-term notes payable $ 5,157,302 $ 5,900,550 $ 6,000,000 b $ 5,045,438
3,822,852 b
(15,835,266) e
Current maturities of long-term debt and capital lease obligations 211,068 6,088,276 6,299,344
Accounts payable 1,651,405 1,414,512 (46,429) a 3,019,488
Accrued expenses 1,290,393 3,330,037 (97,237) b 4,523,193
Income taxes payable 157,212 -- -- 157,212
Deferred tax liability 173,379 0 173,379
------------ ------------ ------------ ------------
Total current liabilities $ 8,640,759 $ 16,733,375 $ (6,156,080) $ 19,218,054
Long-term debt and capital lease obligations, less current maturities 2,819,225 2,567,000 15,000,000 b 16,598,725
(3,787,500) e
------------ ------------ ------------ ------------
Total Liabilities $ 11,459,984 $ 19,300,375 $ 5,056,420 $ 35,816,779
Equity:
Preferred stock, $ .001 par value; 1,000,000 shares
authorized; none issued -- -- --
Common stock, $ .001 par value; 20,000,000 shares authorized;
3,315,308 shares issued and outstanding 3,315 -- 4,167 c 7,482
Additional paid-in capital / Contributed capital 14,871,559 5,398,129 (5,398,129) b 38,403,522
1,173,134 b
20,828,383 c
1,530,446 d
Retained earnings / Accumulated earnings 3,012,642 16,594,318 (16,594,318) b 3,012,642
Net unrealized gain on investment securities 273,225 -- -- 273,225
------------ ------------ ------------ ------------
Total Equity $ 18,160,741 $ 21,992,447 $ 1,543,683 $ 41,696,871
------------ ------------ ------------ ------------
Total Liabilities and Equity $ 29,620,725 $ 41,292,822 $ 6,600,103 $ 77,513,650
============ ============ ============ ============
Unaudited -- See accompanying notes to pro forma financial statements
F-27
KELLSTROM INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED BALANCE SHEET--UNAUDITED
(A) For purposes of presenting the pro forma combined balance sheet, the
following adjustments have been made:
[Enlarge/Download Table]
December 31, 1996
-----------------
a. Elimination of inter-company balances:
Reduction in accounts receivable:
Kellstrom accounts receivable from IASI $ (40,600)
IASI accounts receivable from Kellstrom (5,829)
------------
$ (46,429)
============
Reduction in accounts payable
Kellstrom accounts payable to IASI $ (5,829)
IASI accounts payable to Kellstrom (40,600)
------------
$ (46,429)
============
b. Acquisition of IASI assets:
Revaluation of inventory acquired (due to change in intended use) $ (4,382,144)
Revaluation of engines acquired (under operating leases)
(due to change in intended use) (4,049,306)
Elimination of IASI notes receivable (1,126,897)
Elimination of prepaid insurance (12,208)
Excess of Purchase Price over Fair Value of Net Assets Acquired 13,801,366
Elimination of IASI goodwill (324,509)
Bank note payable incurred 3,822,852
Elimination of some IASI accrued expenses (97,237)
Bridge loan debt incurred 6,000,000
Subordinated debt incurred 15,000,000
Elimination of IASI contributed capital (5,398,129)
Elimination of IASI accumulated earnings (16,594,318)
Additional paid-in capital from warrants issued 1,173,134
------------
$ 0
============
c. Exercise balance of warrants:
Common stock issued 4,167
Additional paid-in capital received 20,828,383
------------
$ 20,832,550
============
d. Prepayment of finance charge on acquisition debt:
Additional paid-in capital from warrants issued 1,530,446
Finance charge paid in cash 1,209,784
------------
$ 2,740,230
============
e. Use of proceeds from exercise of warrants:
Reduction of bridge loans and line of credit financing (15,835,266)
Reduction of subordinated notes (3,787,500)
------------
$(19,622,766)
============
F-28
KELLSTROM INDUSTRIES, INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS
(Unaudited)
[Download Table]
Year Ended
December 31, 1996
Pro Forma
Combined
-----------------
Net revenues $ 47,291,200
Cost of goods sold (30,951,057)
Selling, general and administrative expenses (4,542,415)
Depreciation and amortization (2,045,686)
-----------------
Operating income $ 9,752,042
Interest income 61,278
Interest expense (3,307,986)
-----------------
Income before income taxes $ 6,505,334
Income taxes (2,315,248)
-----------------
Net income $ 4,190,086
=================
Net income per share 0.53
=================
Weighted average number of shares outstanding 7,952,470
=================
See accompanying notes to pro forma combined statement of earnings
F-29
KELLSTROM INDUSTRIES, INC.
PRO FORMA COMBINED STATEMENT OF EARNINGS
(Unaudited)
[Enlarge/Download Table]
Year Ended December 31, 1996
------------------------------------------------------------------
HISTORICAL PRO FORMA PRO FORMA
KELLSTROM IASI ADJUSTMENTS (A) COMBINED
------------------------------ --------------- ---------
Net revenues $ 24,921,587 $ 22,863,747 $ (494,134) $ 47,291,200
------------ ------------ ----------- ------------
Cost of goods sold (16,235,159) (15,083,516) 367,618 (30,951,057)
Selling, general and administrative expenses (3,491,457) (1,744,434) 693,476 (4,542,415)
Depreciation and amortization (441,854) (937,716) 23,952 (2,045,686)
(690,068)
------------ ------------ ----------- ------------
Operating income $ 4,753,117 $ 5,098,081 $ (99,156) $ 9,752,042
Interest income 18,001 43,277 61,278
Interest expense (662,528) (1,066,418) 942,515 (3,307,986)
(2,521,555)
Expenses related to sale of business -- (234,866) 234,866 --
------------ ------------ ----------- ------------
Income before income taxes $ 4,108,590 $ 3,840,074 $(1,443,330) $ 6,505,334
Income taxes (1,462,247) (3,075) (849,926) (2,315,248)
------------ ------------ ----------- ------------
Net income $ 2,646,343 $ 3,836,999 $(2,293,256) $ 4,190,086
============ ============ =========== ============
Net income per share $ 0.45 $ 0.53
============ ============
Weighted average number of common shares outstanding 8,147,455 7,952,470
============ ============
Unaudited -- See accompanying notes to pro forma combined statement of earnings
F-30
KELLSTROM INDUSTRIES, INC.
NOTES TO PRO FORMA COMBINED STATEMENT OF EARNINGS
(A) For purposes of presenting the pro forma combined statement of
operations, the following adjustments have been made:
[Enlarge/Download Table]
Twelve Months Ended
December 31, 1996
-------------------
Increase (decrease) in income:
Decrease in net revenues from inter-company sales $ (494,134)
Decrease in cost of goods sold from inter-company sales 367,618
Decrease in IASI selling, general and administrative expenses due to elimination of
pension plan and bonus program and consolidation of insurance policies 693,476
Elimination of IASI goodwill amortization expense 23,952
Amortization of goodwill related to acquisition (690,068)
Reduction of bank interest expense - exercise of warrants 942,515
Interest expense on acquisition debt (2,521,555)
Elimination of expenses related to the sale of IASI 234,866
-------------------
$ (1,443,330)
Tax effect of pro forma adjustments (849,926)
-------------------
Net adjustment $ (2,293,256)
===================
F-31
Report of Independent Auditors
The Board of Directors
International Aircraft Support
We have audited the accompanying combined balance sheet of International
Aircraft Support (the "Company") as of December 31, 1996, and the related
combined statements of income and retained earnings, and cash flows for the year
then ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of International
Aircraft Support as of December 31, 1996, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
San Francisco, California
February 21, 1997
F-32
International Aircraft Support
Combined Balance Sheet
December 31, 1996
[Download Table]
ASSETS
Current assets:
Cash $ 3,600
Accounts receivable, net of allowance for doubtful
accounts of $18,622 3,711,669
Inventory 21,969,313
Notes receivable from related parties 2,251,847
Other current assets 46,735
------------
Total current assets 27,983,164
Jet aircraft engines held for lease, net of
accumulated depreciation of $3,861,190 12,903,284
Property and equipment:
Furniture and equipment 317,588
Trucks and automobiles 41,997
Leasehold improvements 26,501
------------
386,086
Accumulated depreciation and amortization (311,221)
------------
74,865
Goodwill, net of accumulated amortization of $163,678 324,509
Other assets 7,000
------------
Total assets $ 41,292,822
============
LIABILITIES AND EQUITY
Current liabilities:
Revolving line of credit $ 4,000,000
Engine line of credit 1,900,550
Current portion of notes payable 6,088,276
Accounts payable and accrued liabilities 3,439,967
Consignments payable 1,258,032
Other current liabilities 46,550
------------
Total current liabilities 16,733,375
Notes payable, less current portion 2,567,000
------------
Total liabilities 19,300,375
------------
Commitments and contingencies
Equity:
Contributed capital 5,398,129
Retained earnings 16,594,318
------------
21,992,447
------------
Total liabilities and equity $ 41,292,822
============
See accompanying notes to combined financial statements.
F-33
International Aircraft Support
Combined Statement of Income and Retained Earnings
Year ended December 31, 1996
[Download Table]
Revenues, including consignment parts sales of $2,289,107 $ 22,863,747
Operating expenses:
Direct labor and materials, including consignment parts cost
of $ 1,793,270 13,662,392
Indirect labor and operating 1,421,124
Depreciation and amortization 937,716
General and administrative 1,744,434
------------
Total operating expenses 17,765,666
Income from operations 5,098,081
Other (income) expense:
Interest expense 1,066,418
Expenses related to sale of business 234,866
Other income (43,277)
------------
Income before income taxes 3,840,074
Provision for income taxes 3,075
------------
Net income 3,836,999
Retained earnings at beginning of year 12,757,319
------------
Retained earnings at end of year $ 16,594,318
============
See accompanying notes to combined financial statements.
F-34
International Aircraft Support
Combined Statement of Cash Flows
Year ended December 31, 1996
[Download Table]
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,836,999
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 937,716
Decrease in accounts receivable, net 275,795
Increase in inventory, net (1,940,775)
Decrease in other assets 64,387
Increase in accounts payable and accrued liabilities 1,666,442
Increase in consignments payable 472,351
Increase in other liabilities 38,587
-----------
Net cash provided by operating activities 5,351,502
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment (6,328)
Purchase of jet aircraft engine held for lease and overhaul costs (5,950,542)
-----------
Net cash used in investing activities (5,956,870)
NET CASH FLOWS FROM FINANCING ACTIVITIES
Loan to shareholder (1,500,000)
Net borrowings on lines of credit 1,612,550
Proceeds from borrowings on notes payable 6,300,000
Principal payments on notes payable (6,328,720)
-----------
Net cash provided by financing activities 83,830
Decrease in cash (521,538)
Cash at beginning of year 525,138
-----------
Cash at end of year $ 3,600
===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 1,049,977
===========
Noncash transaction: transfer of engine held for lease to inventory
at book value $ 314,282
===========
See accompanying notes to combined financial statements.
F-35
International Aircraft Support
Notes to Combined Financial Statements
December 31, 1996
1. BASIS OF PRESENTATION
The combined financial statements include the accounts of International Aircraft
Support, Inc. and International Aircraft Support, L.P. (collectively referred to
as "International Aircraft Support" or the "Company"). All material intercompany
balances and transactions have been eliminated.
International Aircraft Support, Inc. was acquired by IASI, Inc., an entity
wholly-owned by General William Lyon, on February 15, 1990. IASI, Inc. was
merged into International Aircraft Support, Inc. on February 26, 1990.
Accordingly, International Aircraft Support, Inc. is wholly-owned by General
William Lyon. The acquisition was accounted for as a purchase.
International Aircraft Support, L.P. (the "Partnership") is a California limited
partnership formed in 1990. International Aircraft Support, Inc. is the 5%
managing general partner of the Partnership, Air/Lyon, Inc. is a 5% general
partner and Air/Lyon Associates L.P. is the sole 90% limited partner. Air/Lyon
Associates L.P. is a California limited partnership comprised of Air/Lyon, Inc.,
general partner, and General William Lyon, limited partner. Air/Lyon, Inc. is
wholly-owned by General William Lyon. Effective August 1, 1990, the operations
of International Aircraft Support, Inc. were transferred to the Partnership.
The Company provides jet aircraft engine maintenance support to owners and/or
operators of commercial jet aircraft engines. The Company's services include:
complete engine sales and leasing, engine part sales, engine maintenance
monitoring and technical support services. Customers of the Company consist
primarily of airlines, commercial jet engine repair shops, air freight operators
and aircraft leasing companies.
Partnership losses are allocated in reverse order of previously allocated
profits and then in proportion to capital accounts until capital account
balances are zero, with any remaining losses allocated to the general partners
in proportion to their ownership interests. Profits are first allocated in
reverse order of previously allocated losses and then in proportion to the
partners' ownership interests. Preferred returns are a special allocation of
profits calculated at prime plus .5% on the partners' unreturned capital
contributions.
F-36
International Aircraft Support
Notes to Combined Financial Statements (continued)
2. ACCOUNTING POLICIES
INVENTORY
Inventory, consisting primarily of new and used jet aircraft engine parts, is
stated at the lower of cost or market. Market is based on net realizable value.
Appropriate consideration is given to deterioration, obsolescence and other
factors in evaluating net realizable value. Engine parts are acquired primarily
by purchasing engines and disassembling them into their component parts. Engine
costs are then allocated to the individual parts using the relative sales value
method. The costs of refurbishing individual parts are included in the total
cost of each part using the specific identification method. Costs related to
procurement, storage and refurbishment activities are also allocated to
inventory costs.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes expenditures for major
replacements and improvements. Depreciation is computed using the straight-line
or double declining balance method over the estimated useful service lives of
the assets, which range from five to seven years. Leasehold improvements are
depreciated using the straight line method over the shorter of the useful life
of the improvement or the remaining term of the lease. Repairs and maintenance
costs are expensed as incurred.
The Company leases jet aircraft engines to airlines and air freight operators.
Depreciation of engines is computed based upon flight hours, flight cycles or
both over the estimated useful service lives of the engines, allowing for
estimated salvage value. The costs associated with major engine overhauls are
accrued based upon usage. During the year ended December 31, 1996, depreciation
for engines totaled $879,776. Overhaul costs of $1,736,261 were incurred during
1996.
GOODWILL
Goodwill arising from the acquisition of International Aircraft Support, Inc. by
IASI, Inc. totaled $488,187 and is being amortized using the straight-line
method over 20 years.
REVENUE RECOGNITION
Revenue generated from complete engine sales is recognized upon acceptance of
the equipment by the customer. Parts sales revenue is recognized upon shipment
of the related item to the customer. Technical services and leasing revenues are
recognized over the term of the related agreements.
F-37
International Aircraft Support
Notes to Combined Financial Statements (continued)
CONSIGNMENT REVENUE AND COSTS
Consignment revenue and costs represent the sales of engine parts which the
Company does not own. The Company routinely takes possession of engines which it
does not own, has the engines disassembled and the parts overhauled as needed.
The Company then inventories the parts at the Company's warehouse and sells the
parts to third parties. The Company is responsible for the costs to disassemble
the engine, overhaul, warehouse and sell the parts. Certain of these costs are
allocated to the parts and recovered from the parts sales prior to the owner of
the parts participating in the sale proceeds. At December 31, 1996, the Company
had incurred $774,931 of refurbishment costs, which are included in accounts
receivable, that had not been recovered. These costs are fully reimbursable to
the Company upon the termination of their services under the terms of the
consignment agreements.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The financial instruments which potentially subject the Company to
concentrations of credit risk are accounts receivable. Concentrations of credit
risk with respect to accounts receivable that consist principally of receivables
from airlines, commercial jet engine repair shops, air freight operators and
aircraft leasing companies located throughout the world, are limited due to the
initial and continuing credit evaluation of all customers who are extended
credit.
Approximately 44% of the Company's total revenue relates to five recurring
customers which are significant participants in the aviation industry. In 1996,
one customer accounted for more than 10% of revenues.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of notes receivable from related parties approximates their
fair value due to short-term maturity. Management estimates or believes the
carrying value of the Company's long-term debt approximates its fair value due
to periodic adjustments in floating interest rates.
F-38
International Aircraft Support
Notes to Combined Financial Statements (continued)
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1996, consists of $2,923,782 in trade
account receivables, $774,931 of consignment repair receivables and $31,578 of
unbilled work-in-process, net of a $18,622 allowance for doubtful accounts. The
majority of unbilled work-in-process relates to technical support services which
were not complete as of December 31, 1996. Subsequent to December 31, 1996, all
year-end work-in-process was completed and invoiced
4. INVENTORY
Inventory at December 31, 1996, consists primarily of new and used jet aircraft
engine parts. All inventory is held for sale and, accordingly, has been
classified as a current asset in the combined balance sheet. Historically, the
period required to sell the jet aircraft engine parts is substantially longer
than one year. As a result, management anticipates that a portion of the jet
aircraft engine parts inventory at December 31, 1996, will not be sold during
1997 and such amount could be significant. Inventory at December 31, 1996,
consists of new and used jet aircraft engine parts totaling $13,416,595 and
$7,017,542, respectively. During 1996, the Company sold new and used jet
aircraft engine parts with a cost basis approximating $10,630,334. Included in
inventory at December 31, 1996, is $1,532,542 of capitalized costs related to
the procurement, storage and refurbishment of aircraft engine parts.
During 1996, the Company purchased for their parts inventory a new model PW4060
engine for cash of $2,755,687 and a Prime +1% interest bearing note payable to
the Union Bank of California (the Bank) of $3,000,000. This engine is currently
awaiting teardown to piece parts.
In addition, the company purchased a CFM 56-3B1 aircraft engine and a CFM 56-3B2
core module for $3,200,000. This was financed through the Company's line of
credit ($758,000) and the Engine line of credit ($2,442,000). These are in
inventory as piece parts as of December 31, 1996.
5. AIRCRAFT ENGINES HELD FOR LEASE
Aircraft engines held for lease, stated at cost, consist of the following at
December 31, 1996:
Model PW4060 aircraft engine, leased $ 8,686,777
Model JT9D-7A aircraft engine 3,803,526
Model JT8D-217A aircraft engine, leased 1,774,171
Model JT8D-219 aircraft engine, leased 2,500,000
-------------
16,764,474
Accumulated depreciation (3,861,190)
-------------
$ 12,903,284
=============
Aircraft engines are normally leased for periods of less than one year.
Generally, the lessee is responsible for rental payments based on in-flight
usage of the engine as well as a daily or monthly base lease charge.
F-39
International Aircraft Support
Notes to Combined Financial Statements (continued)
5. AIRCRAFT ENGINES HELD FOR LEASE (continued)
During 1994, the Company entered into a longterm lease with a German carrier
involving the model PW4060 aircraft engine. The lease expires on July 29, 2000
and provides for minimum annual amounts of $559,200, plus a usage fee per flight
hour. The lessee has an option to terminate this lease after July 29, 1997, with
a 90-day prior notice to the Company. This lease also gives the lessee an option
to purchase the engine for a defined amount.
During 1995, the Company entered into a lease agreement for the model JT9D-7A
aircraft engine with an air freight operator. The lease term for this engine
expired on October 24, 1996, and as of December 31, 1996 this engine was not
leased.
During 1996, the Company entered into a lease agreement for the model JT8D-217A
with a domestic carrier. The lease was for a period of 90 days (beginning March
15, 1996), with the lessee having the option for three successive 180 day
periods. At December 31, 1996, the lessee had exercised this option up.
On November 26, 1996, the Company entered into a lease agreement for the model
JT8D-219 with a Scandinavian carrier. The lease was for a minimum period of six
months. This provides for minimum monthly amounts of $39,000, plus a usage fee
per flight hour.
During the year ended December 31, 1996, leasing income totaled $1,881,686,
including $961,196 for usage fees.
6. LINES OF CREDIT
The Company has a revolving line of credit with the Bank, with interest payable
monthly at the Bank's prime rate (8.25% at December 31, 1996) plus 1/2%. The
line is secured by a general security agreement on accounts receivable and
inventory. Borrowings are available through the line's due date of June 30,
1997, and may not exceed the lower of $7,000,000 or eligible accounts receivable
and inventory. The balance on the line of credit at December 31, 1996, was
$4,000,000.
The Company also has an engine line of credit with availability of up to
$4,000,000 with interest payable monthly at the Bank's prime rate plus 1%. This
engine line of credit is secured by any engine purchased with amounts drawn on
the line of credit. Borrowings are available through the line's due date of June
30, 1997, and may not exceed the lower of 90% of the actual purchase price of
the aircraft engine to be financed or the maximum credit available at the time
of the advance. As of December 31, 1996, the balance on the engine line of
credit is $1,900,550, which is secured by the residual parts from a model
PW2000, from a CFM56 engine and a CFM56 module.
F-40
International Aircraft Support
Notes to Combined Financial Statements (continued)
7. NOTES PAYABLE
Notes payable consist of the following at December 31, 1996:
[Enlarge/Download Table]
Note payable secured by model PW4060 aircraft engine held for lease, monthly
principal payments due of $35,000 plus interest at prime plus 0.5%, with the
unpaid balance due September 30, 1997. $1,985,000
Note payable secured by a model PW4060 aircraft engine parts, and proceeds of
sale of aircraft engine parts, monthly minimum principal payments due of
$100,000 plus interest at prime plus 1.0%, with the unpaid balance due
November 30, 1997. 3,000,000
Note payable secured by an automobile, monthly principal payments of $672
plus interest at 10.0% with the unpaid
balance due in October, 1997. 5,276
Note payable secured by model JT8D-219 aircraft engine held for lease monthly
principal payments due of $36,500 plus interest of prime plus 0.75%, with the
unpaid balance due November 30, 1998. 2,200,000
Note payable secured by model JT8D-217A aircraft engine held for lease,
monthly principal payments of $30,000, plus interest at prime plus 0.5%, with
the unpaid balance due May 31, 1999. 890,000
Note payable secured by model JT9D-7A aircraft engine held for lease, monthly
principal payments due of $25,000 plus interest at prime plus 0.5%, with the
unpaid balance due August 31, 1999. 575,000
----------
8,655,276
Less: current portion 6,088,276
----------
$2,567,000
==========
The future principal payments due under the terms of notes payable and the
Company's lines of credit subsequent to December 31, 1996, are as follows:
Years ending December 31
1997 $ 6,088,276
1998 2,397,000
1999 170,000
-----------
Total $ 8,655,276
===========
The prime rate averaged approximately 8.38% during the year ended December 31,
1996, and was 8.25% at December 31, 1996.
F-41
International Aircraft Support
Notes to Combined Financial Statements (continued)
8. INCOME TAXES
Effective January 1, 1991, International Aircraft Support, Inc. elected S
corporation status. Accordingly, a provision has not been provided for federal
income taxes on the earnings of International Aircraft Support, Inc. for the
year ended December 31, 1996, as its income is taxed at the shareholder's level
for federal income tax purposes. A provision has been provided for State of
California franchise taxes equal to 1.5% of the earnings of International
Aircraft Support, Inc. for the year ended December 31, 1996.
A provision has not been provided for federal and state income taxes on the
earnings of International Aircraft Support, L.P., a partnership, as its income
and losses are taxed at the partner level for federal and state income tax
purposes.
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution Money Purchase Pension Plan (the "Plan")
which provides retirement and other benefits for most full-time employees. Under
the Plan, the Company is required to contribute amounts equal to 10% of eligible
employees' compensation, up to $150,000 in covered compensation per employee per
year. For the period ended December 31, 1996, the Company accrued contributions
of $87,833 to the Plan. Historically, the Company has not contributed amounts to
the Plan in excess of the maximum amount deductible for federal income tax
purposes.
10. COMMITMENTS AND CONTINGENCIES
The Company conducts its operations in leased facilities and the lease is
accounted for as an operating lease. The lease requires monthly rent payments of
approximately $21,000 and expires January 31, 1999. Facility rent expense, net
of sublease income, was $226,659 for the year ended December 31, 1996.
During 1994, the Company, as lessor, entered into an engine lease agreement with
a European carrier whereby the Company will provide an aircraft parts purchasing
credit to the lessee for any additional costs incurred by the lessee due to
European tax laws associated with the lease. As of December 31, 1996, this
purchasing credit was not material.
The loan agreements for the revolving line of credit, the engine line of credit
and the notes payable (see Note 7) contain certain convenants which restrict the
distribution of cash or the payment of dividends and require the Company to
maintain certain levels of net worth and profitability.
F-42
International Aircraft Support
Notes to Combined Financial Statements (continued)
11. RELATED PARTY TRANSACTIONS
During June 1996, the Company issued a promissory note for $1,500,000 to William
Lyon at 0% interest. As a part of purchase by Kellstrom, this note was repaid on
January 15, 1997 (see Note 12). Also, the Company issued, in prior years, two
promissory notes totaling $600,000 at 6% interest to companies under common
ownership. These notes are unsecured and are due upon demand. As of December 31,
1996, accrued interest on these notes was $151,847. The Company recognized
$42,258 of interest income on the notes during 1996.
The Company participates in an insurance program for essentially all of its
insurance needs, other than employee benefits, with companies affiliated through
common ownership. Payments for such services during 1996 totaled $165,577.
During July 1995, the Company purchased from an affiliate certain aircraft parts
for $400,000 (purchase price). In accordance with the agreement, the affiliate
guaranteed the recovery of the Company's purchase price plus accrued, imputed
interest compounded annually at the prime rate. As of December 31, 1996, the
parts were held on consignment by a third party located in Florida. As of
December 31, 1996, related parts with a costs basis of $376,860 remain in
inventory.
12. SUBSEQUENT EVENTS
On January 15, 1997, Kellstrom Industries, Inc. (Kellstrom) through its 100%
subsidiary, IASI, Inc., purchased substantially all of the assets and assumed
certain of the liabilities of International Aircraft Support, L.P. for a cash
purchase consideration of $26.5 million. In addition, the Partners of
International Aircraft Support, L.P., were issued warrants, with an expiration
date of two years from January 15, 1997, to purchase 500,000 shares of Kellstrom
at $9.25 per share. The combined financial statements do not include accruals
for future decisions, activities and transactions or adjustments relating to
decisions regarding the Company's operations and assets that might result from
the subsequent event.
F-43
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
International Aircraft Support
We have audited the accompanying combined balance sheet of International
Aircraft Support (the 'Company') as of December 31, 1995, and the related
combined statements of income and equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of International
Aircraft Support as of December 31, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
March 21, 1996
Ernst & Young LLP
F-44
International Aircraft Support
Combined Balance Sheet
December 31, 1995
[Download Table]
ASSETS
CURRENT ASSETS:
Cash $525,000
Accounts receivable net of allowance
for doubtful accounts of $42,000 3,987,000
Inventory 19,757,000
Other current assets 111,000
-----------
TOTAL CURRENT ASSETS 24,380,000
Jet aircraft engines held for lease,
net of accumulated depreciation of $2,981,000 8,147,000
Property and equipment:
Furniture and equipment 311,000
Trucks and automobiles 42,000
Leasehold improvements 27,000
-----------
380,000
Accumulated depreciation and amortization (277,000)
-----------
103,000
Goodwill, net of accumulated amortization 348,000
of $140,000
OTHER ASSETS 716,000
-----------
TOTAL ASSETS $33,694,000
===========
F-45
[Download Table]
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Revolving line of credit $2,600,000
Engine line of credit 1,688,000
Current portion of notes payable 5,869,000
Accounts payable and accrued liabilities 1,773,000
Consignments payable 786,000
Other current liabilities 8,000
-----------
TOTAL CURRENT LIABILITIES 12,724,000
Long Term Liabilities:
Notes payable, less current portion 2,815,000
-----------
TOTAL LIABILITIES 15,539,000
Commitments and contingencies
Equity 5,398,000
Contributed capital 12,757,000
-----------
Accumulated earnings 18,155,000
-----------
TOTAL LIABILITIES AND EQUITY $33,694,000
===========
See accompanying notes.
F-46
INTERNATIONAL AIRCRAFT SUPPORT
COMBINED STATEMENT OF INCOME AND EQUITY
YEAR ENDED DECEMBER 31, 1995
[Download Table]
Revenues, including consignment parts sales $22,135,000
of $2,956,000:
Operating expenses:
Direct labor and materials, including consignment 13,342,000
parts cost of $2,463,000
Indirect labor and operating 1,360,000
Depreciation and amortization 1,021,000
General and administrative 1,737,000
-----------
17,460,000
Income from operations 4,675,000
Interest expense 1,423,000
Amortization of intangibles 25,000
Other income 89,000
-----------
Income before income taxes 3,316,000
Provision for income taxes 2,000
-----------
NET INCOME 3,314,000
EQUITY AT BEGINNING OF YEAR 14,841,000
-----------
EQUITY AT END OF YEAR $18,155,000
===========
See accompanying notes.
F-47
INTERNATIONAL AIRCRAFT SUPPORT
COMBINED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1995
[Enlarge/Download Table]
OPERATING ACTIVITIES
Net income $3,314,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,046,000
Decrease in accounts receivable, net 5,151,000
Decrease in inventory, net 2,221,000
Increase in other assets (97,000)
Decrease in accounts payable and accrued liabilities (1,648,000)
Increase in consignments payable 273,000
Decrease in other liabilities (92,000)
----------
Net cash provided by operating activities 10,168,000
Investing activities
Dispositions of property and equipment, net 27,000
Change in jet aircraft engine held for lease (449,000)
-----------
Net cash used in investing activities (422,000)
FINANCING ACTIVITIES
Net borrowings on lines of credit (371,000)
Proceeds from borrowings on notes payable 1,200,000
Principal repayments on notes payable (10,054,000)
-----------
Net cash used in financing activities (9,225,000)
Net change in cash 521,000
Cash at beginning of year 4,000
----------
Cash at end of year $525,000
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $1,426,000
==========
See accompanying notes.
F-48
INTERNATIONAL AIRCRAFT SUPPORT
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. BASIS OF PRESENTATION
The combined financial statements include the accounts of International Aircraft
Support, Inc. and International Aircraft Support, L.P. (collectively referred to
as "International Aircraft Support" or the "Company"). All material intercompany
balances and transactions have been eliminated.
International Aircraft Support, Inc. was acquired by IASI, Inc., an entity
wholly-owned by General William Lyon, on February 15, 1990. IASI, Inc. was
merged into International Aircraft Support, Inc. on February 26, 1990.
Accordingly, International Aircraft Support, Inc. is wholly-owned by General
William Lyon. The acquisition was accounted for as a purchase.
International Aircraft Support, L.P. (the "Partnership") is a California limited
partnership formed in 1990. International Aircraft Support, Inc. is the 5%
managing general partner of the Partnership, Air/Lyon, Inc. is a 5% general
partner and Air/Lyon Associates L.P. is the sole 90% limited partner. Air/Lyon
Associates L.P. is a California limited partnership comprised of Air/Lyon, Inc.,
general partner, and General William Lyon, limited partner. Air/Lyon, Inc. is
wholly-owned by General William Lyon. Effective August 1, 1990, the operations
of International Aircraft Support, Inc. were transferred to the Partnership.
Partnership losses are allocated in reverse order of previously allocated
profits and then in proportion to capital accounts until capital account
balances are zero, with any remaining losses allocated to the general partners
in proportion to their ownership interests. Profits are first allocated in
reverse order of previously allocated losses and then in proportion to the
partners' ownership interests. Preferred returns are a special allocation of
profits calculated at prime plus .5% on the partners' unreturned capital
contributions.
The Company provides jet aircraft engine maintenance support to owners and/or
operators of commercial jet aircraft engines. The Company's services include:
complete engine sales and leasing, engine part sales, engine maintenance
monitoring and technical support services. Customers of the Company consist
primarily of airlines, commercial jet engine repair shops, air freight operators
and aircraft leasing companies.
2. ACCOUNTING POLICIES
Inventory
Inventory, consisting primarily of new and used jet aircraft engine parts, is
stated at the lower of cost or market. Market is based on net realizable value.
Appropriate consideration is given to deterioration, obsolescence and other
factors in evaluating net realizable value. During 1995, $151,000 of estimated
costs related to obsolete inventory was written-off as direct
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materials expense. Engine parts are acquired primarily by purchasing engines and
disassembling them into their component parts. Engine costs are then allocated
to the individual parts using the relative sales value method. The costs of
refurbishing individual parts are included in the total cost of each part using
the specific identification method. Overhead costs related to procurement,
storage and refurbishment activities are also allocated to inventory costs.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and includes expenditures for major
replacements and improvements. Depreciation is computed using the straight-line
or double declining balance method over the estimated useful service lives of
the assets, which range from three to ten years. Leasehold improvements are
depreciated using the straight-line method over the shorter of the useful life
of the improvement or the remaining term of the lease. Repairs and maintenance
costs are expensed as incurred.
The Company leases jet aircraft engines to airlines. Depreciation of engines is
computed based upon flight hours, flight cycles or both over the estimated
useful service lives of the engines, allowing for estimated salvage value. The
costs associated with major engine overhauls are accrued based upon usage.
During the year ended December 31, 1995, depreciation for engines totaled
$980,000. Overhaul costs of $817,000 were incurred during 1995.
GOODWILL
Goodwill arising from the acquisition of International Aircraft Support, Inc. by
IASI, Inc. totaled $488,000 and is being amortized using the straight-line
method over 20 years.
REVENUE RECOGNITION
Revenue generated from complete engine sales is recognized upon acceptance of
the equipment by the customer. Parts sales revenue is recognized upon shipment
of the related item to the customer. Technical services and leasing revenues are
recognized over the term of the related agreements.
CONSIGNMENT REVENUE AND COSTS
Consignment revenue and costs represent the sales of engine parts which the
Company does not own. The Company routinely takes possession of engines which it
does not own, has the engines disassembled and the parts overhauled as needed.
The Company then inventories the parts at the Company's warehouse and sells the
parts to third parties. The Company is responsible for the costs to disassemble
the engine, overhaul, warehouse and sell the parts. Certain of these costs are
allocated to the parts and recovered from the parts sales prior to the owner of
the parts participating in the sale proceeds. At December 31, 1995, the Company
had incurred $961,000 of refurbishment costs, which are included in accounts
receivable, that had not been recovered. These costs are fully reimbursable to
the Company upon the termination of their services under the terms of the
consignment agreements. Additionally, on certain consignment engines, the
consignor has the option to require the Company to purchase any consigned
inventory below a specific sales threshold. As of December 31, 1995, this option
had
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not been exercised and the Company's total outstanding purchase commitment was
approximately $176,000.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash investments and accounts
receivable. The Company performs a periodic evaluation of the credit standing of
the financial institution in which its cash is maintained. Concentrations of
credit risk with respect to accounts receivable that consist principally of
receivables from airlines, commercial jet engine repair shops, air freight
operators and aircraft leasing companies located throughout the world, are
limited due to the initial and continuing credit evaluation of all customers who
are extended credit.
Approximately 59% of the Company's total revenue relates to six recurring
customers which are significant participants in the aviation industry.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash approximates its fair value due to its short-term
maturity. The carrying value of the Company's long-term debt approximates its
fair value due to periodic adjustments in floating interest rates.
3. ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1995, consists of $2,921,000 in trade
account receivables, $961,000 of consignment repair receivables and $147,000 of
unbilled work-in-process, net of a $42,000 allowance for doubtful accounts. The
majority of unbilled work-in-process relates to technical support services which
were not complete as of December 31, 1995. Subsequent to December 31, 1995, all
year-end work-in-process was completed and invoiced.
4. INVENTORY
Inventory at December 31, 1995, consists primarily of new and used jet aircraft
engine parts. All inventory is held for sale and, accordingly, has been
classified as a current asset in the combined balance sheet. Historically, the
period required to sell the jet aircraft engine parts is substantially longer
than one year. As a result, management anticipates that a portion of the jet
aircraft engine parts inventory at December 31, 1995, will not be sold during
1996 and such amount could be significant. Inventory at December 31, 1995,
consists of new and used jet aircraft engine parts totaling $12,839,000 and
$6,918,000, respectively. During 1995, the
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Company sold new and used jet aircraft engine parts with a cost basis
approximating $10,172,000. Included in inventory at December 31, 1995, is
$1,491,000 of capitalized overhead costs related to the procurement, storage and
refurbishment of aircraft engine parts.
During 1995, the Company purchased for their parts inventory two new model
PW2000 engines for cash of $4,200,000 and a noninterest bearing note payable to
the seller of $3,700,000. The note payable to the seller was discounted by
$238,000 based upon an imputed interest rate of 7.75% and the related cost basis
of the engine purchased was adjusted for the discount (see Note 7). In addition,
the Company purchased a JT9D-7A engine for their parts inventory, for cash and a
note payable to the seller of $347,000, bearing interest at 10% (see Note 7).
5. AIRCRAFT ENGINES HELD FOR LEASE
Aircraft engines held for lease, stated at cost, consist of the following at
December 31, 1995:
Model PW4060 aircraft engine, leased $7,433,000
Model JT9D-7A aircraft engine, leased 3,789,000
----------
Accumulated depreciation 3,075,000
----------
$8,147,000
==========
Aircraft engines are normally leased for periods of less than one year.
Generally, the lessee is responsible for rental payments based on in-flight
usage of the engine as well as a daily or monthly base lease charge. During
1994, the Company entered into a long-term lease with a European carrier
involving the model PW4060 aircraft engine. The lease expires on July 29, 2000
and provides for minimum annual amounts of $559,000, plus a usage fee per flight
hour. The lessee has an option to terminate this lease after July 29, 1997, with
a 90-day prior notice to the Company. This lease also gives the lessee an option
to purchase the engine for a defined amount. During 1995, the Company entered
into a lease agreement for the model JT9D-7A aircraft engine. The lease term for
this engine expires on October 24, 1996.
During the year ended December 31, 1995, leasing income totaled $1,818,000.
6. LINES OF CREDIT
The Company has a revolving line of credit with a bank, with interest payable
monthly at the bank's prime rate (8.5% at December 31, 1995) plus 1/2%. The line
is secured by a general security agreement on accounts receivable and inventory.
Borrowings are available through the line's due date of June 30, 1996, and may
not exceed the lower of $6,000,000 or eligible accounts receivable and
inventory. The balance on the line of credit at December 31, 1995, was
$2,600,000.
The Company also has an engine line of credit which was modified during 1995 to
increase the amount of availability to $4,000,000 with interest payable monthly
at the bank's prime rate plus 1%. This engine line of credit is secured by any
engine purchased with amounts drawn on the line of credit. Borrowings are
available through the line's due date of June 30, 1996, and may not exceed the
lower of 90% of the actual purchase price of the aircraft engine to be
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financed or the maximum credit available at the time of the advance. As of
December 31, 1995, the balance on the engine line of credit is $1,688,000, and
is secured by engine model PW2000 aircraft engine parts.
7. NOTES PAYABLE
Notes payable consist of the following at December 31, 1995:
Note payable secured by a model PW4060
aircraft engine held for lease, monthly
principal payments due of $35,000 plus
interest at prime plus 0.5%, with unpaid
balance due September 30, 1997. $2,405,000
Note payable secured by model PW4000 aircraft
engine parts, bearing interest at an imputed
rate of 5.5% (net of unamortized discount of
$41,000), with the unpaid balance due June 9,
1996. 1,959,000
Notes payable secured by model PW2000
aircraft engine parts, bearing interest at an
imputed rate of 7.75% (net of unamortized
discount of $170,000), with the unpaid
balance due December 27, 1996. 2,836,000
Notes payable secured by automobiles, monthly
principal payments of $631 plus interest at
10.0% with unpaid balance due in October,
1997. 12,000
Note payable secured by model JT8D-9A and
JT9D-7A aircraft engine parts, monthly
principal payments due of $25,000, plus
interest at prime plus 0.5%, with unpaid
balance due August 31, 1999 $1,125,000
Note payable secured by model JT9D-7A
aircraft engine parts with principal plus
interest at 10% due June 13, 1996, paid in
full in March 1996. 347,000
----------
8,684,000
Less current portion 5,869,000
----------
$2,815,000
==========
The future principal payments due under the terms of notes payable and the
Company's lines of credit subsequent to December 31, 1995, are as follows:
Years ending December 31
-------------------------
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1996 $5,869,000
1997 2,290,000
1998 300,000
1999 225,000
----------
Total $8,684,000
==========
The prime rate averaged approximately 8.83% during the year ended December 31,
1995, and was 8.5% at December 31, 1995.
8. INCOME TAXES
Effective January 1, 1991, International Aircraft Support, Inc. elected S
corporation status. Accordingly, a provision has not been provided for federal
income taxes on the earnings of International Aircraft Support, Inc. for the
year ended December 31, 1995, as its income is taxed at the shareholder's level
for federal income tax purposes. A provision has been provided for state of
California franchise taxes equal to 1.5% of the earnings of International
Aircraft Support, Inc. for the year ended December 31, 1995.
A provision has not been provided for federal and state income taxes on the
earnings of International Aircraft Support, L.P., a partnership, as its income
and losses are taxed at the partner level for federal and state income tax
purposes.
9. EMPLOYEE BENEFIT PLANS
The Company has a defined contribution Money Purchase Pension Plan (the "Plan")
which provides retirement and other benefits for most full-time employees. Under
the Plan, the Company is required to contribute amounts equal to 10% of eligible
employees' compensation, up to $150,000 in covered compensation per employee per
year. For the period ended December 31, 1995, the Company accrued contributions
of $94,000 to the Plan. Historically, the Company has not contributed amounts to
the Plan in excess of the maximum amount deductible for federal income tax
purposes.
10. COMMITMENTS AND CONTINGENCIES
The Company conducts its operations in leased facilities and the lease is
accounted for as an operating lease. The lease requires monthly rent payments of
approximately $18,000 and expires January 31, 1996. Facility rent expense was
$215,000 for the year ended December 31, 1995.
During 1994, the Company, as lessor, entered into an engine lease agreement with
a European carrier whereby the Company will provide an aircraft parts purchasing
credit to the lessee for any additional costs incurred by the lessee due to
European tax laws associated with the lease.
As of December 31, 1995, this purchasing credit was not material.
The loan agreements for the revolving line of credit, the engine line of credit
and the notes payable (see Note 7) contain certain covenants which restrict the
distribution of cash or the payment of dividends and require the Company to
maintain certain levels of net worth and profitability.
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11. RELATED PARTY TRANSACTIONS
Included in other assets at December 31, 1995, are two unsecured promissory
notes totaling $600,000 from companies affiliated through common ownership. The
promissory notes are due upon demand and bear interest at 6% per annum. The
Company recognized $40,000 of interest income on the promissory notes during
1995. Repayment from the affiliates is not expected in the next year; the
promissory notes may ultimately become an obligation of the owner of the
affiliates which is the owner of the Company.
The Company participates in an insurance program for essentially all of its
insurance needs, other than employee benefits, with companies affiliated through
common ownership. Payments for such services during 1995 totaled $145,000.
On July 1995, the Company purchased from an affiliate certain aircraft parts for
$400,000 (purchase price). In accordance with the agreement, the affiliate
guaranteed the recovery of the Company's purchase price plus accrued, imputed
interest compounded annually at the prime rate. Currently, the parts are held on
consignment by a third party located in Florida. As of December 31, 1995,
related engine parts with a costs basis of $390,000 remain in inventory.
During 1995, the Company entered into an agreement with Air/Lyon, Inc. to
provide a debt repayment guarantee of up to $1,240,000 for an affiliated entity.
12. SUBSEQUENT EVENTS
On February 1996, the Company purchased a CFM 53-3B1 aircraft engine and a CFM
56-382 core module for $3,200,000. In accordance with the purchase agreement,
the seller agreed to repurchase approximately $3,400,000 worth of parts from the
engine and module. The engine and module are in the process of being torn-down
by the seller on behalf of the Company.
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Dates Referenced Herein and Documents Incorporated by Reference
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