As filed with the Securities and Exchange Commission on October 2, 2001.
Registration No. 333-69464
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
PRE-EFFECTIVE
AMENDMENT NO. 1 TO
FORM S-4
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
AVIATION SALES COMPANY
(Exact name of registrant as specified in its charter)
Delaware 5084 65-0665658
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code No.) Identification No.)
of Incorporation or
organization)
623 Radar Road
Greensboro, North Carolina 27410
(336) 668-4410 (x3004)
(Address, including Zip Code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
Roy T. Rimmer, Jr.,
President and Chief Executive Officer
Aviation Sales Company
623 Radar Road
Greensboro, North Carolina 27410
(336) 668-4410 (Ext 3004)
(Name, address, including Zip Code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
Philip B. Schwartz, Esq.
Akerman, Senterfitt & Eidson, P.A.
One Southeast Third Avenue
Miami, Florida 33131-1704
(305) 982-5604
---------------
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after this Registration Statement becomes
effective in connection with the exchange offer described in the prospectus
contained in this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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TABLE OF CO-REGISTRANTS
Primary Standard
Industrial IRS Employee
State of Classification Identification
Name of Additional Registrant Incorporation Code Number
----------------------------- ------------- ---------------- --------------
Aero Hushkit Corporation........ Delaware 811210 59-3220181
Aerocell Structures, Inc. ...... Arkansas 336410 71-0704240
Aircraft Interior Design,
Inc. .......................... Florida 336410 59-2449132
Aviation Sales Distribution
Services Company............... Delaware 336410 65-0673002
Aviation Sales Finance Company.. Delaware 551112 51-0375317
Aviation Sales Leasing Company.. Delaware 336410 65-0674397
Aviation Sales Maintenance,
Repair & Overhaul Company...... Delaware 551112 65-0871343
Aviation Sales Property
Management Corp. .............. Delaware 551112 65-0885418
Aviation Sales SPS I, Inc. ..... Delaware 7359 65-0774065
AVS/CAI, Inc.................... Florida 811210 59-1710967
AVS/M-1, Inc.................... Delaware 336410 65-0791491
AVS/M-2, Inc.................... Delaware 336410 31-1575338
AVS/M-3, Inc.................... Arizona 336410 65-0801884
AVSRE, L.P...................... Delaware 531120 65-0885420
Hydroscience, Inc............... Texas 811210 75-1456297
Timco Engine Center, Inc........ Delaware 811210 58-2485688
Timco Engineered Systems, Inc... Delaware 811210 57-1095954
Triad International Maintenance
Corporation.................... Delaware 811210 54-1510639
Whitehall Corporation........... Delaware 811210 41-0838460
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus and consent solicitation is not complete +
+and may be changed. We may not complete this exchange offer and consent +
+solicitation and issue these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus and consent solicitation is not an offer to sell these securities +
+and is not soliciting an offer to buy these securities in any jurisdiction +
+where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 2, 2001
PROSPECTUS AND CONSENT SOLICITATION
AVIATION SALES COMPANY
-----------
Exchange Offer for and Consent Solicitation with Respect to
All Outstanding 8 1/8% Senior Subordinated Notes due 2008
-----------
We are offering to exchange a combination of up to $10.0 million in cash and
up to $100,000,000 of our 8% senior subordinated convertible PIK notes due
2006, our common stock and our warrants to purchase our common stock for any
and all of our outstanding $165,000,000 aggregate principal amount of 8 1/8%
senior subordinated notes due 2008. We are also soliciting consents to amend
the indenture under which the 8 1/8% senior subordinated notes due 2008 were
issued. In this prospectus and consent solicitation we sometimes refer to the 8
1/8% senior subordinated notes due 2008 as the "old notes" and the 8% senior
subordinated convertible PIK notes due 2006 as the "new notes."
In August 2001, we entered into an agreement with the holders of 73.02% of
the old notes to restructure those notes. Under the agreement, the note holders
will exchange their old notes in this exchange offer and consent solicitation.
In connection with the restructuring, we intend to conduct an offering of
rights to purchase 24,024,507 post-reverse split shares (defined below) of our
common stock to all existing stockholders to raise $20 million. Lacy Harber,
who is a beneficial owner of approximately 29.4% of our outstanding common
stock and one of our principal stockholders, has agreed to purchase any unsold
allotments in the rights offering. Investors who purchase the $20 million of
shares in our reorganized company in the rights offering will own 80% of the
outstanding common stock of the reorganized company. Our existing stockholders
will own 5% of the reorganized company and will also be granted five year
warrants to purchase an additional 3,003,363 post-reverse split shares of our
common stock at exercise price $5.16 per share. Additionally, the new note
holders will own 15% of the reorganized company and will be granted five year
warrants to purchase an additional 3,003,363 post-reverse split shares of our
common stock at exercise price $5.16 per share. Further, the new note holders
may receive additional shares of our post-reverse split common stock upon
redemption of the new notes and upon maturity, if not previously redeemed, the
new notes (inclusive of all accrued but unpaid interest) will automatically
convert into an aggregate of 270,275,706 shares of our post-reverse split
common stock.
The rights offering, including the potential sale of up to 80% of our to-be-
outstanding common stock to one of our principal stockholders if he is called
upon to purchase unsold allotments in the rights offering, the exchange offer
and consent solicitation, and the recapitalization and reverse split (both as
defined below) will require approval of a majority of our stockholders.
Completion of the rights offering will be subject to the requirement that the
exchange offer and consent solicitation be consummated at the same time and to
obtaining the consent to the exchange offer and consent solicitation and the
rights offering from our senior lenders and the parties to our tax retention
operating lease. Although there can be no assurances, the rights offering and
restructuring contemplated by this prospectus and consent solicitation are
expected to close by the end of 2001.
-----------
Both acceptance and rejection of this exchange offer and consent solicitation
involve a high degree of risk. You should consider carefully the risk factors
discussed beginning on page 19 of this prospectus and consent solicitation in
evaluating the exchange offer and consent solicitation.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus and consent solicitation is truthful or complete. Any
representation to the contrary is a criminal offense.
The exclusive dealer manager for this exchange offer and consent solicitation
is
Houlihan Lokey Howard & Zukin Capital
The date of this prospectus and consent solicitation is , 2001.
(Continued on next page)
(Continued from previous page)
In connection with the note restructuring, we also intend to change our
capitalization (the "recapitalization") by increasing the number of our
authorized shares of common stock from 30 million shares to 500 million shares,
followed by a reduction in the number of our issued and outstanding shares of
common stock. We expect to accomplish this reduction in our issued and
outstanding common stock through a reverse-split of our issued and outstanding
common stock on a ten-share-for-one-share basis (the "reverse split"). The
reverse split will become effective immediately prior to the closing of the
exchange offer and consent solicitation and the rights offering, all of which
must occur if any of it occurs.
Exchange offer and consent solicitation
. The exchange offer and consent solicitation will expire at 5:00 p.m., New
York City time, on , 2001.
. For each $1,000 principal amount of old notes tendered and accepted for
exchange, you will receive, at your election, (1) $303 in cash, up to an
aggregate maximum of $10 million in cash for $33 million in principal amount
of old notes or (2) $757.58 principal amount of our new notes, 34.12 post-
reverse split shares of our common stock and warrants to purchase 22.75
post-reverse split shares of our common stock (at an exercise price of $5.16
per share).
. Up to $10 million in cash will be exchanged for $33 million principal amount
of old notes. If less than all of our outstanding old notes are exchanged,
then the $10 million in cash available will be reduced $303 for every $1,000
principal amount of old notes not exchanged.
. If more than $33 million principal amount of old notes are tendered under
the cash option, every additional $1,000 principal amount of old notes
tendered will be exchanged for the combination of $757.58 principal amount
of new notes, 34.12 post-reverse split shares of our common stock and
warrants to purchase 22.75 post-reverse split shares of our common stock (at
an exercise price of $5.16 per share). We will distribute up to $10 million
in cash so that everyone who tenders old notes under this option will
receive cash, new notes, common stock and warrants in the same proportion as
everyone else who tenders old notes under this option.
. In the aggregate, up to $100 million principal amount of new notes, up to
4,504,595 post-reverse split shares of our common stock and up to 3,003,063
warrants to purchase post-reverse split shares of our common stock (at an
exercise price of $5.16 per share) will be exchanged for $132 million in
principal amount of our old notes.
. If more than $132 million principal amount of old notes are tendered under
the non-cash option, every additional $1,000 principal amount tendered will
be exchanged for $303 in cash. We will distribute the new notes, common
stock and warrants so that everyone who tenders under this option will
receive new notes, common stock, warrants and cash in the same proportion as
everyone else who tenders old notes under this option.
. The new notes will be our general unsecured obligations, will be
subordinated in right of payment to all of our current and future senior
debt and senior to any old notes not exchanged, and will be fully and
unconditionally guaranteed on a senior subordinated basis by our wholly
owned U.S. subsidiaries.
. If you tender your old notes, you will automatically consent to amendments
to the indenture governing the old notes. These amendments remove all of the
material covenants contained in the indenture, except the obligation to pay
principal and interest, including the covenants restricting increasing the
amount of senior debt we and our subsidiaries may incur. The amendments will
apply to the old notes not tendered for exchange.
. This exchange offer and consent solicitation is subject to the following
conditions:
. Holders of old notes must tender a minimum of $132 million in aggregate
principal amount of old notes along with consents to amendments to the
indenture governing the old notes;
(Continued on next page)
(ii)
(Continued from previous page)
. We must receive consent to the exchange offer and consent solicitation
from our senior lenders and the parties to our tax retention operating
lease, and there can be no assurance we will obtain the required
consents;
. We must receive $20 million in cash in our rights offering in exchange for
80% of the to-be-outstanding common stock of the reorganized company;
. We must increase the number of authorized shares of our common stock to
500 million shares by means of an amendment to our certificate of
incorporation and reduce the number of our issued and outstanding shares
by reducing every ten shares into one share through the reverse split; and
. We must receive the approval from the holders of a majority of our
outstanding common shares of:
. the issuance of the new notes, shares of our common stock and warrants
to purchase common stock in the exchange offer and consent
solicitation;
. the issuance to existing stockholders of warrants to purchase an
aggregate of 3,003,363 post reverse split shares of our common stock
(at an exercise price of $5.16 per share);
. the sale of 80% of the to-be-outstanding common stock of the
reorganized company for $20 million in the rights offering;
. the sale of post-reverse split common stock to Lacy Harber in
accordance with his agreement to purchase unsold allotments in the
rights offering; and
. the increase in the number of our authorized shares to 500 million
shares and the reduction of our issued and outstanding shares on a one-
for-ten basis in the reverse split.
If we are unable to consummate this exchange offer and consent solicitation,
we may have to seek bankruptcy protection or commence liquidation or
administration proceedings. In that case, holders of old notes may only receive
repayment of little or none of the principal amount of their old notes.
If the conditions are not satisfied or waived or if we otherwise terminate
the exchange offer and consent solicitation, we will return tendered old notes
to you, without expense to you.
If the conditions of the exchange offer and consent solicitation are
satisfied or waived by us, we will accept for exchange any and all old notes
that are validly tendered and not withdrawn before 5:00 p.m., New York City
time, on , 2001, the expiration date of the exchange offer and consent
solicitation.
Our common stock is listed on the New York Stock Exchange under the symbol
"AVS." However, we are currently subject to review by the NYSE, which may
result in the delisting of our common stock for failure to meet the NYSE's
continued listing requirements. If we continue to fail to meet these
requirements in the future, we may be delisted or we may elect to transfer our
listing to another national securities exchange or quotation system. On
September 26, 2001, our common stock closed at $0.41 per share. The new notes
will not be traded on an exchange or quoted on any automated quotation system.
(iii)
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER AND CONSENT SOLICITATION.. 1
SUMMARY.................................................................. 4
RISK FACTORS............................................................. 19
FORWARD-LOOKING STATEMENTS............................................... 33
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK............................ 35
CAPITALIZATION........................................................... 36
RATIO OF EARNINGS TO FIXED CHARGES....................................... 37
USE OF PROCEEDS.......................................................... 37
SELECTED FINANCIAL DATA ................................................. 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 40
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK.................. 51
BUSINESS................................................................. 52
OUR MANAGEMENT........................................................... 61
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........... 66
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 68
THE EXCHANGE OFFER AND CONSENT SOLICITATION.............................. 69
DESCRIPTION OF NEW NOTES................................................. 88
DESCRIPTION OF OLD NOTES................................................. 113
DESCRIPTION OF OTHER INDEBTEDNESS........................................ 135
DESCRIPTION OF OUR CAPITAL STOCK......................................... 137
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES............................ 140
BOOK-ENTRY SYSTEM--THE DEPOSITORY TRUST COMPANY.......................... 148
LEGAL MATTERS............................................................ 149
EXPERTS.................................................................. 149
WHERE YOU CAN FIND MORE INFORMATION...................................... 149
CONSOLIDATED FINANCIAL STATEMENTS OF AVIATION SALES COMPANY.............. F-1
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.......... P-1
(iv)
QUESTIONS AND ANSWERS ABOUT THE EXCHANGE OFFER AND CONSENT SOLICITATION
Q: What is the proposed transaction?
A: We are offering to exchange either (a) up to $10 million of cash or (b) a
combination of our new notes, common stock and warrants for any and all of
our outstanding 8 1/8% senior subordinated notes due 2008, which we refer to
as the old notes. As a part of the exchange offer and consent solicitation,
we are soliciting consents to amend the indenture under which the old notes
were issued. We will not complete the exchange offer and consent
solicitation if fewer than $132 million in aggregate principal amount of the
old notes are tendered.
Q: Why are we proposing this transaction?
A: We are making the exchange offer and consent solicitation as part of a
strategic plan to reduce and refinance our old notes and provide working
capital to our business and to restructure the capital stock of our company.
The other parts of our strategic plan are a rights offering and a
recapitalization, which we describe later in this prospectus and consent
solicitation.
Q: What will I receive in the exchange offer if I tender my old notes?
A: If you tender your old notes prior to the expiration of the exchange offer,
you will receive, at your election, for each $1,000 principal amount of old
notes (1) $303 in cash or (2) $757.58 principal amount of our new notes,
34.12 shares of our post-reverse split common stock and warrants to purchase
22.75 shares of our post-reverse split common stock (at an exercise price of
$5.16 per share).
Q: Is there a maximum amount of cash or new notes, common stock and warrants
that may be exchanged for old notes?
A: Yes, the cash option is limited to a maximum of $10 million. We will
purchase no more than $33 million principal amount of old notes for cash. If
more than $33 million of old notes are tendered for the cash option, every
additional $1,000 of old notes tendered will be exchanged for the
combination of new notes, common stock and warrants. We will distribute the
$10 million in cash so that everyone who tenders old notes under the cash
option will receive cash, new notes, common stock and warrants in the same
proportion as everyone else who tenders old notes under this limited cash
option.
If less than all the outstanding old notes are exchanged, then the $10
million in cash available for the cash option will be reduced $303 for every
$1000 principal amount of old notes not exchanged.
In the aggregate, up to $100 million principal amount of new notes, up to
4,504,595 shares of our post-reverse stock split common stock and warrants
to purchase up to 3,003,063 shares of our post-reverse stock split common
stock (at an exercise price of $5.16 per share) will be exchanged for $132
million in principal amount of old notes. If more than $132 million
principal amount of old notes are tendered under this option, every
additional $1,000 principal amount tendered will be exchanged for $303 in
cash. We will distribute the new notes, common stock and warrants so that
everyone who tenders under this option will receive new notes, common stock,
warrants and cash in the same proportion as everyone else who tenders old
notes under this option.
Q: May I tender a portion of my old notes?
A: You do not have to tender all of your old notes to participate in the
exchange offer and consent solicitation. You do not have to choose the same
option for all of the old notes that you tender.
Q: May I tender my old notes without consenting to the proposed amendments?
A: No. If you tender your old notes in the exchange offer and consent
solicitation, you will automatically consent to the proposed amendments to
the indenture governing those old notes. Similarly, if you wish to consent
to the proposed amendments, you must tender your old notes.
1
Q: Will my rights as a holder of old notes change if I tender my old notes in
the exchange offer?
A: Yes. Currently, your rights as a holder of old notes are governed by the
indenture under which the old notes were issued. If you exchange your old
notes for a combination of new notes, common stock, and warrants, your
rights as a noteholder with respect to the new notes will be governed by the
indenture under which the new notes will be issued, your rights as a
stockholder will be governed by Delaware law and our certificate of
incorporation and bylaws and your rights as a warrant holder will be
governed by Delaware law and the warrant agreement.
Q: How would the proposed amendments to the indenture affect my rights as a
holder of old notes if I fail to tender?
A: If the indenture is amended, old notes that you do not tender will have a
significantly less restrictive covenant package. We intend to eliminate all
of the material covenants in the indenture, except the obligation to pay
principal and interest. Those covenants, among other things, generally limit
our ability to incur debt, pay certain dividends or similar distributions,
enter into transactions with affiliates, permit a change of control without
offering to repurchase the old notes, and incur liens to secure
indebtedness. In addition, the new notes will be senior to the old notes in
priority of payment.
Q: When will accrued but unpaid interest on my old notes be paid?
A: There will be no separate payment of accrued interest, including the August
15, 2001 payment, on the old notes in this exchange offer and consent
solicitation and no assurance can be given that we will be able to make past
due and/or future interest payments on any outstanding old notes.
Q: If I tender my old notes and consent to the proposed amendments, will I be
able to revoke this decision if I later change my mind?
A: Yes. You may revoke your consent to the proposed amendments and withdraw
your notes at any time on or before the expiration of the exchange offer. By
withdrawing your old notes, you lose your right to receive the exchange
offer consideration.
Q: When does the exchange offer expire?
A: Unless we extend the exchange offer, it will expire at 5:00 p.m., New York
City time, on , 2001.
Q: What are the terms of the new notes?
A: The principal amount of the new notes is $100 million (valued at $ on our
financial statements). The new notes bear interest at 8% per annum. We may
pay the interest due on the new notes in cash or in additional paid-in-kind
new notes, at our option. The new notes rank in right of payment after our
senior debt and before the old notes that remain outstanding after the
completion of this exchange offer and consent solicitation. We may redeem
the new notes by paying, in cash, the following percentage of the sum of the
principal, interest previously paid in kind through the issuance of new
notes and accrued but unpaid interest due through the date of redemption:
If the new notes are redeemed at any time during: The redemption percentage will be:
------------------------------------------------- ----------------------------------
2002 70%
2003 72.5%
2004 73%
2005 75.625%
2006 77.5%
2
Additionally, if we redeem the new notes, in addition to making the cash
payment described above, we will issue to the holders of the new notes
additional shares of our post-reverse split common stock as follows: (i) if
we redeem the new notes in 2002 and 2003, we will issue an aggregate of
4,504,545 post-reverse split shares, and (ii) if we redeem the new notes in
2004, 2005 or 2006, we will issue an aggregate of 3,003,063 post-reverse
split shares.
If we do not redeem the new notes prior to maturity, the new notes, plus any
accrued but unpaid interest thereon, will automatically convert at maturity
into an aggregate of 270,275,706 post-reverse split shares of our common
stock.
Q: Who can help answer my questions?
A: If you have any questions about the exchange offer or consent solicitation
or if you need additional copies of this prospectus and consent
solicitation, you should either contact us at:
You may contact the Company at: or you may contact the Dealer Manager at:
Aviation Sales Company Houlihan Lokey Howard & Zukin Capital
1623 Radar Road 685 Third Avenue, 15th Floor
Greensboro, North Carolina 27410 New York, New York 10017-4024
Attention: Chief Financial Officer Attention:
Telephone: (336) 668-4410 (Ext 3004) Telephone: (212) 497-4100
or you may contact the Exchange Agent at:
[Exchange Agent address and phone number]
3
SUMMARY
The following summary highlights some information from this prospectus and
consent solicitation. It may not contain all of the information that may be
important to you. To understand this exchange offer and consent solicitation
fully and for a more complete description of the legal terms of this exchange
offer and consent solicitation, you should read carefully this entire
prospectus and the other documents to which we have referred you, including the
consent and letter of transmittal accompanying this prospectus and consent
solicitation.
Unless otherwise indicated, "Aviation Sales," "we," "us," and "our" refer to
Aviation Sales Company and its subsidiaries. Also, in this prospectus we
sometimes refer to the guarantees of the new notes as the "guarantees" and to
our subsidiaries that guarantee the new notes as the "subsidiary guarantors."
About Aviation Sales Company
General
We are a leading provider of aviation maintenance, repair and overhaul
("MR&O") services. We believe we are the largest independent provider of heavy
maintenance services for aircraft in North America. We sell and provide
aircraft maintenance, repair and overhaul services to commercial passenger
airlines and air cargo carriers throughout the world.
We offer maintenance and repair services through our eight repair stations
licensed by the Federal Aviation Administration. These services include
maintenance, repair and modification services for aircraft, and repair and
overhaul services on flight control surfaces, aircraft interiors and Pratt &
Whitney JT8D engines. In addition, we also provide modification services for
the conversion of passenger aircraft to freighter configuration as well as
aircraft engineering services.
Our strategy is to be the vendor of choice to our customers, providing total
aircraft maintenance solutions to meet our customers' MR&O requirements. The
services we offer allow our customers to reduce their costs by outsourcing some
or all of their MR&O functions.
Our principal executive offices are at 623 Radar Road, Greensboro, North
Carolina 27410, and our telephone number is (336) 668-4410 (Ext. 3004).
Recent developments
In May 2001, we completed the sale of the assets of Caribe Aviation, one of
our component repair operations. The gross purchase price was $22.5 million, of
which $21.8 million was received in cash at the closing and the balance will be
received within one year, subject to post closing adjustments. We used $10.0
million of the proceeds from the sale to repay our revolving credit facility
and $5.5 million to repay borrowings under our senior term loans. The balance,
net of expenses, was used for working capital. In addition, the purchaser
acquired the real estate and facility on which the Caribe operation is located
for an aggregate purchase price of $8.5 million. The proceeds from the sale of
the real estate and facility were used to reduce our outstanding tax retention
operating lease financing.
In August 2001, we entered into an agreement with the holders of 73.02% of
our old notes to restructure those notes. Under the agreement, the holders of
more than a majority of the outstanding old notes have agreed to exchange their
old notes in an exchange offer and consent solicitation and to waive the
default arising as a result of the failure to pay the interest payment due
August 15, 2001. Also, our senior lenders have agreed to forbear until
December 31, 2001 on the default in the senior loan agreements resulting from
the failure to make the old note interest payment.
4
Rights offering and future issuance of common stock
As part of the restructuring, we intend to conduct an offering of rights to
purchase 24,024,507 post-reverse split shares of our common stock to all
existing stockholders to raise $20 million. Lacy Harber, who is a beneficial
holder of approximately 29.4% of our common stock and our largest stockholder,
has agreed to purchase any unsold allotments in the rights offering. Investors
who purchase the $20 million of shares in the reorganized company will receive
80% of our to-be-outstanding common stock. Our existing stockholders will own
5% of our reorganized company and will also be granted five-year warrants to
purchase an additional 3,003,063 post-reverse split shares of our common stock
an exercise price of $5.16 per share. Additionally, the new note holders will
own 15% of the reorganized company and will be granted five-year warrants to
purchase an additional 3,003,063 post-reverse split shares of our common stock
an exercise price of $5.16 per share. Further, new note holders may in the
future receive additional shares of our post-reverse split common stock upon
redemption of the new notes and upon maturity if not previously redeemed, the
new notes (inclusive of all accrued but unpaid interest) will automatically
convert into 270,275,706 shares of our post-reverse split common stock.
The rights offering, including the potential sale of up to 80% of our to-be-
outstanding common stock to one of our principal stockholders if he is called
upon to purchase unsold allotments in the rights offering, the exchange offer
and consent solicitation, the recapitalization and the reverse split, will
require approval of a majority of our stockholders. Completion of the rights
offering will be subject to the requirement that the exchange offer and consent
solicitation be consummated at the same time and to obtaining the consent to
the exchange offer and consent solicitation and the rights offering from our
senior lenders and the parties to our tax retention operating lease. Although
there can be no assurance, the rights offering and restructuring are expected
to close by the end of 2001.
We have filed a registration statement relating to the rights offering.
Recapitalization
We intend to change our capitalization (the "recapitalization") by
increasing the number of our authorized shares of common stock from 30 million
shares to 500 million shares and by reducing the number of our issued and
outstanding shares of common stock by converting every ten shares of our issued
and outstanding common stock into one share. The recapitalization is expected
to become effective upon the closing of the exchange offer and consent
solicitation.
Purpose of this exchange offer and consent solicitation
We are making this exchange offer and consent solicitation as part of a
strategic plan to reduce and refinance our existing indebtedness and to provide
working capital for our business. The other parts of our plan are the rights
offering and the recapitalization, including the reverse split.
Background of the exchange offer and the consent solicitation
We are currently operating with a very high level of indebtedness. Our
obligation to make regular payments of interest, fees and principal to service
our indebtedness has had, and continues to have, a significant impact on our
financial results and our available working capital. The effect of these
obligations on our financial performance has been exacerbated in recent periods
by a decline in our cash flow from operations resulting from the difficult
business conditions in the aviation services industry that we, and our
competitors, are currently experiencing.
Our goal is to provide for the financing of our business through this
exchange offer and consent solicitation and through the rights offering.
We intend to close the exchange offer and consent solicitation and the
rights offering by December 31, 2001, but we cannot assure you that we will do
so.
5
The four major items of our current indebtedness are our senior revolving
credit facility, our $15.5 million senior term loan, our $10 million senior
term loan (collectively the "senior debt") and our old notes. Amounts due under
our senior revolving credit facility and the $15.5 million senior term loan, of
which $12.0 million is currently outstanding, are due for repayment in full in
July 2002, and the $10 million senior term loan is due for repayment on August
14, 2002. The $15.5 million senior term loan is to be paid down in monthly
payments of $500,000 starting in January 2002, with the balance due in July
2002. The principal balance of the old notes is due for repayment on February
15, 2008.
As of September 6, 2001, $4.1 million was outstanding under the senior
revolving credit facility, $2.7 million was available for borrowing under the
senior revolving credit facility (based on the applicable borrowing base
formula) and outstanding letters of credit aggregated $29.6 million. In
addition, we are obligated to make monthly lease payments under our tax
retention operating lease for our former corporate headquarters. We are
required to make the monthly lease payments under the tax retention operating
lease until its termination in December 2003. The old notes rank behind our
senior revolving credit facility, senior term loans and tax retention operating
lease obligations in right of payment. As of June 30, 2001, we had $195.3
million in aggregate indebtedness, of which $26.9 million was senior debt
(including $22.0 million of senior term loans).
We do not currently have, nor do we expect to have, sufficient liquidity to
repay in full our senior revolving credit facility, senior term loans, tax
retention operating lease obligations and the old notes. We were also without
sufficient working capital to pay the interest payment on the old notes that
was due on August 15, 2001. Based on our recent history, expectations and the
problems facing our industry generally, we do not anticipate that we will
generate sufficient cash flow from operations to continue to make principal and
interest payments on our senior debt and the old notes.
If we are unable to consummate this exchange offer and consent solicitation,
we may have to seek bankruptcy protection or commence liquidation or
administration proceedings. In that case, owners of old notes may only receive
repayment of little or none of the principal amount of their old notes.
Interests of our officers, directors and principal stockholders in the exchange
offer
None of our officers, directors or principal stockholders hold old notes
except for Lacy Harber, who beneficially owns approximately 29.4% of our
currently outstanding pre-reverse split common stock and approximately 7.1%, or
$11,750,000 aggregate principal amount, of our old notes. Pursuant to the
agreement with our old note holders, Mr. Harber has agreed to exchange all of
his old notes in the exchange offer and consent solicitation. In addition, Mr.
Harber has agreed to purchase unsold allotments in the rights offering. Mr.
Harber will beneficially own approximately 82.6% of our outstanding common
stock if he purchases all of the shares available in our rights offering and
elects the non-cash option in the exchange offer and consent solicitation with
respect to all of his old notes and as a result exchanges all of his old notes
for new notes, shares and warrants. Roy T. Rimmer, Jr., our Chairman and Chief
Executive Officer, holds a proxy to vote the shares of common stock owned by
Mr. Harber and serves on our board as a representative of Mr. Harber.
Pursuant to the agreement with our old note holders, we may issue options or
warrants to purchase up to 8% of our reorganized company to our officers,
directors and employees.
6
Summary Historical and Unaudited Pro Forma Condensed Consolidated Financial
Data
The following summary historical financial data for each of the fiscal years
1998 through 2000 has been derived from our Consolidated Financial Statements,
which have been audited by Arthur Andersen LLP, independent certified public
accountants, and are included elsewhere herein. The following summary
historical unaudited financial data for the six months ended June 30, 2000 and
2001 and as of June 31, 2001, has been derived from our unaudited historical
financial statements included elsewhere herein which, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary for a fair and consistent presentation of such data.
The following unaudited condensed consolidated pro forma financial data
present: our pro forma results of operations for the year ended December 31,
2000 and the six months ended June 30, 2001 and our pro forma financial
position as of June 30, 2001, as if the exchange offer, rights offering and
reverse split had been consummated as of the beginning of the periods for
results of operations data and as of June 30, 2001 for financial position data.
Neither the summary historical consolidated financial data nor the summary pro
forma condensed consolidated financial data are necessarily indicative of
either the future results of operations or the results of operations that would
have occurred if the events described had been consummated on the indicated
dates. The following summary historical and pro forma condensed consolidated
financial data should be read in conjunction with "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Unaudited Pro Forma Condensed Consolidated Financial Statements,"
and the audited and unaudited historical financial statements of Aviation
Sales, which are included elsewhere in this prospectus.
Years Ended December 31,
-----------------------------------------
2000
1998 1999 2000 Pro Forma
-------- -------- --------- -----------
(Unaudited)
STATEMENTS OF OPERATIONS DATA
(Dollars in Thousands):
Operating revenues.................. $184,448 $371,753 $ 338,077
Gross profit (loss)................. 42,879 63,809 (15,254)
Operating expenses.................. 17,721 41,774 74,580
Income (loss) from operations....... 25,158 22,035 (89,834)
Income (loss) from continuing
operations......................... 8,534 2,998 (115,873)
Discontinued operations, net of
taxes.............................. 16,959 (24,721) (23,432)
Loss on disposal of discontinued
operations, net of taxes........... -- -- (72,325)
Net income (loss)................... 25,493 (21,723) (211,630)
DILUTED PER SHARE DATA:
Income (loss) from continuing
operations......................... $ 0.68 $ 0.21 $ (7.72)
Income (loss) from discontinued
operations......................... 1.34 (1.77) (6.37)
Net income (loss)................... 2.02 (1.56) (14.09)
OTHER DATA:
Ratio of earnings to fixed charges..
7
Six Months Ended June 30,
(Unaudited)
------------------------------------
2001
2000 2001 Pro Forma
------------ ----------- -----------
STATEMENTS OF OPERATIONS DATA (Dollars in
Thousands):
Operating revenues....................... $209,341 $ 152,462
Gross profit (loss)...................... 20,369 (80)
Operating expenses....................... 22,777 29,217
Loss from operations..................... (2,408) (29,297)
Loss from continuing operations.......... (16,743) (64,943)
Discontinued operations, net of taxes.... (6,920) --
Loss on disposal of discontinued
operations, net of taxes................ (9,218) (4,342)
Net income (loss)........................ (32,881) (69,285)
DILUTED PER SHARE DATA:
Loss from continuing operations.......... $ (1.12) $ (4.33)
Loss from discontinued operations........ (1.07) (0.28)
Extraordinary item....................... -- --
Net income (loss)........................ (2.19) (4.61)
OTHER DATA:
Ratio of earnings to fixed charges.......
June 30,
December 31, June 30, 2001
2000 2001 Pro Forma
------------ ----------- -----------
(Unaudited) (Unaudited)
BALANCE SHEET DATA (Dollars in
Thousands):
Working capital.......................... $ 24,673 $(152,732)
Total assets............................. 300,611 199,647
Total debt............................... 220,861 195,295
Stockholders' equity (deficit)........... 6,892 (59,455)
8
The Exchange Offer and Consent Solicitation
The Old Notes............... We are making the exchange offer with respect to
the entire $165 million aggregate principal
amount of our old 8 1/8% senior subordinated
notes due 2008.
The Exchange Offer..........
We are offering (1) $303 in cash for each $1,000
principal amount of outstanding old notes, up to
an aggregate maximum of $10 million in cash for
$33 million in principal amount of old notes or
(2) $757.58 principal amount of 8% senior
subordinated convertible PIK notes due 2006,
34.12 post-reverse split shares of our common
stock and warrants to purchase 22.75 post-reverse
split shares of our common stock (at an exercise
price of $5.16 per share) for each $1,000
principal amount of outstanding old notes. If
less than all of the outstanding old notes are
exchanged, then the $10 million in cash available
will be reduced $303 for every $1,000 principal
amount of old notes not exchanged. The terms of
the new notes are described below.
Our board of directors makes no recommendation to
holders of the old notes whether to tender their
old notes in the exchange offer and consent
solicitation or which election each holder should
make. Our board of directors is not making a
recommendation regarding the exchange offer and
consent solicitation because holders of the old
notes must make their own decision whether to
tender their old notes in the exchange offer and
consent solicitation and as to which election to
make. We have not authorized anyone to make a
recommendation on our behalf regarding the
exchange offer and consent solicitation.
Oversubscription and Up to $10 million in cash will be exchanged for
Proration.................. $33 million principal amount of old notes. If
more than $33 million principal amount of old
notes is tendered for cash, each additional
$1,000 principal amount of old notes tendered
will be exchanged for the combination of $757.58
of principal amount of new notes, 34.12 post-
reverse split shares of our common stock and
warrants to purchase 22.75 post-reverse split
shares of our common stock (at an exercise price
of $5.16 per share). We will distribute the $10
million in cash so that everyone who tenders old
notes under this option will receive cash, new
notes, common stock and warrants in the same
proportion as everyone else who tenders old notes
under this option.
In the aggregate, up to $100 million principal
amount of new notes, up to 4,504,595 shares of
our post-reverse split common stock and warrants
to purchase up to 3,003,063 shares of our post-
reverse split common stock (at an exercise price
of $5.16 per share) will be exchanged for $132
million in principal amount of old notes. If more
than $132 million in principal amount are
tendered for new notes, common stock and
warrants, every additional $1,000 principal
amount tendered will be exchanged for $303 in
cash. We will distribute the new notes, common
stock and warrants so that everyone who tenders
under this option will receive new notes,
9
common stock, warrants and cash in the same
proportion as everyone else who tenders old notes
under this option.
The Solicitation............ We are also soliciting consents to the proposed
amendments to the indenture under which the old
notes were issued. If you tender old notes in the
exchange offer on or before the expiration of the
exchange offer, you will automatically consent to
the proposed amendments to that indenture.
The Amendments to the Old
Notes Indenture............
If we receive the requisite tenders of old notes,
all of the material restrictive covenants in the
indenture relating to the old notes will be
eliminated from the indenture. These covenants,
among other things, generally limit our ability
to:
. consolidate with or merge with or into any
other person or convey, transfer or lease
substantially all of our assets;
. incur debt;
. issue debt junior to our senior indebtedness
but senior to the old notes;
. make, declare or pay certain dividends or
similar distributions, or permit our
subsidiaries to do the same;
. enter into transactions with affiliates, or
permit our subsidiaries to do the same;
. permit our subsidiaries to issue preferred
stock;
. permit a change of control without offering to
repurchase the old notes;
. sell assets without distributing the proceeds
to holders of the old notes;
. restrict our subsidiaries from making
distributions to us;
. transfer assets to a subsidiary without
obtaining a guarantee from such subsidiary;
. incur liens to secure indebtedness or permit
subsidiaries to do the same; and
. engage in new lines of business or permit
subsidiaries to do the same.
Requisite Consents.......... The aggregate outstanding principal amount of old
notes is $165 million. Under the indenture
governing the old notes, approval of the proposed
amendments to the indenture notes requires the
consent of the holders of a majority in aggregate
principal amount of old notes outstanding. As a
condition of the exchange offer and consent
solicitation, we are requiring that holders of
the old notes tender a minimum of $132 million in
aggregate principal amount of old notes along
with consents. Accordingly, we will require the
consent of the holders of the old notes in an
aggregate principal amount of at least $132
million to amend the indenture governing the old
notes.
10
Effectiveness of Proposed
Amendments................. We and the trustee for the old notes will execute
the supplemental indenture providing for the
proposed amendments to the indenture governing
the old notes promptly following the expiration
of the exchange offer and consent solicitation if
at least $132 million in aggregate principal
amount of the old notes has been tendered and the
requisite consents received. The proposed
amendments, however, will not become operative
until we have accepted for exchange all notes
validly tendered and not withdrawn in the
exchange offer and consent solicitation. If the
proposed amendments become operative, all persons
who continue to hold old notes thereafter will be
subject to the provisions of the indenture as
amended by the proposed amendments.
Accrued Interest............ The last payment of interest on the old notes was
made February 15, 2001. This payment covered
accrued interest at the rate of 8 1/8% from
August 15, 2000 through February 14, 2001. There
will be no separate payment of accrued interest,
including the August 15, 2001 payment, on the old
notes in this exchange offer and consent
solicitation.
Source of Funds.............
We anticipate that we will obtain the cash
portion of this exchange offer and consent
solicitation from the proceeds of the rights
offering.
Expiration of the Exchange
Offer and Consent 5:00 p.m., New York City time, on , 2001,
Solicitation............... unless extended. The supplemental indenture will
be executed promptly following the expiration of
the exchange offer, assuming that a minimum of
$132 million in aggregate principal amount of the
old notes have been tendered for exchange and,
therefore, the requisite consents have been
received. If the terms of the exchange offer are
changed, the exchange offer will remain open for
an additional 5-10 business days, depending on
the nature of the change.
Exchange Date............... The exchange of old notes for cash or a
combination of new notes, common stock and
warrants will be made promptly following the
expiration of the exchange offer.
Conditions to the Exchange
Offer and Consent This exchange offer and consent solicitation is
Solicitation............... subject to the following conditions:
. holders of old notes must tender a minimum of
$132 million in aggregate principal amount of
old notes along with consents to amendments to
the indenture governing the old notes;
. our senior bank lenders and the parties to our
tax retention operating lease must consent to
this exchange offer and consent solicitation;
. we must receive $20 million in cash in the
rights offering in exchange for 80% of the to-
be-outstanding common stock of the reorganized
company;
11
. we must increase the number of authorized
shares to 500 million shares of our common
stock by means of an amendment to our
certificate of incorporation and reduce the
number of our issued and outstanding shares by
reducing every ten shares into one share
through the reverse stock split;
. we must receive the approval of the holders of
a majority of our outstanding common stock for:
. the issuance of the new notes, shares of
our common stock and warrants to purchase
common stock in the exchange offer and
consent solicitation;
. the issuance to existing stockholders of
warrants to purchase an aggregate of
3,003,363 post-reverse split shares of our
common stock (at an exercise price of $5.16
per share);
. the sale of 80% of the to-be-outstanding
common stock of the reorganized company in
the rights offering for $20 million;
. the sale of post-reverse split common stock
to Lacy Harber in accordance with his
agreement to purchase unsold allotments in
the rights offering; and
. the increase in the number of our
authorized shares to 500 million shares
and the reduction of our issued and
outstanding shares on a ten-for-one basis
in a reverse split;
. this exchange offer and consent solicitation
must comply with applicable laws and
applicable interpretations of the staff of the
SEC;
. this exchange offer and consent solicitation
must comply with all applicable state
securities or "blue sky" laws;
. no litigation may have been instituted or
threatened or law enacted that could prohibit
this exchange offer and consent solicitation,
materially adversely affect our business, or
materially impair the benefits to us of this
exchange offer and consent solicitation;
. no event may have occurred affecting our
business that would reasonably be expected to
prohibit, prevent or significantly delay this
exchange offer and consent solicitation or
materially impair the benefits of this
exchange offer and consent solicitation;
. the trustee of the old notes may not have
objected to this exchange offer and consent
solicitation; and
. no tender or exchange offer for our equity
securities or any business combination
involving us may have been proposed or
announced or have occurred.
Subject to satisfaction or waiver of the
conditions, we will accept for exchange any and
all old notes that are validly tendered and not
withdrawn before 5:00 p.m., New York City time,
on
12
, 2001, the expiration date of this
exchange offer and consent solicitation. However,
we reserve the right to:
. delay the acceptance of the old notes for
exchange;
. terminate this exchange offer and consent
solicitation;
. extend the expiration date and retain all old
notes that have been tendered, subject to the
right of owners of old notes to withdraw their
tendered old notes;
. refuse to accept the old notes and return all
old notes that have been tendered to us; or
. waive any condition or otherwise amend the
terms of this exchange offer and consent
solicitation in any respect.
We will not waive or amend any condition after
the expiration date of this exchange offer and
consent solicitation.
Procedures for Tendering
Old Notes and Delivering If you want to tender your old notes in the
Consents................... exchange offer and deliver consents pursuant to
the consent solicitation, you should either:
. If you hold physical certificates evidencing
your old notes, complete and sign the enclosed
consent and letter of transmittal (or a
manually signed facsimile thereof) in
accordance with the instructions in that
document, have your signature guaranteed if
required by Instruction 1 of the consent and
letter of transmittal, and send or deliver your
manually signed consent and letter of
transmittal, together with the certificates
evidencing the notes being tendered and any
other required documents, to the exchange
agent; or
. If you hold your old notes in book-entry form,
request your broker, dealer, commercial bank,
trust company or other nominee to effect the
transaction for you.
If you own old notes that are registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee, you must contact that
broker, dealer, commercial bank, trust company or
other nominee if you desire to tender your notes
and deliver consents.
If you are tendering your notes by book-entry
transfer to the exchange agent's account at The
Depository Trust Company, you can execute the
tender through DTC's Automated Tender Offer
Program, for which the transaction will be
eligible. DTC participants that are accepting the
exchange offer must transmit their acceptance to
DTC, which will verify the acceptance and execute
a book-entry delivery to the exchange agent's
account at DTC. DTC will then send an agent's
message to the exchange
13
agent for its acceptance. Delivery of the agent's
message by DTC will satisfy the terms of the
exchange offer and consent solicitation as to the
tender of notes and the delivery of consents.
If you desire to tender old notes in the exchange
offer and consent solicitation and cannot comply
with the procedures for tender or delivery on a
timely basis or if your notes are not immediately
available, you may tender your notes using the
procedures for guaranteed delivery described in
this prospectus and consent solicitation.
Revocation of Consents...... You may revoke your consents at any time prior to
the expiration of the consent solicitation, but
not thereafter. If you validly revoke your
consent, it will render your tender of notes
defective, and, you will not be eligible to
receive the exchange offer consideration for your
old notes.
Withdrawal Rights........... You may withdraw your tender of old notes at any
time before the expiration of the exchange offer
and consent solicitation but the exchange offer
consideration will not be payable for any notes
so withdrawn. If you withdraw your tendered
notes, it will be deemed a revocation of the
related consent.
Untendered Old Notes........ If you do not tender your old notes and they are
not exchanged in the exchange offer, they will
remain outstanding. If the requisite tenders and
the related consents to amend the indenture are
received and the proposed amendments become
operative under the supplemental indenture,
untendered notes will no longer have the benefits
of the restrictive covenants that will be
eliminated from the indenture by the proposed
amendments. In addition, as a result of the
consummation of the exchange offer, the aggregate
principal amount of the old notes that are
outstanding will be significantly reduced, which
may adversely affect the liquidity of and,
consequently, the market price for the old notes,
if any, that remain outstanding after the
completion of the exchange offer.
Acceptance of Tendered Old
Notes and Exchange; Upon the terms of the exchange offer and consent
Acceptance of Consents..... solicitation and upon satisfaction or our waiver
of the conditions to the exchange offer and
consent solicitation, we will accept for exchange
old notes validly tendered on or before the
expiration of the exchange offer. Only if you
validly tender your notes, and thereby consent to
the proposed amendments, on or before the
expiration of the exchange offer will you receive
the exchange consideration. We will make payment
of the exchange consideration for notes validly
tendered and accepted for payment, by deposit of
the appropriate amount of cash or number of
shares of our common stock, warrants, and
appropriate amounts of new notes, as applicable,
with the exchange agent who will act as agent for
the tendering and consenting holders of old notes
for the purpose of the exchange.
14
We expect the exchange to be made on the exchange
date described in this prospectus and consent
solicitation promptly following our acceptance of
the old notes in the exchange offer.
Use of Proceeds.............
Our new notes, common stock and warrants are
being issued in exchange for your old notes. All
old notes accepted by us in the exchange offer
will be cancelled. We will not receive any cash
proceeds from the issuance of the new notes,
common stock and warrants offered in this
exchange offer and consent solicitation. We will
receive $20 million from the proceeds of the
rights offering which will be used to pay the
cash portion of this exchange offer and consent
solicitation (up to $10.0 million), expenses
relating to this exchange offer and consent
solicitation and the rights offering, (estimated
to be $4.0 million) and for working capital
purposes.
Federal Income Tax You are referred to the discussion about the
Considerations............. federal income tax consequences of the exchange
offer commencing on page 138. Tax matters are
very complicated and the tax consequences of the
exchange offer to you will depend on the facts of
your own situation. You should consult your own
tax advisor for a full understanding of the tax
consequences to you of the exchange offer.
Risk Factors................
Holders of the old notes should consider the risk
factors relevant to the exchange offer and
consent solicitation. See "Risk Factors."
We are not making this offer to, and we will not
accept tenders from, holders of old notes in any
jurisdiction in which this exchange offer and
consent solicitation or the acceptance of notes
would not comply with applicable securities or
"blue sky" laws of that jurisdiction.
"Blue Sky" Compliance.......
No Appraisal Rights......... You will not have any right to dissent and
receive an appraisal of your old notes, under
either the indenture or applicable law, in
connection with the exchange offer and consent
solicitation.
Dealer Manager..............
Houlihan Lokey Howard & Zukin Capital is the
dealer manager for this exchange offer and
consent solicitation. Its address and telephone
numbers are located in the section "Questions and
Answers About The Exchange Offer and Consent
Solicitation."
Exchange Agent.............. is the exchange agent for this exchange
offer and consent solicitation. Its address and
telephone numbers are located in the section
"Questions and Answers About The Exchange Offer
and Consent Solicitation."
Fees and Expenses........... We will bear the expenses of soliciting tenders
for the exchange offer and consents for the
consent solicitation.
15
Terms of the New Notes
New Notes Offered...........
Up to $100 million in aggregate principal amount
of 8% senior subordinated convertible PIK notes
due 2006.
Issuer...................... Aviation Sales Company
Trustee.....................
Maturity.................... December 31, 2006
Guarantees.................. Triad International Maintenance Corporation and
our other wholly owned United States subsidiaries
will fully and unconditionally and jointly and
severally guarantee, on a senior subordinated
basis, the new notes.
Ranking..................... The new notes will rank in right of payment
behind our senior revolving credit facility, our
$10 million and $12.0 million senior term loans,
our tax retention operating lease obligations and
all of our other existing and future senior debt.
The new notes will rank in right of payment ahead
of any remaining old notes. If we issue
additional subordinated debt in the future, the
new notes will rank in right of payment ahead of,
or equal to, that debt. The new notes will be
unsecured. Because the new notes are
subordinated, in the event of our bankruptcy,
liquidation or dissolution, owners of the new
notes will not be entitled to receive any payment
until the holders of our senior debt and the
lessor of our tax retention operating lease have
been paid in full.
Assuming we completed our overall restructuring
plan, including the exchange of all outstanding
old notes in the exchange offer, on June 30,
2001, upon the closing of this exchange offer and
consent solicitation the new notes would have
been subordinated to approximately $81.7 million
of senior debt.
The terms of the new notes impose limitations on
the amount of additional new indebtedness that we
can incur. The terms of the new notes also
prevent us from assuming any new indebtedness
which results in right of payment behind our
senior debt but ahead of the new notes.
The guarantees of the new notes will rank junior
in right of payment to all of the existing and
future senior debt of the subsidiary guarantors
and their obligations under the tax retention
operating lease.
The guarantees will rank senior or equal to any
of the existing and future senior subordinated
indebtedness of the subsidiary guarantors and
rank senior in right of payment to all other of
the existing and future subordinated obligations
of the subsidiary guarantors.
Interest Payments........... Interest on the new notes will accrue at a rate
of 8% per annum and will be paid on each and
, beginning , to holders of record on
each and . Interest on the new notes will
be paid either in cash or will be
16
paid-in-kind through the issuance of additional
new notes, at our option.
Optional Redemption......... We may redeem the new notes at any time, and from
time to time, after January 1, 2002. We may
redeem all or part of the new notes at the
redemption prices, which are based upon
percentages of the sum of (a) principal amount
and (b) accrued and unpaid interest thereon
(including interest previously paid-in-kind
through the issuance of additional new notes) to
the applicable redemption date, through the
payment of cash and the issuance of additional
shares of post-reverse split common stock. The
cash redemption percentages are 70% in 2002,
72.5% in 2003, 73% in 2004, 75.625% in 2005 and
77.5% in 2006. Additionally, if the new notes are
redeemed in 2002 and 2003, we will issue an
aggregate of 4,504,595 shares of our post-reverse
split common stock (ratably) to the holders of
the new notes as part of the redemption price,
and if the new notes are redeemed in 2004, 2005
or 2006 (prior to maturity), we will issue an
aggregate of 3,003,063 shares of our post-reverse
split common stock (ratably) to the holders of
the new notes as part of the redemption price.
For example, the redemption prices are expressed
below as the amount of cash payable (ratably) to
the holders of the new notes if the new notes are
redeemed (assuming all interest has previously
been paid-in-kind and including interest accrued
to the stated redemption date) and the number of
shares of our post-reverse split common stock
issuable (ratably) to the holders of our new
notes if the redemption had occurred on the date
indicated:
Post-Reverse Split
Aggregate Number of Shares
Redemption Date Cash of Common Stock
December 31, Redemption Price to be Issued
---------------- ---------------- ------------------
2002.................... $ 75,700,000 4,504,595
2003.................... $ 84,800,000 4,504,595
2004.................... $ 92,400,000 3,003,063
2005.................... $103,525,000 3,003,063
2006 immediately prior
to maturity............ $114,700,000 3,003,063
Automatic Conversion at
Maturity................. At maturity, the new notes, (including new notes
previously issued as paid-in-kind interest and
accrued but unpaid interest), will automatically
convert into an aggregate of 270,275,706 post-
reverse split shares of our common stock.
Put Right on Change of
Control.................... Upon a change of control, owners of the new notes
may require us to purchase their new notes at a
price equal to the redemption price which we
would be obligated to pay if we redeemed the new
notes on the date of such change of control.
Put Right on Asset Sale..... Upon the occurrence of an applicable asset sale,
owners of the new notes may, under certain
circumstances, require us to purchase their
17
new notes at a price equal to the redemption
price which we would be obligated to pay if we
redeemed the new notes on the date of such
applicable asset sale. Such repurchase, if
required, would only be with the excess proceeds
of such asset sale that we do not use to repay
indebtedness senior to the new notes or to
acquire replacement assets.
Covenants................... The new notes will include limitations on our
ability, and certain of our subsidiaries'
ability, to:
. incur additional senior indebtedness;
. provide guarantees;
. create liens;
. pay dividends on stock or repurchase stock;
. make investments;
. engage in transactions with our affiliates;
. merge or consolidate; and
. transfer or sell substantially all of our
assets.
Events of Default........... The following are events of default under the
indenture governing the new notes:
. our failure to pay interest when due if the
failure continues for 30 days;
. our failure to pay the purchase price of the
new notes on the exercise of the rights which
apply following a change of control or an
asset sale;
. our failure to perform any other covenant for
60 days after written notice;
. our failure to comply with limitations on
mergers, consolidations and sales of assets;
. if we or our subsidiaries default on any
indebtedness which in the aggregate exceeds
$10 million;
. the rendering of a final judgment against us
or any of our subsidiaries in excess of $10
million and such judgment remains unpaid for
over 60 days;
. some events of bankruptcy, insolvency or
reorganization; or
. any subsidiary guarantee becomes unenforceable
or invalid or any subsidiary guarantor denies
its obligations under its guarantee.
Warrants....................
Each warrant entitles the holder thereof to
purchase one share of our post-reverse split
common stock at an exercise price of $5.16 per
share during the five year period commencing on
the date of the exchange. We may redeem all, but
not less than all, of the warrants at a
redemption price of $0.001 per warrant if our
post-reverse split common stock trades at more
than $6.71 per share for 20 consecutive trading
days at any time during the five-year exercise
period. The warrants will trade with the new
notes until , at which time the warrants will
trade separately.
18
RISK FACTORS
By exchanging your old notes, you will be choosing to invest in the new
notes and in our common stock. If you do not participate in the exchange offer
and consent solicitation, you will continue to hold old notes. An investment in
the new notes or your continued holding of the old notes involves a high degree
of risk. In addition to the other information contained in this prospectus and
consent solicitation, you should carefully consider the following risk factors
in deciding whether to tender your old notes in the exchange offer and consent
solicitation.
Risks relating to Aviation Sales Company
Risks associated with our business and financial condition
We have substantial debt that we may be unable to service.
We currently have significant outstanding indebtedness, and subsequent to
the exchange offer, we will continue to be significantly leveraged. As of June
30, 2001 we had outstanding indebtedness of $195.3 million, of which $26.9
million was senior indebtedness and $168.4 million was other indebtedness. In
addition, we had $29.6 million of letters of credit outstanding under our
senior revolving credit facility. Upon the completion of the exchange offer
(assuming full participation), we will have outstanding our senior indebtedness
and up to $100 million in aggregate principal amount of new notes (valued on
our financial statements at $ ). The degree to which we are leveraged could
have important consequences to the holders of the new notes or holders of
common stock obtained upon the exercise of the warrants, including:
. our vulnerability to adverse general economic and industry conditions;
. our ability to obtain additional financing for future working capital
expenditures, general corporate or other purposes;
. the dedication of a portion of our cash flow from operations to the
payment of principal and interest on indebtedness, thereby reducing the
funds available for operations.
In addition, subject to the limitations set forth in the indenture for the
new notes, we and our subsidiaries may incur substantial amounts of additional
indebtedness, much of which is expected to be senior indebtedness. As of June
30, 2001, we had availability under our senior revolving credit facility of
$3.9 million. Our senior credit facilities are secured by substantially all of
our assets.
Our auditors have included a going concern modification in their audit
report regarding our 2000 financial statements.
Our independent auditors' report regarding our 2000 financial statements
contains an explanatory paragraph stating that there is a substantial doubt
about our ability to continue as a going concern because we incurred net losses
for the years ended December 31, 1999 and 2000 and we required cash to fund our
operating activities for each of the three years ended December 31, 2000.
We were not able to make the August 2001 interest payment due on the old
notes and we may not be able to repay or refinance the principal amount of our
old notes at their maturity date.
We did not have sufficient available liquid resources to pay the August 2001
interest payment due on the old notes. As a result of our failure to make the
August 2001 interest payment, we are in breach of the terms of the indenture.
We do not currently have sufficient available liquid resources to repay the
principal balance of
19
the old notes at maturity and we believe that there is uncertainty regarding
our ability to refinance or repay the old notes at that time.
We are in default under our senior debt and our tax retention operating
lease and under the terms of our indenture for the old notes, which may result
in a future acceleration of the obligation to pay these debt obligations.
As a result of our inability to make the August 2001 interest payment, we
are in default under our senior revolving credit facility, senior term loans
and the tax retention operating lease and the lenders under our senior
revolving credit facility and senior term loans, and the lessor under our tax
retention operating lease have the right to declare due and require immediate
payment of the indebtedness that ranks senior in right of payment to the old
notes, which as of June 30, 2001 aggregated $81.7 million, before any payment
could be made on the old notes. Our lenders under our senior credit facility
and senior term loans and the lessor under our tax retention operating lease
have agreed to not require immediate payment of such obligations until
December 31, 2001 (the "forbearance"), subject to the condition that no other
events of default occur under such agreements and no remedies for default are
exercised under the indenture for the old notes. Upon the occurrence of an
event of default under the senior debt and our tax retention operating lease
and without the forbearance, or upon the expiration of the forbearance, the
respective lenders could elect to declare all amounts outstanding, together
with accrued interest, to be immediately due and payable. Substantially all of
our assets are pledged as collateral security for the senior credit facility
and senior term loans and the tax retention operating lease. If we were unable
to repay all outstanding amounts under our senior debt and tax retention
operating lease, the lenders and parties could proceed against the collateral
granted to them to secure that indebtedness and other obligations, and any
proceeds realized upon the sale of this collateral would be used first to
satisfy all amounts outstanding under our senior credit facility, senior term
loans and tax retention operating lease, for the old notes, and thereafter, any
of our other liabilities. In addition, we may be prevented from making new
borrowings or drawing down further on our senior credit facility.
As a result of our inability to make the August 2001 interest payment due on
the old notes, we are in default under the indenture for the old notes. The
trustee or the holders of at least 25% of the outstanding principal of the old
notes could declare such indebtedness due and immediately payable (the
"acceleration"). Under our agreement with the holders of 73.02% of the
aggregate principal amount of the old notes, these holders have agreed to vote
pursuant to the indenture to rescind any acceleration. If these holders fail to
timely rescind the acceleration, then the lenders under our senior credit
facility and senior term loans or the parties under our tax retention operating
lease could declare due and require immediate payment of the indebtedness owed
them.
We may not receive all of the anticipated purchase price in connection with
a prior sale of inventory and may be required to provide additional funds to
the lender of a company which we partially own for the sale of inventory.
In December 2000, we acquired a 50% interest in a limited liability company,
KAV Inventory, LLC. KAV was organized by us and by a second company, Kellstrom
Industries, Inc., which purchased our redistribution operation in December
2000. We sold to KAV aircraft and engine spare parts inventory and engine
inventory. Compensation for the sale of inventory was comprised of cash and two
senior subordinated notes, each in the principal amount of $13.7 million (one
of which was immediately sold to Kellstrom), and one junior subordinated note
in the principal amount of $15.7 million. The notes bear interest at 14% per
annum and are subordinated in all respects to KAV's institutional financing. In
addition, we posted an $8.5 million letter of credit to secure, in part, KAV's
institutional financing. As of July 31, 2001, the financial institution
providing the financing has informed KAV that it is in default under the loan
agreement and the financial institution reserves the right to call the letter
of credit.
KAV's sole business is the liquidation of the inventory it acquired from us.
Our agreement regarding this transaction specifies that all of the proceeds
from sales of the inventory, less a consignment commission of 20%
20
(which is payable to Kellstrom in connection with their sale of such
inventory), will be used to pay interest and principal on KAV's institutional
debt. After the institutional debt is paid in full, proceeds from the sale of
inventory will be used to reimburse us and Kellstrom for advances made to KAV
to allow it to pay fees and costs relating to its institutional financing and
thereafter to pay interest and principal on the two $13.7 million senior notes.
Interest and principal on the $15.7 million junior note will be paid from the
remaining proceeds from the sale of inventory, less a 35% consignment
commission. During the quarter ended June 30, 2001, as a result of the default
of KAV under its credit agreement with the financial institution that provided
the funding for the purchase of the inventory and the weakened economic
conditions in the aviation industry being experienced by Kellstrom as reported
in its SEC filings, we recorded non-cash reserves totaling $34.5 million
relating to these matters, including a full reserve on the notes receivable due
from KAV.
In addition, as described above, Kellstrom leased from us a facility and
certain furniture, fixtures and equipment used in the redistribution operation
for a one-year period. Kellstrom has an option to acquire these assets during
the term of the lease and after one year we have an option to require Kellstrom
to acquire the assets, which can be extended by Kellstrom for six months under
certain circumstances. We have also entered into a sublease agreement relating
to the redistribution operation's warehouse and corporate headquarters facility
for a five-year period, with the right to renew for five consecutive five-year
periods at a market rental rate. Further, in the event that the weakened
economic conditions being experienced by Kellstrom, as reported in its SEC
filings, adversely impact its ability to make payments under its lease
obligations and/or its obligation to purchase certain property and equipment,
additional write downs and accruals may be necessary. Finally, the weakened
economic conditions being experienced by Kellstrom, as reported in its SEC
filings, may adversely impact its ability to satisfy its obligations under the
above-described ancillary agreements.
We depend on financing transactions to support our growth.
During 1998, 1999 and 2000, we relied primarily upon significant borrowings
under our senior revolving credit facility, and sales of our securities,
including our previously issued subordinated notes, to satisfy our funding
requirements relating to our acquisitions of several businesses and to finance
the growth of our business. We cannot assure you that financing alternatives
will be available to us in the future to support continued growth.
Our lenders impose significant restrictions on us.
Our senior credit facilities impose and the new notes will impose
significant operating and financial restrictions on us. These restrictions may
significantly limit our ability to incur additional indebtedness, pay
dividends, repay indebtedness prior to its stated maturity, sell assets or
engage in mergers or acquisitions. In addition, our failure to comply with
these restrictions could result in an event of default which, if not cured or
waived, could materially adversely affect our business, financial condition or
results of operations.
We have incurred losses in the past and we may incur losses in the future.
If we incur losses in the future, our ability to obtain sufficient working
capital for our operations and our ability to service our indebtedness may be
impaired.
We incurred losses from continuing operations of approximately $115.9
million during our 2000 fiscal year and approximately $64.9 million during the
six months ended June 30, 2001. If we continue to incur losses in the future,
we may limit our ability to obtain sufficient working capital for our
operations and our ability to execute our business strategy. In addition, our
ability to service our indebtedness may be harmed because we may not generate
sufficient cash flow from operations to pay principal or interest when due.
A large portion of our operating expenses are relatively fixed and
cancellations, reductions or delays in orders by a customer or group of
customers could materially adversely affect our business, financial condition
or results of operations.
21
The sale of our common stock in the rights offering and the election of the
non-cash option in the exchange offer and consent solicitation may vest control
of our company with one of our principal stockholders.
As of September 6, 2001, two of our stockholders beneficially owned
approximately 29.4% and 21.0% of our outstanding common stock. Our directors
and executive officers, as a group, beneficially own an aggregate of
approximately 34.7% (including the 29.4% referred to above) of our outstanding
common stock. Lacy Harber, one of our principal stockholders who beneficially
owns 7.1%, or $11,750,000 aggregate principal amount, of our old notes, has
agreed to purchase unsold allotments of our rights offering. He would own
approximately 82.6% of our outstanding common stock if he were to purchase all
of the shares available in our rights offering and elect the non-cash option to
convert all of the old notes which he owns in the exchange offer into new
notes, shares and warrants.
If, through his purchase of the unsold allotments of our rights offering or
otherwise, Mr. Harber gains beneficial ownership of more than 50% of our
outstanding common stock, he will be able to control the vote on all matters
submitted to the vote of our stockholders and therefore, will be able to direct
our management and policies, including, but not limited to, the election of our
entire board of directors and the appointment of our officers. In addition,
under such circumstances, we will not, without Mr. Harber's approval, be able
to consummate transactions involving an actual or potential change of control,
including transactions in which holders of our common stock might otherwise
receive a premium for their shares over the then current market prices.
The loss of one or two of our major customers could materially hurt our
business because we depend on only a small number of customers.
Our four largest continuing customers accounted for approximately 32% of our
total revenue for the year ended December 31, 2000 and approximately 56.7% of
our total revenues for the six months ended June 30, 2001 and our largest
continuing customer accounted for approximately 14% of total revenues for the
year ended December 31, 2000 and approximately 28.6% of our total revenues for
the six months ended June 30, 2001. While the relative significance of
customers varies from period to period, the loss of, or significant
curtailments of purchase of our services by, one or more of our significant
customers at any time could adversely affect our revenue and cash flow.
We depend on our executive officers and our employees.
Our continued success depends significantly upon the services of our
executive officers and upon our ability to attract and retain qualified
personnel in all of our operations. While we have employment agreements with
several of our executive officers, most of our employees are employed on an at-
will basis. The loss of one or more of our executive officers and of a
significant number of our other employees without capable successors could
materially adversely affect our business, financial condition or results of
operations.
Risks associated with the aviation services industry
Problems in the airline industry could adversely affect our business.
Since our customers consist of airlines, maintenance and repair facilities
that service airlines and aircraft spare parts redistributors, as well as
original equipment manufacturers, economic factors affecting the airline
industry impact our business. When economic factors adversely affect the
airline industry, they tend to reduce the overall demand for aircraft spare
parts and maintenance and repair services, causing downward pressure on pricing
and increasing the credit risks associated with doing business with airlines.
Additionally the price of fuel affects the aircraft spare parts and maintenance
and repair markets, since older aircraft, which consume more fuel and which
account for most of our aircraft spare parts and maintenance and repair
services business, become less viable as the price of fuel increases. We cannot
assure you that economic and other factors which may affect the airline
industry will not adversely impact our business, financial condition or results
of operations.
22
On September 11, 2001, four commercial aircraft were hijacked and destroyed
in terrorist attacks on the World Trade Center in New York City and the
Pentagon in Washington, D.C. The impact which these terrorist attacks, or
future events arising as a result of these terrorist attacks, could have on the
airline industry in general, or on our company in particular, cannot presently
be determined with any accuracy. Factors arising (directly or indirectly) from
these terrorist attacks which could affect our business may include: (i) the
impact of these terrorist attacks and the impact of declines in air travel as a
result of these terrorist attacks on the financial condition of one or more of
our airline customers, (ii) possible increases in jet fuel prices as a result
of events relating to these terrorist attacks, (iii) potential reductions in
the need for aircraft maintenance due to declines in airline travel and (iv)
the adverse effect of these terrorist attacks, or future events arising as a
result of these terrorist attacks, on the economy in general.
Our business is subject to heavy government regulation.
The aviation industry is highly regulated by the Federal Aviation
Administration in the United States and by similar agencies in other countries.
We must be certified by the FAA in order to repair aircraft and aircraft
components.
The aircraft spare parts which we sell to our customers in connection with
our services must be accompanied by documentation that enables our customers to
substantiate their compliance with applicable regulatory requirements.
Before parts may be installed in an aircraft, they must meet standards of
condition established by the FAA and/or the equivalent regulatory agencies in
other countries. Specific regulations vary from country to country, although
regulatory requirements in other countries generally coincide with FAA
requirements. Our parts may not meet applicable standards or standards may
change in the future, requiring parts already in our inventory to be scrapped
or modified. Aircraft manufacturers may also develop new parts to be used in
lieu of parts already in our inventory. To the extent that we have any of these
parts in our inventory, their value may be reduced.
We cannot assure you that new and more stringent government regulations will
not be adopted in the future or that any such new regulations, if enacted,
would not materially adversely affect our business, financial condition or
results of operations.
Our business is highly competitive.
The airline industry and the markets for our products and services are
extremely competitive, and we face competition from a number of sources. Our
competitors include aircraft manufacturers, aircraft part manufacturers,
airline and aircraft service companies, other companies providing maintenance,
repair and overhaul services, and other aircraft spare parts redistributors.
Certain of our competitors are currently experiencing financial difficulties
similar to our own. Some or all of these competitors may respond to their
financial difficulties by reducing prices on their services to increase or
retain market share. Any material deterioration in our financial condition is
likely to affect our ability to compete with price-cutting by our competitors.
Some of our competitors have substantially greater financial and other
resources than us. We cannot assure you that competitive pressures will not
materially adversely affect our business, financial condition or results of
operations.
Our business is susceptible to product liability claims.
Our business exposes us to possible claims for personal injury or death
which may result if an aircraft spare part which we have sold, manufactured or
repaired fails or if we were negligent in repairing an airplane. We cannot
assure you that claims will not arise in the future or that our insurance
coverage will be adequate to protect us in all circumstances. Additionally, we
cannot assure you that we will be able to maintain adequate insurance coverages
in the future at an acceptable cost. Any product liability claim not covered by
adequate insurance could materially adversely affect our business, financial
condition or results of operations.
23
Risks associated with the exchange offer and consent solicitation
If we do not receive an extension of the forbearances previously granted us
and consents to the exchange offer and consent solicitation from our lenders
under our senior revolving credit facility and the parties to our tax retention
operating lease, we will not be able to complete the exchange offer and consent
solicitation.
Our lenders under our senior indebtedness and the parties to our tax
retention operating lease have given us a forbearance which postpones until
December 31, 2001 the exercise of their remedies for our default under such
agreements. We may need to receive extensions of these forbearances to allow
the consummation of the exchange offer and consent solicitation and the
restructuring transactions. In addition, we need to receive the consents to the
exchange offer and consent solicitation from our lenders under our senior
revolving credit facility and senior term loans and the parties under our tax
retention operating lease are required in order for us to consummate the
exchange offer and consent solicitation. We may not receive their consents if
they disapprove of the terms of the exchange offer and consent solicitation. If
we do not receive their consents, we will not be able to effectuate the
exchange offer and consent solicitation.
A court may void the issuance of the old notes or the new notes in
circumstances of a fraudulent transfer under federal or state fraudulent
transfer laws.
If a court determines the issuance of the old notes or the new notes
constituted a fraudulent transfer, the holders of the old notes or the new
notes may not receive payment on those notes.
Under federal or state fraudulent transfer laws, if a court were to find
that, at the time the old notes or the new notes were issued we:
. issued the old notes or the new notes with the intent of hindering,
delaying or defrauding current or future creditors, or
. received less than fair consideration or reasonably equivalent value for
incurring the indebtedness represented by the old notes or the new
notes, and we were insolvent or were rendered insolvent by reason of the
issuance of the old notes or the new notes; or we were engaged, or about
to engage, in a business or transaction for which our assets were
unreasonably small; or we intended to incur, or believed, or should have
believed, we would incur, debts beyond our ability to pay as such debts
mature; or we were a defendant in an action for money damages, or had a
judgment for money damages docketed against it (if, in either case,
after final judgment the judgment is unsatisfied),
then a court could:
. avoid all or a portion of our obligations to the holders of the old
notes or the new notes,
. subordinate our obligations to the holders of those notes to other
existing and future indebtedness of us, as the case may be, the effect
of which would be to entitle the other creditors to be paid in full
before any payment could be made on those notes, or
. take other action harmful to the holders of the old notes or the new
notes, including in certain circumstances, invalidating those notes.
In any of these events, we could not assure you that the holders of the old
notes or the new notes would ever receive payment on those notes.
The measures of insolvency for the purposes of the above will be as
described in the risk factor "A court may void the guarantees of the new notes
or subordinate the guarantees to other obligations of the guarantor." We cannot
assure you as to what standard a court would apply in order to determine
whether we were "insolvent" as of the date the old notes or the new notes were
issued, or that, regardless of the method of valuation, a court would not
determine that we were insolvent on that date. Nor can we assure you that a
court would not determine, regardless of whether we were insolvent on the date
the old notes or the new notes were issued, that the issuance of the notes
constituted fraudulent transfers on another ground.
24
Separate and apart from any fraudulent transfer attack, any payment made to
holders in consideration for their old notes, including the cash payment
election, may also be subject to challenge as a preference if such payment: (i)
is made within ninety days prior to a bankruptcy filing by us; (ii) is made
when we are insolvent; and (iii) permits the holders to receive more than they
otherwise might receive in a liquidation of Aviation Sales pursuant to Chapter
7 of the United States Bankruptcy Code. If such payment were deemed to be a
preference, such payment could be recovered by the Aviation Sales' trustee in
bankruptcy and holders would be restored to their previous positions as
unsecured creditors of Aviation Sales.
A court may treat the new notes as equity.
Although the new notes will be issued as debt securities for non-tax and
financial accounting purposes, the new notes should be treated as equity
securities for federal income tax purposes. This classification is required
pursuant to applicable Internal Revenue Service (IRS) primarily because of
automatic conversion feature of the new notes and the fact that, at our
election, we can ultimately satisfy all obligations under the new notes through
the automatic conversion of the new notes into shares of our common stock. The
new notes which are issued in connection with any interest which is paid in
kind will be treated as equity securities also, for the same reasons as the new
notes issued pursuant to the exchange offer and consent solicitation. We will
classify the new notes as debt securities. Due to the similarities of the new
notes to equity securities, a bankruptcy court could treat the holder of the
new notes as our equity holders and the holders of the new notes may not
receive any payment on the new notes.
This exchange offer and consent solicitation will not be consummated unless
we receive tenders of and consents from at least $132 million in aggregate
principal amount of outstanding old notes and we consummate the restructuring
conditions.
This exchange offer and consent solicitation is conditioned on us receiving
tenders of and consents from at least $132 million in aggregate principal
amount of the outstanding old notes. We cannot assure you that we will receive
tenders of and consents from at least $132 million in aggregate principal
amount of the outstanding old notes. If we are unable to consummate this
exchange offer and consent solicitation, we may have to seek bankruptcy
protection or commence liquidation or administration proceedings. In that case,
owners of old notes may only receive repayment of little or none of the
principal amount of their old notes.
This exchange offer and consent solicitation is subject to the conditions
that:
. we must receive $20 million in cash in exchange for 80% of the common
stock of the reorganized company in the rights offering;
. we must receive consent to the exchange offer and consent solicitation
from our senior lenders and the parties to our tax retention operating
lease;
. we must increase the number of authorized shares of our common stock to
500 million shares by means of an amendment to our certificate of
incorporation and reduce the number of our issued and outstanding shares
by reducing every ten shares into one share in a reverse split; and
. we must receive the approval of a majority of our stockholders to:
. the issuance of the new notes, shares of our common stock and warrants
to purchase common stock in the exchange offer and consent
solicitation;
. the issuance to existing stockholders of warrants to purchase 10% of
the common stock of the reorganized company;
. the sale of 80% of the common stock of the reorganized company for $20
million in the rights offering;
. the sale of post-reverse split common stock to Lacy Harber in
accordance with his agreement to purchase unsold allotments in the
rights offering; and
. the increase in the number of our authorized shares to 500 million
shares and the reduction of our issued and outstanding shares on a
ten-for-one basis in a reverse split.
25
Our agreement with our noteholders and largest stockholder regarding the
restructuring is subject to certain termination events.
We have entered into an agreement with holders of 73.02% of our old notes
and our largest stockholder to restructure the old notes pursuant to this
exchange offer and consent solicitation and to conduct the rights offering. The
noteholder and stockholder parties to the agreement have agreed to vote their
respective notes and shares in favor of the restructuring. In addition, the
noteholder parties to the agreement have agreed to tender their old notes in
the exchange offer and to waive the default arising as a result of the failure
to pay the interest payment on the old notes due August 15, 2001. Also, our
largest stockholder has agreed to provide a standby commitment to purchase any
unsold allotments of our proposed rights offering subject to entering into
definitive documentation. However, the agreement is subject to several
termination events and we cannot assure you that these events will not occur.
The agreement provides that it can be terminated if any of the following
termination events occur:
. the restructuring is not completed by March 31, 2002;
. we withdraw from or materially alter the restructuring;
. we breach any material provisions of the agreement, including failure to
use our best efforts to obtain approval of the restructuring; or
. we file a chapter 11 bankruptcy proceeding that is dismissed or
converted to a chapter 7 bankruptcy proceeding or we file a chapter 11
proceeding with a plan of reorganization that does not incorporate the
terms of the restructuring provided in the agreement or an involuntary
bankruptcy proceeding is filed against us which is not dismissed or
converted to a voluntary chapter 11 proceeding within 120 days.
The exchange ratios for this exchange offer and consent solicitation do not
reflect any valuation of the old notes or the new notes.
Our board of directors has made no determination that the exchange ratios
represent a fair valuation of either the old notes or the new notes. We have
not obtained a fairness opinion from any financial advisor about the fairness
of the exchange ratios to you or to us. We cannot assure you that if you tender
your old notes you will receive more value than if you choose to keep them.
If you choose the limited cash option and it is oversubscribed, you will
have to accept a combination of new notes, common stock and warrants as part of
your exchange consideration.
If you choose the limited cash option under this exchange offer and consent
solicitation, and the limited cash option is oversubscribed, you will receive a
combination of new notes, common stock and warrants as a portion of your
consideration. We will not determine whether the limited cash option is
oversubscribed until after this exchange offer and consent solicitation closes.
You will not be able to withdraw your tender of old notes at the time that we
make this determination, even though it may affect the type of exchange
consideration that you will receive in this exchange offer and consent
solicitation.
Up to $10 million in cash will be exchanged for $33 million principal amount
of old notes. If less than all of our outstanding old notes are exchanged, then
the $10 million in cash available will be reduced $303 for every $1,000
principal amount of old notes not exchanged.
The restructuring will cause immediate and substantial dilution to our
existing stockholders.
The proposed issuances of new notes, warrants and common stock in the
exchange offer and consent solicitation and the proposed issuance of common
stock in the rights offering and upon exercise of the warrants will result in
immediate and substantial dilution to our existing stockholders. After the
restructuring, our existing stockholders will own 5% of the outstanding common
stock of our reorganized company. In addition, we will be obligated to issue
additional shares of our post-reverse split common stock when we redeem the new
notes (4,504,595 post-reverse split shares if the new notes are redeemed in
2002 or 2003 and 3,003,063 post-reverse split shares if the new notes are
redeemed in 2004, 2005 or 2006). Additionally, pursuant to the agreement with
our old note holders, we may grant options or warrants to purchase up to 8% of
the post-reverse split common stock of the reorganized company to our
directors, officers and employees. Finally, if the
26
new notes have not been redeemed prior to their maturity, they will
automatically convert into 270,275,706 post-reverse split shares of our common
stock, at which time the percentage ownership of our existing common
stockholders will be further substantially diluted.
Risks associated with our new notes
We are not obligated to make any cash payments of interest on the new notes
and we are not obligated to make any cash payment of principal of the new notes
at maturity.
Under the indenture for the new notes, we are only obligated to pay interest
on the notes in either additional new notes or, at our option, cash. Upon the
maturity of the new notes, including any new notes previously issued for paid-
in-kind interest, unless earlier redeemed, the new notes (including all accrued
but unpaid interest) will automatically convert into an aggregate of
270,275,706 post-reverse split shares of our common stock.
There may be no active market for our new notes.
The new notes will not be traded on an exchange or quoted on any automated
quotation system. We cannot assure you that a liquid market will develop for
the new notes, that you will be able to sell your new notes at a particular
time or that the prices that you receive when you sell will be favorable.
Moreover, we do not intend to apply for the new notes to be listed on any
securities exchange or to arrange for quotation on any automated dealer
quotation system. In addition, the liquidity of the trading market in the new
notes, and the market price quoted for the new notes, may be adversely affected
by changes in the overall market for high yield securities and by changes in
our financial performance or prospects or in the prospects for companies in our
industry generally. As a result, you cannot be sure that there will be an
active trading market for the new notes.
Your right to receive payments on the new notes is junior to senior debt.
The new notes and the subsidiary guarantees rank behind all of our and the
subsidiary guarantors' existing senior indebtedness and all of our and their
existing and future senior indebtedness, except any future indebtedness that
expressly provides that it ranks equal with, or subordinated in right of
payment to, the new notes and the guarantees. As a result, upon any
distribution to our creditors or the creditors of the subsidiary guarantors in
a bankruptcy, liquidation or reorganization or similar proceeding relating to
us or the subsidiary guarantors or our or their property, the holders of senior
indebtedness of Aviation Sales and the subsidiary guarantors will be entitled
to be paid in full in cash before any payment may be made with respect to the
new notes or the subsidiary guarantees.
The new notes will be subordinated to our senior debt. If we default on our
senior debt, we may not be able to pay you the redemption price for the new
notes.
The new notes will rank in right of payment behind all of our existing and
future senior debt, including our indebtedness under the new credit facility.
We may not redeem or otherwise pay any amounts on the new notes if principal
or interest on our senior debt is not paid when due. In addition, if we are in
default on any of our other obligations under our senior debt, we may be
prohibited from making payments to the owners of the new notes.
The owners of our senior debt will be entitled to receive payment of all
amounts due to them before the owners of the new notes upon any payment or
distribution of our assets to our creditors upon our bankruptcy or liquidation
or other insolvency or reorganization proceedings.
A court may void the guarantees of the new notes or subordinate the
guarantees to other obligations of the guarantors.
A court could void the guarantee of the new notes, or claims by holders of
the new notes under those guarantees could be subordinated to all other debts
of a guarantor. In addition, any payment by that guarantor under its guarantee
could be required to be returned to that guarantor, or to a fund for the
benefit of the creditors of that guarantor.
27
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a court could void the guarantees of the new notes or
subordinate the guarantees to other obligations if the court were to find that,
at the time any guarantor of the new notes incurred the debt evidenced by its
guarantee, the guarantor:
. was insolvent or rendered insolvent by reason of such incurrence; was
engaged in a business or a transaction for which that guarantor's
remaining assets constituted unreasonably small capital; or intended to
incur, or believed that it would incur, debts beyond its ability to pay
such debts as they matured; and
. received less than reasonably equivalent value or fair consideration for
the incurrence of such debt.
The measures of insolvency for purposes of the above will vary depending
upon the law applied in any proceeding. Generally, however, a guarantor would
be considered insolvent if:
. the sums of its debts, including contingent liabilities, was greater
than the saleable value of all of its assets at a fair valuation; or
. the present fair saleable value of its assets was less than the amount
that would be required to pay its probable liability on its existing
debts, including contingent liabilities, as they become absolute and
mature; or
. it could not pay its debts as they become due.
We may not be able to repurchase the new notes upon a change of control in
accordance with the terms of the indenture.
Holders of the new notes may not have their new notes repurchased following
a change of control because:
. we may have insufficient funds to repurchase the new notes; or
. we may be prohibited from repurchasing the new notes by the terms of our
senior indebtedness.
Under the terms of the indenture for the new notes, we may be required to
repurchase all or a portion of the new notes then outstanding on a change of
control at a purchase price equal to the redemption price which we would be
obligated to pay if we redeemed the notes on the date of such change of
control. Before we can repurchase the new notes, we may be required to:
. repay in full all of our indebtedness that is senior to the new notes;
or
. obtain the consent of our senior lenders to make the repurchase.
The terms of our senior indebtedness may prevent us from repurchasing the
new notes without the consent of our senior lenders, unless we also repay our
senior indebtedness in full. In those circumstances, we would be required to
obtain the consent of our senior lenders, or otherwise repay our senior
indebtedness in full, before we could repurchase the new notes following a
change of control. If we were unable to obtain the required consents or
otherwise repay our senior indebtedness, the put right on a change of control
will be ineffective.
Assuming we had completed all parts of our overall refinancing and
restructuring plan on June 30, 2001, based on the assumptions for the pro forma
financial information described on pages P-1 to P- we would have been required
to repay approximately $81.7 million of senior debt before we could repurchase
any of the new notes.
Therefore, if we have insufficient funds to repay our senior indebtedness in
full prior to repurchasing the new notes or if we are unable to obtain any
required consents, the put right will be ineffective.
The subordination provisions of the indenture for the new notes may prevent
payments under a change of control offer. The put right may also be limited or
unavailable in the event of a highly leveraged transaction or other transaction
which may be prejudicial to the interests of the holders of the new notes but
which does not result in a change of control or otherwise violate the indenture
for the new notes.
28
The acquisition of a controlling interest in us or our affiliates is not a
change of control event under the terms of the indenture for the new notes.
Therefore, the put right would not be available to holders of the new notes in
those circumstances.
The indenture for the new notes provides that a sale, lease, exchange or
transfer of "all or substantially all" of our assets is a change of control
event. However, there is no precise definition of the phrase "all or
substantially all" under applicable law. Accordingly, the ability of holders
of the new notes to require us to repurchase their notes upon the sale, lease,
exchange or transfer of "all or substantially all" of our assets is uncertain.
We may not be required, or we may not be able, to repurchase the new notes
upon an asset sale.
Holders of new notes may not have all or any of their notes repurchased
following an asset sale because:
. we are only required to repurchase the new notes if there are excess
proceeds of the asset sale; or
. we may be prohibited from repurchasing the new notes by the terms of our
senior indebtedness.
Under the terms of the indenture for the new notes, we may be required to
repurchase all or a portion of the new notes following an asset sale at a
purchase price equal to the redemption price which we would be obligated to
pay if we redeemed the notes on the date of such asset sale. However, we are
only required to repurchase notes from the excess proceeds of the asset sale
that we do not use to repay indebtedness senior to the new notes or to acquire
replacement assets. We can also defer the offer to you until there are excess
proceeds in an amount greater than $5 million. It is likely that the terms of
our senior indebtedness will require us to apply most, if not all, of the
proceeds of an asset sale to repay that indebtedness, in which case there may
be no excess proceeds of the asset sale for the repurchase of new notes.
In addition, the terms of our senior indebtedness may prevent us from
repurchasing the new notes without the consent of our senior lenders. In those
circumstances, we would be required to obtain the consent of our senior
lenders before we could repurchase the new notes with the excess proceeds of
an asset sale. If we were unable to obtain any required consents, the
requirement that we purchase the new notes from the excess proceeds of an
asset sale will be ineffective.
Assuming that we had completed all parts of our overall refinancing and
restructuring plan on June 30, 2001, based on the assumptions for the pro
forma financial information described on pages P-1 to P- we would have been
required to repay approximately $81.7 million of senior debt before we could
repurchase any of the new notes.
If we make a sale, lease, exchange or transfer of "all or substantially
all" of our assets as permitted under the limitations contained in the
indenture for the new notes regarding mergers, consolidations and sales of
assets, then we will not be required to repurchase the new notes from the
excess proceeds of that transaction. However, there is no precise definition
of the phrase "all or substantially all" under applicable law. Accordingly,
the ability of holders of the new notes to require us to repurchase their
notes upon the sale, lease, exchange or transfer of "all or substantially all"
of our assets is uncertain.
If we default on our obligation to pay the redemption price and go into
bankruptcy, the redemption price could become a partial debt and equity claim.
We may elect to redeem the new notes or an asset sale or change of control
could occur that requires us to pay the redemption price under the indenture
for the new notes. If we default in payment of the redemption price and we go
into a bankruptcy proceeding, the redemption price claim of the holders of the
new notes could possibly convert to a debt claim, to the amount of the cash
portion of the redemption price, and an equity claim for the balance.
29
Risks associated with our old notes
Failure of this exchange offer and consent solicitation may lead to our
bankruptcy, liquidation or administration.
In the event that this exchange offer and consent solicitation fails to
close, we are unlikely to be able to refinance our senior bank debt. If we fail
to refinance our senior bank debt, we may have to seek bankruptcy protection
and/or commence liquidation or administration proceedings. In that case, we
expect that it is highly unlikely that owners of the old notes will receive
repayment in full of the principal amount of their notes. In that case, owners
of the old notes may only receive repayment of little or none of the principal
amount of their notes.
In the event of our bankruptcy, liquidation or administration, we may not be
able to pay principal or interest on the old notes when due. We may also be
prohibited from making those payments if we are in default on our indebtedness
that is senior to the old notes.
The holders of our senior debt, our other subordinated debt, and lessors
under our tax retention operating lease will be entitled to receive payment of
all amounts due to them before the owners of the old notes upon any payment or
distribution of our assets to our creditors upon our bankruptcy, liquidation or
other insolvency or reorganization proceedings.
The old notes will rank in right of payment behind all of our existing and
future senior debt, other secured liabilities and other subordinated debt. This
includes our senior bank debt and, upon the completion of the exchange offer,
up to $100 million in aggregate principal amount of the new notes.
We may not pay any principal or interest on, or any amounts owing on, or
purchase, redeem or otherwise retire the old notes if our senior debt or other
subordinated debt is not paid when due. In addition, if we are in default of
any of our other obligations under our senior debt or other subordinated debt,
we may be prohibited from making payments to the owners of the old notes for
specified periods of time.
The proposed amendments to the indenture for the old notes will remove
restrictions on us which previously benefited holders of the old notes.
If the proposed amendments became operative, old notes that are not tendered
and exchanged pursuant to the exchange offer will remain outstanding and will
be subject to the terms of the indenture as modified by the supplemental
indenture. As a result of the adoption of the proposed amendments, all material
restrictive covenants contained in the indenture, except the obligation to pay
principal and interest, will be eliminated and holders of the old notes not
tendered will no longer be entitled to the benefits of such covenants. The
elimination of these covenants and other provisions will permit us to take
certain actions previously prohibited that could increase the credit risks with
respect to us, adversely affect the market price and credit rating of the
remaining old notes or otherwise be materially adverse to the interest of such
holders, which would otherwise not have been permitted pursuant to the
indenture. We expect that such terms will include operating and financial
restrictions, such as limits on our ability to incur indebtedness, create
liens, sell assets, engage in mergers or consolidations, make investments and
pay dividends.
If you do not exchange your old notes in this exchange offer and consent
solicitation, it is likely you will not be able to sell them in the secondary
market.
Any old notes tendered and exchanged in this exchange offer and consent
solicitation will reduce the aggregate principal amount of the old notes
outstanding. Because it is a condition of this exchange offer and consent
solicitation that at least $132 million in aggregate principal amount of the
old notes are tendered, we anticipate that the liquidity of the market for any
old notes remaining outstanding after this exchange offer and consent
solicitation will be extremely limited.
To the extent that the old notes are tendered and accepted in the exchange
offer for the new notes, any existing trading market for the remaining old
notes may become more limited. A debt security with a smaller
outstanding principal amount available for trading (a smaller "float") may
command a lower price than would
30
a comparable debt security with a greater float. The reduced float may also
make the trading price of the old notes that are not tendered and accepted for
exchange more volatile. Consequently, the liquidity, market value and price
volatility of old notes which remain outstanding may be adversely affected.
Holders of unexchanged old notes may attempt to obtain quotations for the old
notes from their brokers; however, there can be no assurance that any trading
market will exist for the old notes following consummation of the exchange
offer. The extent of the public market for the old notes following consummation
of the exchange offer will depend upon the number of holders remaining at such
time, the interest in maintaining a market in the old notes on the part of
securities firms and other factors.
Risks associated with our common stock and our warrants
The New York Stock Exchange has notified us that we are not in compliance
with its continued listing criteria. If we are delisted by the NYSE, the price
and liquidity of our common stock will be negatively affected.
In June 2001, at the request of the New York Stock Exchange we announced
that we are no longer in compliance with the NYSE continued listing criteria,
which require, among other things, that a listed company have a market
capitalization of not less than $50 million and total shareholder equity of not
less than $50 million. At the market close on June 29, 2001, our market
capitalization was approximately $25.5 million. At June 30, 2001 our
stockholders' deficit was approximately $59.5 million. We have submitted a
business plan to the listings and compliance committee of the NYSE setting
forth our plans to bring us back into compliance with such listing standards,
and believe that it will satisfy the NYSE continuing listing standards by the
end of the third quarter of 2002 (which is the deadline set by the NYSE). After
reviewing the plan, the committee has accepted our plan and we are currently
subject to quarterly monitoring for compliance with the plan.
In the event that our common stock is delisted by the NYSE, or if it becomes
apparent to us that we will be unable to meet the NYSE's continued listing
criteria in the foreseeable future, we will seek to have our stock listed or
quoted on another national securities exchange or quotation system. However, we
cannot assure you that, if our common stock is listed or quoted on such other
exchange or system, the market for our common stock will be as liquid as it has
been on the NYSE. As a result, if we are delisted by the NYSE or transfer our
listing to another exchange or quotation system, the market price for our
common stock may become more volatile than it has been historically.
If our common stock is deemed "penny stock," its liquidity will be adversely
affected.
The price of our common stock fell below $1.00 per share in September 2001.
If the market price for our common stock remains below $1.00 per share and is
no longer listed on the NYSE or another national securities exchange or
quotation system, our common stock may be deemed to be penny stock. If our
common stock is considered penny stock, it would be subject to rules that
impose additional sales practices on broker-dealers who sell our securities.
For example, broker-dealers must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to sale. Also, a disclosure schedule must be prepared before
any transaction involving a penny stock, and disclosure is required about sales
commissions payable to both the broker-dealer and the registered representative
and current quotations for the securities. Monthly statements are also required
to be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stock. Because of these
additional obligations, some brokers may not effect transactions in penny
stocks. This could have an adverse effect on the liquidity of our common stock.
Although our common stock is currently listed on the New York Stock
Exchange, it is thinly traded. Our stock price may fluctuate more than the
stock market as a whole.
As a result of the thin trading market for our stock, its market price may
fluctuate significantly more than the stock market as a whole or the stock
prices of similar companies. Of the 15,015,317 pre-reverse shares of our
currently outstanding common stock, approximately 70% are beneficially owned by
persons other than Lacy Harber, our principal stockholder. Without a larger
float, our common stock will be less liquid than the
31
stock of companies with broader public ownership, and, as a result, the trading
prices for our common stock may be more volatile. Among other things, trading
of a relatively small volume of our common stock may have a greater impact on
the trading price for our stock than would be the case if our public float were
larger.
In addition, sales of a substantial amount of common stock in the public
market, or the perception that these sales may occur, could adversely affect
the market price of our common stock. Possible or actual sale of any of these
shares, particularly by Mr. Harber, may decrease the market price of our common
stock.
We are subject to significant anti-takeover provisions.
Our certificate of incorporation and bylaws contain provisions that may have
the effect of discouraging transactions involving an actual or threatened
change of control. In addition, our board of directors has the authority to
issue up to 1,000,000 shares of preferred stock in one or more series and to
fix the preferences, rights and limitations of any of these series without
stockholder approval. Also, we have adopted a stockholders rights plan which
provides for share purchase rights to become exercisable if a person or group
acquires more than a certain percentage of our common stock or announces a
tender offer for more than a certain percentage of our common stock. Our
ability to issue preferred stock and/or the existence of our stockholders
rights plan could discourage unsolicited acquisition proposals or make it more
difficult for a third party to gain control of us, which could adversely affect
the market price of our common stock.
The holders of our common stock will be subject to substantial dilution upon
the maturity of the new notes.
Unless earlier redeemed by us, the new notes will automatically convert into
an aggregate of 270,275,706 shares of our post-reverse split common stock upon
the maturity of these notes on December 31, 2006. Holders of our common stock
at that time, as a result of such conversion, will face immediate and
substantial dilution in their percentage ownership of the total outstanding
shares of our common stock and a reduction in their voting power. In addition,
as a result of this conversion, there could be a material adverse effect on the
then prevailing market price of our common stock.
The market price of our common stock could be depressed by future sales.
Future sales of our common stock, or the perception that these sales could
occur, could adversely affect the market price of our common stock. We cannot
assure you as to when, and how many of, the shares of our common stock will be
sold and the effect these sales may have on the market price of our common
stock. In addition, we may issue additional shares of common stock in
connection with possible future acquisitions, in connection with future
offerings to raise capital, or in other transactions. Although these securities
may be subject to regulatory or contractual resale restrictions, as these
restrictions lapse or its these shares are registered for sale to the public,
they may be sold to the public. In the event we issue a substantial number of
shares of our common stock, which subsequently become available for
unrestricted resale, there could be a material adverse effect on the prevailing
market price of our common stock.
Adjustments to warrant exercise price and exercise date; the warrants will
not trade separately from the new notes until a later date.
We may, in our sole discretion, and in accordance with the terms of the
warrant agreement with the warrant agent, reduce the exercise price of the
warrants and/or extend the time within which the warrants may be exercised,
depending on such things as the current market conditions, the price of the
common stock and the need for additional capital. Further, in the event that we
issue certain securities or make certain distributions to the holders of our
common stock, the exercise price of the warrants may be reduced. Any such price
reductions (assuming exercise of the warrants) will provide less money for us
and possibly adversely affect the market price of our securities. The warrants
will not trade separately from the new notes until .
32
Impact of warrant exercise on market.
In the event of the exercise of a substantial number of warrants within a
reasonably short period of time after the right to exercise commences, the
resulting increase in the amount of our common stock in the trading market
could substantially affect the market price of our common stock.
Risks related to federal tax consequences
We may incur taxable income from discharge of indebtedness which is not
offset by available exemptions and deductions.
We expect to realize cancellation of indebtedness income for federal income
tax purposes. We believe that available tax deductions and exclusions should
substantially mitigate the amount of any tax liability we might otherwise incur
as a result of such income. If these deductions and exclusions are not
available in the amounts which we expect, however, we may incur substantial
income tax liabilities. See "Tax consequences to us."
If the IRS does not respect the allocation of the consideration received in
the exchange by holders of the old notes, exchanging old note holders may incur
additional interest income or be unable to claim losses with respect to accrued
but unpaid interest.
The exchanging holders of old notes are foregoing accrued and unpaid
interest payments and are exchanging the principal amount of the old notes for
consideration of cash, new notes, common stock and warrants. We will allocate
the entire amount of the consideration we issue to the holders of the old notes
to their principal amount and no portion of that consideration to accrued and
unpaid interest. If the IRS does not respect this allocation, holders of the
old notes could be treated as receiving a payment of all or a portion of the
accrued and unpaid interest, thereby resulting in income for a holder to the
extent that interest was not previously included in income and the denial or
reduction of a loss for a holder that previously included that interest in the
holder's income. See "Tax consequences to United States holders--Tax
consequences of the exchange--Accrued interest."
Holders of the new notes might be treated as receiving taxable distributions
with respect to interest paid in kind, redemption premiums and increases in
their proportionate interest in the assets or earnings and profits.
We will treat the new notes as equity securities for federal income tax
purposes. The fair market value of distributions with respect to the new notes
could be taxed as dividends to the holders of the new notes but only to the
extent of the greater of (i) our current earnings and profits for the year in
which the distribution is made, or (ii) our current and previously accumulated
earnings and profits. Interest paid in kind on the new notes, along with
interest paid in kind on the notes issued to pay interest (the "PIK notes"),
might be treated as such a distribution. In addition, if the new notes (or PIK
notes) are treated as preferred stock and issued with a redemption premium,
holders of the new notes (or PIK notes) could be required to treat the
redemption premium as being distributed over the term of the new notes (or PIK
notes). Finally, if the new notes (or PIK notes) are treated as preferred
stock, holders of the notes could be treated as receiving distributions of our
common stock on such preferred stock over the term of such new notes (or PIK
notes). Any or all of the foregoing distributions could be taxed as a dividend.
See "Tax consequences to United States holders--Tax consequences of the new
notes--Interest payments," "--Redemption premium," and "Redemption and
conversion of the new notes."
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements with respect to our financial
condition, results of operations and business. Forward-looking statements are
statements other than historical information or statements of current
condition. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and similar expressions identify forward-
looking statements. These forward-looking statements relate to our plans,
objectives and expectations for future operations and are subject to risks and
uncertainties, that could cause
33
actual results to differ materially from the results contemplated by the
forward-looking statements. These risks and uncertainties include those
described under "Risk Factors" in this prospectus and consent solicitation and
the following:
. our ability to successfully complete the contemplated exchange offer and
consent solicitation and the rights offering,
. our ability to service our indebtedness,
. our ability to continue to generate sufficient working capital to meet
our operating requirements,
. our maintaining good working relationships with our vendors and
customers,
. competitive pricing for our products and services,
. our ability to achieve gross profit margins at which we can be
profitable, including margins on services we perform on a fixed price
basis,
. competition in the aircraft MR&O market,
. our ability to attract and retain qualified personnel in our businesses,
. utilization rates for our MR&O facilities,
. our ability to effectively manage our business,
. economic factors which affect the airline industry and changes in
government regulations.
In light of the risks and uncertainties inherent in all projected
operational matters, you should not regard the inclusion of forward-looking
statements in this prospectus and consent solicitation as a representation by
us or any other person that our objectives or plans will be achieved or that
any of our operating expectations will be realized. We do not undertake any
obligation to revise or update these forward-looking statements to reflect
future events or circumstances.
34
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
The following information relates to our common stock, par value $.001 per
share, which currently is listed on the New York Stock Exchange under the
symbol AVS. At June 29, 2001, we believe that there were approximately 7,000
beneficial holders of our common stock. The high and low last sales prices of
our pre-reverse split common stock for each quarter during our two most recent
fiscal years as well as for the first, second and third quarters to date of
2001, as reported by the New York Stock Exchange, are set forth below:
High Low
------ ------
1999
First Quarter............................................... $47.31 $37.00
Second Quarter.............................................. $44.69 $35.94
Third Quarter............................................... $43.94 $18.25
Fourth Quarter.............................................. $18.56 $13.75
2000
First Quarter............................................... $19.36 $ 6.44
Second Quarter.............................................. $ 8.13 $ 3.75
Third Quarter............................................... $ 6.63 $ 4.69
Fourth Quarter.............................................. $ 5.63 $ 2.13
2001
First Quarter............................................... $ 4.75 $ 2.63
Second Quarter.............................................. $ 4.07 $ 1.18
Third Quarter (through September 26, 2001).................. $ 1.92 $ 0.41
At the request of the New York Stock Exchange, we announced in June 2001
that we fell below one of the continuing listing standards of the NYSE, in that
our market capitalization and stockholders' equity have each fallen below $50.0
million.
At the market close on June 29, 2001, our market capitalization was
approximately $25.5 million. At June 30, 2001, our stockholders' deficit was
approximately $59.5 million.
We have submitted a business plan to the listings and compliance committee
of the NYSE setting forth our plans to bring us back into compliance with such
listing standards, and believe that it will satisfy the NYSE continuing listing
standards by the end of the third quarter of 2002 (which is the deadline set by
the NYSE). After reviewing the plan, the committee has accepted our plan and we
are currently subject to quarterly monitoring for compliance with the plan.
Should our shares cease being traded on the NYSE, we will attempt to have our
shares traded on an alternative trading venue. No assurance can be given that
an alternative trading venue will be available.
35
CAPITALIZATION
The following table sets forth (1) our actual capitalization as of June 30,
2001 and (2) our pro forma capitalization as of June 30, 2001. The pro forma
adjustments are based on available information and certain adjustments that our
management believes are reasonable, and reference is made to the Unaudited Pro
Forma Condensed Consolidated Financial Statements appearing elsewhere herein.
In the opinion of our management, all adjustments have been made that are
necessary to present fairly the unaudited pro forma data.
The pro forma adjustments have been prepared on the following assumptions:
. $33 million in principal amount of old notes are tendered under the
limited cash option and are exchanged for $10 million in cash, which will
be funded from the proceeds of the rights offering;
. $132 million in principal amount of old notes are tendered for $100
million of new notes, 4,504,595 post-reverse split shares of common stock
and warrants to purchase 3,003,063 post-reverse split shares of common
stock (at an exercise price of $5.16 per share);
. We complete the rights offering and receive the $20 million investment;
. We issue warrants to purchase 3,003,063 shares of post-reverse split
common stock (at an exercise price of $5.16 per share) to our existing
stockholders;
. We complete a ten-for-one reverse split of our issued and outstanding
common stock and our authorized common stock is increased to 500 million
shares; and
. Fees and expenses associated with this exchange offer and consent
solicitation and the rights offering are $4.0 million.
The pro forma balance sheet assumes that 100% of all holders of the old
notes will participate in this exchange offer and consent solicitation and that
20% of the old notes will be exchanged for cash and 80% of the old notes will
be exchanged for new notes, common stock and warrants. Our capitalization
follows:
As of June 30, 2001
--------------------------------
Actual Adjustments Pro Forma
--------- ----------- ---------
(in thousands)
Senior debt................................... $ 26,911
Other indebtedness............................ 3,993
Subordinated notes:
Old notes................................... 164,391
New notes................................... --
--------- --- ---
Total debt................................ 195,295
--------- --- ---
Stockholders' equity (deficit):
Preferred stock, $0.01 par value, 1,000,000
shares authorized, none outstanding, 15,000
shares designated series A junior
participating.............................. $ --
Common Stock, $0.001 par value, 500 million
shares authorized, 1,501,531 shares issued
and outstanding, 30,030,634 shares issued
and outstanding pro-forma as adjusted...... 15
Additional paid in capital.................. 153,226
Accumulated deficit......................... (212,696)
--------- --- ---
Total stockholders' equity (deficit).......... (59,455)
--------- --- ---
Total capitalization.......................... $ 135,840
========= === ===
36
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, "earnings" includes pretax income from
continuing operations plus fixed charges. "Fixed charges" include interest,
whether expensed or capitalized, amortization of debt expense and the portion
of rental expense that represents the interest factor in these rentals. The
following table presents (1) the ratio of earnings to fixed charges of Aviation
Sales for each of the fiscal years 1996 through 2000 and for the first six
months of fiscal years 2000 and 2001; and (2) the pro forma ratio of earnings
to fixed charges for fiscal 2000 and for the first six months of fiscal 2001.
The pro forma ratio of earnings to fixed charges, giving effect to this
exchange offer and consent solicitation and assuming that the old notes are
exchanged for $10 million in cash, $100 million principal amount of new notes,
4,504,595 post-reverse split shares of common stock and warrants to purchase
3,003,063 post-reverse split of common stock, is as follows:
June 30, December 31,
--------- ------------------------
2001 2000 2000 1999 1998 1997 1996
---- ---- ---- ---- ---- ---- ----
Ratio of earnings to fixed charges.........
Pro forma ratio of earnings to fixed
charges...................................
USE OF PROCEEDS
The new notes, common stock and warrants issued in connection with the
exchange offer are being issued in exchange for your old notes. We will not
receive any cash proceeds from the issuance of the new notes, common stock and
warrants in the exchange offer. We will receive $20 million from the proceeds
of the rights offering which will be used to pay the cash portion of this
exchange offer and consent solicitation (up to $10.0 million), expenses
relating this exchange offer and consent solicitation and the rights offering
(estimated to be $4.0 million) and for working capital purposes. We will cancel
all old notes tendered by you and accepted by us in the exchange offer.
37
SELECTED FINANCIAL DATA
The following table represents our selected consolidated financial
information. The selected financial data set forth below should be read in
conjunction with the Consolidated Financial Statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations which contains a description of the factors that materially affect
the comparability from period to period of the information presented herein.
Operating results from continuing operations reflect the results of operations
from our MR & O and leasing operations, including the preacquisition operations
for all periods presented of Whitehall Corporation and the pre-acquisition
operations of Aerocell Structures for 1997.
Year Ended December 31,
-------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
(in thousands, except per share data)
STATEMENT OF INCOME DATA:
Operating revenues.......... $ 76,047 $ 98,327 $184,448 $371,753 $ 338,077
Cost of sales............... 60,215 79,572 141,569 307,944 353,331
-------- -------- -------- -------- ---------
Gross profit (loss)....... 15,832 18,755 42,879 63,809 (15,254)
Operating expenses.......... 6,052 20,179 17,721 41,774 74,580
-------- -------- -------- -------- ---------
Income (loss) from
operations............... 9,780 (1,424) 25,158 22,035 (89,834)
Interest expense and other.. (400) 5,623 13,699 17,322 21,272
-------- -------- -------- -------- ---------
Income (loss) before
income taxes, equity
income of affiliate and
discontinued operations.. 10,180 (7,047) 11,459 4,713 (111,106)
Income tax expense.......... 3,817 (4,179) 4,281 3,004 4,810
-------- -------- -------- -------- ---------
Income (loss) before
equity income of
affiliate and
discontinued operations.. 6,363 (2,868) 7,178 1,709 (115,916)
Equity income of affiliate.. 255 139 1,356 1,289 43
-------- -------- -------- -------- ---------
Income (loss) from
continuing operations.... 6,618 (3,007) 8,534 2,998 (115,873)
Discontinued operations:
Operations, net of income
taxes.................... 6,166 7,850 16,959 (24,721) (23,432)
Loss on disposal, net of
income tax............... -- -- -- -- (72,325)
-------- -------- -------- -------- ---------
Net income (loss)......... $ 12,784 $ 4,843 $ 25,493 $(21,723) $(211,630)
======== ======== ======== ======== =========
Basic Earnings (Loss) Per
Share:
Income (loss) from
continuing operations.... $ 0.62 $ (0.25) $ 0.70 $ 0.22 $ (7.72)
Income (loss) from
discontinued operations.. 0.58 0.64 1.38 (1.78) (6.37)
-------- -------- -------- -------- ---------
Net income (loss)......... $ 1.20 $ 0.39 $ 2.08 $ (1.56) $ (14.09)
======== ======== ======== ======== =========
Diluted Earnings (Loss) Per
Share:
Income (loss) from
continuing operations.... $ 0.61 $ (0.25) $ 0.68 $ 0.21 $ (7.72)
Income (loss) from
discontinued operations.. 0.57 0.64 1.34 (1.77) (6.37)
-------- -------- -------- -------- ---------
Net income (loss)......... $ 1.18 $ 0.39 $ 2.02 $ (1.56) $ (14.09)
======== ======== ======== ======== =========
As of December 31,
-------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
BALANCE SHEET DATA:
Accounts receivable......... $ 18,461 $ 20,672 $ 50,027 $ 91,926 $ 67,558
Inventories................. 6,440 9,101 61,462 90,145 53,115
Working capital............. 18,822 (78,531) (82,465) (72,846) 24,673
Total assets................ 118,502 303,110 560,331 710,875 300,611
Total debt.................. 34,651 165,802 366,176 442,964 220,861
Stockholders' equity........ 115,896 121,280 154,298 218,522 6,892
38
Six Months Ended
June 30,
-------------------
2000 2001
-------- ---------
STATEMENT OF INCOME DATA:
Operating revenues........................................ $209,341 $ 152,462
Cost of sales............................................. 188,972 152,542
-------- ---------
Gross profit (loss)....................................... 20,369 (80)
Operating expenses........................................ 22,777 29,217
-------- ---------
Loss from operations.................................... (2,408) (29,297)
Interest expense.......................................... 10,765 13,116
Charge to reserve notes receivable from KAV Inventory,
LLC...................................................... -- 29,400
Other expense (income).................................... 1,036 (6,918)
-------- ---------
Loss before income taxes, equity income of affiliate and
discontinued operations................................ (14,209) (64,895)
Income tax expense........................................ 2,627 48
-------- ---------
Loss before equity income of affiliate and discontinued
operations............................................. (16,836) (64,943)
Equity income of affiliate................................ 93 --
-------- ---------
Loss from continuing operations......................... (16,743) (64,943)
Discontinued operations:
Operations, net of income taxes......................... (6,920) --
Loss on disposal, net of income taxes................... (9,218) (4,342)
-------- ---------
Net loss.................................................. $(32,881) $ (69,285)
======== =========
Basic loss per share:
Loss from continuing operations......................... $ (1.12) $ (4.33)
Loss from discontinued operations....................... (1.07) (0.28)
-------- ---------
Net loss................................................ $ (2.19) $ (4.61)
======== =========
Diluted loss per share:
Loss from continuing operations......................... $ (1.12) $ (4.33)
Loss from discontinued operations....................... (1.07) (0.28)
-------- ---------
Net loss................................................ $ (2.19) $ (4.61)
======== =========
As of
June 30,
2001
---------
BALANCE SHEET DATA:
Accounts receivable....................................... $ 38,942
Inventories............................................... 46,904
Working capital........................................... (152,732)
Total assets.............................................. 199,647
Total debt................................................ 195,295
Stockholders' equity...................................... (59,455)
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Contemplated exchange offer and rights offering
On August 14, 2001, we entered into an agreement with the holders of 73.02%
of our old notes to restructure those notes. Under the agreement, the note
holders will exchange their existing $165.0 million in old notes for up to
$10.0 million in cash or $100.0 million of new five-year senior subordinated
notes with paid-in-kind interest of 8% per annum and 15% of the equity of the
reorganized company. The new notes will be redeemable at our option at the
following percentages of par plus accrued interest through the date of
redemption: 2002 - 70.0%, 2003 - 72.5%, 2004 - 73.0%, 2005 - 75.625% and 2006 -
77.5%. The new notes will also provide that the holders will receive an
aggregate of 4,504,595 post-reverse split shares of common stock if the new
notes are redeemed in 2002 or 2003 and an aggregate of 3,003,063 post-reverse
split shares of common stock if the new notes are redeemed in 2004, 2005 or
2006. If the new notes are not redeemed prior to their maturity, they will
convert into an additional 270,275,706 post-reverse split shares of common
stock.
Under the agreement, the holders of more than a majority of the outstanding
old notes have also agreed to waive the default arising as a result of the
failure to pay the interest payment due August 15, 2001. Also, the senior
lenders have agreed to forbear in regard to the default in the senior loan
agreements resulting from the failure to make the August 15, 2001 note interest
payment until December 31, 2001.
In connection with the restructuring, we are conducting an offering of
rights to purchase shares of our common stock to all existing stockholders to
raise $20.0 million. One of our principal stockholders has agreed to provide us
with a standby commitment to purchase any unsold allotments in the rights
offering. Investors who purchase the $20.0 million of shares in the reorganized
company will receive 80% of the outstanding common stock of the reorganized
company. Under the terms of the agreement, our existing stockholders will own
5% of the reorganized company and the holders of the new notes will own 15% of
the common stock of the reorganized company. Additionally, the new note holders
and our existing stockholders will each as a group be granted warrants at a
fixed price to purchase an additional 10% of the reorganized company.
We have previously filed a registration statement relating to the rights
offering.
The note restructuring and the sale of common stock in the rights offering
will require approval of a majority of our stockholders. Completion of the note
restructuring will be subject to the requirement that holders of $132 million
aggregate principal amount of our existing old notes tender their old notes in
the exchange offer and consent to the removal of all covenants contained in the
indenture relating to the existing old notes (other than the obligation to pay
principal and interest) and approval by our senior lenders and other customary
conditions. Although there can be no assurances, we believe that we will be
able to complete the restructuring by the end of 2001.
In the event that the old note exchange offer and rights offering fail to
close, such failure is likely to have a material adverse effect on us. If we
are unable to close the note exchange offer and rights offering, we will seek
alternative financing to meet our working capital obligations. However, there
can be no assurance such funding will be available.
Recent developments concerning our operations
We believe that we will meet our working capital requirements during 2001
from funds available under our senior revolving credit agreement, from our
operations, from the proceeds of the rights offering and from sales of one or
more of our operations, individual assets or equity securities, and from debt
infusions and other sources. However, there can be no assurance that we will
have sufficient working capital to meet our requirements. Because of our
current financial situation, our auditors have included a going concern
modification in their audit report regarding our 2000 financial statements.
40
In December 2000, we completed the sale of our Dixie Aerospace Bearings new
parts distribution operation and our redistribution operation and in September
2000 we completed the sale of our manufacturing operation and three of the A-
300 aircraft which we owned. For the terms of these transactions, see Note 2 to
Consolidated Financial Statements.
In May 2001, we completed the sale of the assets of Caribe Aviation, one of
our component repair operations. The gross purchase price was $22.5 million, of
which $21.8 million was received in cash at the closing and the balance will be
received within one year, subject to post closing adjustments. We used $10.0
million of the proceeds from the sale to repay our revolving credit facility
and $5.5 million to repay borrowings under our term loans. The balance, net of
expenses, was used for working capital. In addition, the purchaser acquired the
real estate and facility on which the Caribe business operated for an aggregate
purchase price of $8.5 million. The proceeds from the sale of the real estate
and facility were used to reduce our outstanding tax retention operating lease
financing.
As a result, in part, of the anticipated reduced volume of services to be
provided to a customer which filed for bankruptcy and in an effort to reduce
operating expenses, in March 2001 we temporarily closed our Oscoda, Michigan
heavy airframe maintenance facility and reduced headcount at certain of our
other MR&O facilities. We also consolidated our Aircraft Interior Design
operation into a single facility in Dallas, Texas and consolidated our Winston
Salem, North Carolina heavy airframe maintenance operation into our Greensboro,
North Carolina facility. In addition, in April 2001, we implemented salary and
benefit reductions that affected virtually all employees. These initiatives,
which reduced our total headcount by approximately 400, are expected to reduce
our operating expenses by approximately $22.0 million to $25.0 million on an
annual basis. During the second quarter of 2001, we implemented further
headcount reductions. In total, the employee headcount for our remaining MR&O
operations has been reduced by 19% since the beginning of 2001 to approximately
2,900 employees as of June 30, 2001.
We currently hold $29.4 million of notes receivable from KAV Inventory, LLC
("KAV"), the joint venture formed as part of the sale of our redistribution
operation (see Note 2 to the Consolidated Financial Statements). In addition,
we currently have recorded assets including inventory on consignment with the
purchaser of that operation, potential additional notes receivable from KAV and
accounts receivable sold as part of the transaction which we may be required to
repurchase, which are included in net assets of discontinued operations. The
realizability of these assets is highly dependent upon the timing of sales from
the inventory of KAV and prices obtained by the purchaser pursuant to its
consignment agreement with KAV as well as the financial condition of the
purchaser and general economic and industry conditions. During the quarter
ended June 30, 2001, as a result of the default of KAV under its credit
agreement with the financial institution that provided funding for the purchase
of the inventory and the weakened economic conditions being experienced by the
purchaser of that business (as reported in its filings with the SEC) and in the
aviation industry, we recorded non-cash reserves totaling $34.5 million
relating to these matters, including a full reserve on the notes receivable due
from KAV.
Results of operations
Operating revenues consist primarily of service revenues and sales of
materials consumed while providing services, net of allowances for returns.
Cost of sales consists primarily of labor, materials, freight charges and
commissions to outside sales representatives.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future. Many factors affect our operating results,
including:
. decisions made regarding sales of our assets to reduce our debt,
. timing of repair orders and payments from large customers,
. competition from other third party MR&O service providers,
41
. the number of airline customers seeking repair services at any time,
. the impact of fixed pricing on gross margins and our ability to
accurately project our costs in a dynamic environment,
. our ability to fully utilize our hangar space dedicated to maintenance
and repair services,
. the volume and timing for 727 cargo conversions and the impact during
future periods on airline use of both the 727 fleet type and JT8D
engines (both of which are older models) as a result of increased fuel
costs and interest rates,
. our ability to attract and retain a sufficient number of mechanics to
perform the maintenance, overhaul and repair services requested by our
customers, and
. the timeliness of customer aircraft arriving for scheduled maintenance.
Large portions of our operating expenses are relatively fixed. Since we
typically do not obtain long-term commitments from our customers, we must
anticipate the future volume of orders based upon the historic patterns of our
customers and upon discussions with our customers as to their future
requirements. Cancellations, reductions or delays in orders by a customer or
group of customers could have a material adverse effect on our business,
financial condition and results of operations.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 2001
The following tables set forth certain information relating to our
operations for the periods indicated:
Six Months Ended June 30,
----------------------------------
2000 2001
---------------- ----------------
$ % $ %
-------- ------ -------- ------
(Dollars in Thousands)
Operating revenues:
Sales.................................... $206,232 98.5% $146,847 96.3%
Other.................................... 3,109 1.5% 5,615 3.7%
-------- ------ -------- ------
Total operating revenues............... 209,341 100% 152,462 100%
Cost of sales.............................. 188,972 90.3% 152,542 --
-------- ------ -------- ------
Gross profit (loss)...................... 20,369 9.7% (80) --
Operating expenses......................... 22,777 10.9% 29,217 19.2%
-------- ------ -------- ------
Loss from operations..................... (2,408) (1.2%) (29,297) (19.2%)
Interest expense........................... 10,765 5.1% 13,116 8.6%
Charge to reserve notes receivable from KAV
Inventory, LLC............................ -- -- 29,400 19.3%
Other expense (income)..................... 1,036 0.5% (6,918) (4.5%)
-------- ------ -------- ------
Loss before income taxes, equity income
of affiliate and discontinued
operations.............................. (14,209) (6.8%) (64,895) (42.6%)
Income tax expense......................... 2,627 1.2% 48 --
-------- ------ -------- ------
Loss before equity income of affiliate
and discontinued operations ............ (16,836) (8.0%) (64,943) (42.6%)
Equity income of affiliate................. 93 -- -- --
-------- ------ -------- ------
Loss from continuing operations.......... (16,743) (8.0%) (64,943) (42.6%)
Discontinued operations, net of income
taxes..................................... (16,138) (7.7%) (4,342) (2.8%)
-------- ------ -------- ------
Net loss............................... $(32,881) (15.7%) $(69,285) (45.4%)
======== ====== ======== ======
42
Operating revenues for the six months ended June 30, 2001 decreased $56.8
million or 27.1% to $152.5 million, from $209.3 million for the six months
ended June 30, 2000. The decrease in revenues is primarily attributable to
decreased revenues from our heavy airframe maintenance operations. This
decrease was generally caused by a reduction in market opportunities due to
adverse market conditions, which has caused many of our customers to delay
maintenance on their aircraft or park older aircraft maintained by us due to
rising fuel prices and economic conditions. Our market has also been adversely
impacted during 2001 by increased competition that has spread outsourced
available heavy airframe maintenance among a larger group of providers. In
addition, revenues decreased due to the temporary closure of our Oscoda,
Michigan facility and the consolidation of our Winston Salem, North Carolina
heavy aircraft maintenance facility into our Greensboro, North Carolina
operations, impacts of fixed pricing and a change in the timing of revenue
recognition in relation to the design and construction of specialized parts
effective December 31, 2000. In addition, revenue for one of our aircraft
component MR&O operations declined $6.6 million, due to a reduction in market
opportunities and the effects of reduced working capital availability. Also,
revenues for Caribe Aviation declined $3.6 million due primarily to the sale of
that business in May 2001.
Gross profit decreased $20.5 million, or 100.5% to ($0.1) million for the
six months ended June 30, 2001, compared with $20.4 million for the six months
ended June 30, 2000. Gross profit for the six months ended June 30, 2000 was
negatively impacted by a charge recorded in the second quarter of 2000 of $6.6
million relating to the disposition of the three A-300 aircraft that were sold
during August and September 2000. In addition, we incurred losses of $1.3
million during the beginning of the first quarter of 2001 associated with the
start-up of operations at one of our heavy airframe maintenance facilities for
a new program that began at the end of 2000. Additionally, due to adverse
economic conditions as described above, we provided for an additional $2.0
million in inventory and other reserves during the six months ended June 30,
2001. The remaining decrease in gross profit during these periods is primarily
attributable to the reduction in revenue described above relative to our
primarily fixed cost structure and the impact of price competition and fixed
pricing on certain of our heavy airframe maintenance operations. As a result of
reduced revenues and market opportunities, as described above, during the first
six months of 2001 we closed and consolidated certain facilities and reduced
headcount at each of our operations resulting in an aggregate reduction of
approximately 19% of our workforce. In addition, in April 2001 we implemented
salary and benefit reductions that affected virtually all employees. These
initiatives are expected to reduce our operating expenses by approximately
$22.0 million to $25.0 million on an annual basis. Gross profit as a percentage
of operating revenues decreased to less than 0.1% for the six months ended June
30, 2001, from 9.7% for the six months ended June 30, 2000.
Operating expenses increased $6.4 million or 28.1% to $29.2 million for the
six months ended June 30, 2001, compared with $22.8 million for the six months
ended June 30, 2000. Operating expenses as a percentage of operating revenues
were 19.2% for the six months ended June 30, 2001, compared to 10.9% for the
six months ended June 30, 2000. Included in operating expenses for the six
months ended June 30, 2001 are an aggregate of $12.0 million in non-cash
charges including the write off of goodwill and certain leasehold improvements
associated with the closure of the Oscoda, Michigan heavy airframe maintenance
facility, an impairment relating to the Oscoda, Michigan engine overhaul
operation, an allowance relating to a receivable from one airframe customer
which has experienced significant financial difficulty and consolidation of the
operations of Aircraft Interior Design into a single facility in Dallas, Texas.
Interest expense for the six months ended June 30, 2001 increased by $2.3
million or 21.3% to $13.1 million, from $10.8 million for the six months ended
June 30, 2000. This increase was primarily attributable to increased
amortization of bank fees due to the significant bank fees paid during 2000 and
the beginning of 2001 and amortization relating to the sale of Caribe during
the second quarter.
As described above, during the quarter ended June 30, 2001, we recorded a
charge to fully reserve against the notes receivable due from KAV Inventory,
LLC in the amount of $29.4 million. See further discussion above.
43
Other expense (income) decreased $7.9 million from expense of $1.0 million
for the six months ended June 30, 2000 to income of $6.9 million for the six
months ended June 30, 2001. Other expense (income) for the six months ended
June 30, 2000 includes our recording a loss of $0.9 million in connection with
the disposition of the AvAero joint venture. Included in other income for the
six months ended June 30, 2001 is the gain on the sale of Caribe and the
recognition of income on a lease deposit, totaling $7.9 million in the
aggregate.
As a result of the above factors, loss before income taxes, equity income of
affiliate and discontinued operations for the six months ended June 30, 2001
was a loss of $64.9 million, compared to a loss of $14.2 million for the six
months ended June 30, 2000.
Equity income of affiliate, net of income taxes, decreased $0.1 million for
the six months ended June 30, 2001 to zero from $0.1 million for the same
period in 2000. The decrease was attributable to the winding down in the
operations of the affiliate. During the second quarter of 2000, our remaining
investment in the affiliate was liquidated resulting in a charge of $0.9
million, which is included in interest expense and other.
For the reasons set forth above, loss from continuing operations for the six
months ended June 30, 2001 was $64.9 million or $4.33 per diluted share,
compared to $16.7 million, or $1.12 per diluted share for the six months ended
June 30, 2000. Weighted average common and common equivalent shares outstanding
(diluted) were 15.0 million during the six months ended June 30, 2001 and 2000.
Loss from discontinued operations for the six months ended June 30, 2001 was
$4.3 million, or $0.28 per diluted share, compared to $16.1 million or $1.07
per diluted share for the six months ended June 30, 2000. Loss from
discontinued operations for the six months ended June 30, 2001 is primarily
comprised of collections on receivables retained from the sale of the
redistribution operations that had been fully reserved offset by the reserving
of certain other assets including $5.1 million of reserves relating to assets
whose realizability is impacted by KAV and the financial condition of the
purchaser of the redistribution operations.
Year Ended December 31, 1999 Compared to Year Ended December 31, 2000
The following tables set forth certain information relating to our
operations for the periods indicated:
1999 2000
---------------- -----------------
$ % $ %
-------- ------ --------- ------
(In Thousands)
Operating revenues:
Sales, net.............................. $359,956 96.8% $ 333,289 98.6%
Other................................... 11,797 3.2% 4,788 1.4%
-------- ------ --------- ------
Total operating revenues.............. 371,753 100.0% 338,077 100.0%
Cost of sales and services................ 307,944 82.8% 353,331 104.5%
-------- ------ --------- ------
Gross profit (loss)..................... 63,809 17.2% (15,254) (4.5%)
Operating expenses........................ 41,774 11.2% 74,580 22.1%
-------- ------ --------- ------
Income (loss) from operations........... 22,035 6.0% (89,834) (26.6%)
Interest expense and other................ 17,322 4.7% 21,272 6.3%
-------- ------ --------- ------
Income (loss) before income taxes, equity
income of affiliates and discontinued
operations............................... 4,713 1.3% (111,106) (32.9%)
Income tax expense........................ 3,004 0.8% 4,810 1.4%
-------- ------ --------- ------
Income (loss) before equity income of
affiliates and discontinued
operations............................. 1,709 0.5% (115,916) (34.3%)
Equity income of affiliates............... 1,289 0.3% 43 --
-------- ------ --------- ------
Income (loss) from continuing
operations............................. 2,998 0.8% (115,873) (34.3%)
Discontinued operations, net of income
taxes.................................... (24,721) (6.6%) (95,757) (28.3%)
-------- ------ --------- ------
Net loss.............................. $(21,723) (5.8%) $(211,630) (62.6%)
======== ====== ========= ======
44
Operating results from continuing operations reflect the results of
operations of our MR&O and leasing operations. Operating revenues for the year
ended December 31, 2000, decreased $33.7 million, or 9.1%, to $338.1 million,
from $371.8 million for the same period in 1999. As discussed herein, operating
revenues in 2000 were negatively impacted by a reduced volume of orders
received from existing customers due to concerns over the status of our credit
facility and our financial stability, and a reduction in market opportunities
caused by several airline customers delaying or deferring maintenance in an
effort to reduce costs. Revenues were also affected by increased competition
that spread outsourced aircraft maintenance among a larger group of providers,
which caused us to give various price concessions and fixed pricing in order to
retain customers. In addition, revenues from our leasing operation decreased
$13.0 million from period to period, due to a significant reduction in leased
assets and sales of leased assets in 1999, which did not recur in 2000.
Gross profit decreased $79.1 million, or 123.9%, to a loss of $15.3 million
for the year ended December 31, 2000, compared with a profit of $63.8 million
for the year ended December 31, 1999. As discussed below, gross profit for the
year ended December 31, 1999 included charges related to the carrying value of
our inventory and aircraft that we owned totaling $12.7 million. Gross profit
for the year ended December 31, 2000 was negatively impacted by a charge
recorded in the second quarter of 2000 of $6.6 million relating to the
disposition of the three A-300 aircraft which were sold during August and
September 2000. Additionally, due to our continuing efforts to reduce our debt
through sales of our assets, we recorded a charge of $4.9 million in the year
ended December 31, 2000 to reduce the carrying value of certain equipment on
lease and inventory (including the A-300 aircraft we continue to own) to an
amount estimated to be recoverable through the sale of such assets. We further
recorded a charge of $3.0 million relating to inventory which was scrapped in
connection with the move of one of our MR&O operations, Aircraft Interior
Design, from Florida to Texas. We also experienced a decrease in gross profit
from our leasing operations, due to a reduction in our investment in leased
assets and sales of leased assets in 1999, which did not recur in 2000.
Gross profit as a percentage of operating revenues decreased to (4.5)% for
the year ended December 31, 2000, from 17.2% for the year ended December 31,
1999. In addition to the items discussed above, gross profit for the year ended
December 31, 2000 was also negatively impacted by inefficiencies and reductions
in gross profits realized as a result of delays in the timing of orders being
placed into service, a reduced volume of orders received from existing and
potential customers due to concerns which existed over the status of our credit
facility and our financial stability, and a reduction in market opportunities
caused by several airline customers' decision to defer aircraft or aircraft
component maintenance in an effort to reduce costs due to higher fuel prices
and interest rates. Also, due to our primarily fixed cost structure, excess
capacity in our airframe maintenance facilities resulted in reduced realization
and gross profit. Lastly, gross profit was negatively impacted by the effects
of price concessions and fixed pricing in the dynamic competitive environment
that we experienced in 2000. Our operating results for the year ended December
31, 2000 were significantly adversely affected by these factors. While there
can be no assurances, we believe these concerns have been reduced as a result
of the execution of an amended credit facility, the closing of our Oscoda,
Michigan heavy airframe maintenance facility, our recent headcount reductions
and the previously announced transactions involving sales of our assets to
reduce our debt, all as described above.
Operating expenses increased $32.8 million or 78.5% to $74.6 million for the
year ended December 31, 2000, compared with $41.8 million for the year ended
December 31, 1999. Operating expenses as a percentage of operating revenues
were 22.1% for the year ended December 31, 2000, compared to 11.2% for the year
ended December 31, 1999. As discussed below, operating expenses for the year
ended December 31, 1999 included non-recurring charges of $5.3 million.
Operating expenses in 2000 were affected by increased costs associated with the
operation of new facilities opened during 1999. They were also affected by a
$2.0 million increase in professional fees during 2000 compared to 1999,
relating primarily to the completion of our 1999 audit and the refinancing and
amendments to our credit facility, and a charge of $22.3 million relating to
bad debt reserves recorded against certain major customers, including accounts
receivable relating to a customer which filed for bankruptcy protection in 2000
and maintenance performed on an aircraft for a customer that recently ceased
operation. In addition, during 2000 we recorded a non-cash charge of $7.8
million relating to
45
the write-off of goodwill and contract costs associated with the temporary
closure of one of our MR&O facilities, as described above. Operating expenses
were also negatively impacted by costs associated with the move to new
facilities during the third quarter of 2000 of two of our MR&O operations,
Caribe Aviation and Aircraft Interior Design.
Interest expense and other from continuing operations for the year ended
December 31, 2000 increased by $4.0 million or 22.8% to $21.3 million, from
$17.3 million for the year ended December 31, 1999. The increase was due, in
part, to our recording a loss of $0.9 million in connection with the
disposition of the AvAero joint venture. Additionally, we paid bank fees of
$10.6 million during the year ended December 31, 2000. Total amortization of
bank fees, including bank fees attributable to discontinued operations, for the
year ended December 31, 2000 was $13.7 million. Interest expense relating to
continuing operations for the year ended December 31, 2000 was $20.3 million,
compared to $18.6 million for the year ended December 31, 1999. Cash interest
due in 2001 includes an aggregate of $13.4 million in interest due on our
outstanding old notes, and annualized current interest on amounts due under our
senior credit facilities of approximately $5.5 million.
In addition, we were not in compliance with the financial covenants under
our credit facility as of December 31, 1999 and March 31, 2000. As a result,
during the first quarter of 2000, we entered into a standstill agreement with
our lenders under which they agreed to forbear in regards to these covenant
violations and other matters. Under the terms of the standstill agreements, our
interest rate was increased by 2%. We were also required to pay substantial
financing fees ($1.5 million) that were expensed over the term of the original
standstill agreement, which expired on March 31, 2000 and an additional $1.5
million that related to a further extension of the standstill agreement through
May 31, 2000 which were expensed during the second quarter of 2000. In
connection with the May 31, 2000 amendment of the credit facility, we paid
additional bank fees of $3.8 million, which are being amortized over the term
of the facility which expires in July 2002, and we committed to pay an
additional $2.0 million in fees in 2001 if the credit agreement has not been
refinanced by that date. In connection with the amendment to the credit
facility which became effective June 25, 2000, we paid fees of $2.2 million,
which are being amortized between July 1, 2000 and June 30, 2002.
As a result of the above factors, income (loss) before income taxes, equity
income of affiliate and discontinued operations for the year ended December 31,
2000 was a loss of $111.1 million, compared to income of $4.7 million for the
year ended December 31, 1999.
Income tax expense increased $1.8 million to $4.8 million for the year ended
December 31, 2000, from $3.0 million for the year ended December 31, 1999.
Income tax expense for the year ended December 31, 2000 is primarily comprised
of state income tax accrual and a provision for a full valuation allowance on
our deferred tax assets. These charges are primarily non-cash charges.
Equity income of affiliate, net of income taxes, decreased $1.2 million for
the year ended December 31, 2000 to $0.1 million, from $1.3 million for the
same period in 1999. The decrease was attributable to the winding down in the
operations of the AvAero joint venture. During the second quarter of 2000, our
remaining investment in the joint venture was liquidated resulting in a $0.9
million charge, which is included in interest expense and other.
For the reasons set forth above, income (loss) from continuing operations
for the year ended December 31, 2000 was a loss of $115.9 million ($7.72 per
diluted share), compared to income of $3.0 million ($0.21 per diluted share)
for the year ended December 31, 1999. Weighted average common and common
equivalent shares outstanding (diluted) were 15.0 million during the year ended
December 31, 2000, compared to 14.2 million for the year ended December 31,
1999.
Discontinued operations include the results of operations of our
redistribution operation, new parts distribution operation and manufacturing
operations, all of which were sold during 2000.
46
Income (loss) from discontinued operations for the year ended December 31,
2000 was a loss of $23.4 million, or $1.55 per diluted share, compared to a
loss of $24.7 million, or $1.77 per diluted share, for the year ended December
31, 1999. Revenues and gross margin in our redistribution operations decreased
during 2000 as a result of our decision to limit purchases of spare aircraft
parts commencing at the end of the first quarter of 2000 and our initiative to
reduce inventory in our redistribution operations (and use the proceeds from
such inventory reductions to repay senior debt). Operating revenues were also
negatively impacted during 2000 by customer concerns regarding the status of
our credit agreement and financial stability. Operating expenses relating to
our redistribution operations also increased as a result of our strategy during
1999 and the beginning of 2000 to continue to grow these operations. During the
latter portion of the first quarter of 2000, we restructured our redistribution
operations and reduced headcount in that business. Additionally, our
redistribution operation experienced an increase in interest expense primarily
attributable to the increased debt required to support its operations.
Results from discontinued operations also include losses on the disposal of
the discontinued operations of $72.3 million (or $4.82 per diluted share) for
the year ended December 31, 2000. Please read "Recent Developments" above.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1999
The following tables set forth certain information relating to our
operations for the periods indicated:
1998 1999
--------------- ----------------
$ % $ %
-------- ------ -------- ------
(In Thousands)
Operating revenues:
Sales, net................................. $177,279 96.1% $359,956 98.6%
Other...................................... 7,169 3.9% 11,797 3.2%
-------- ------ -------- ------
Total operating revenues................. 184,448 100.0% 371,753 100.0%
Cost of sales and services................... 141,569 76.8% 307,944 82.8%
-------- ------ -------- ------
Gross profit............................... 42,879 23.2% 63,809 17.2%
Operating expenses........................... 17,721 9.6% 41,774 11.2%
-------- ------ -------- ------
Income from operations..................... 25,158 13.6% 22,035 6.0%
Interest expense and other................... 13,699 7.5% 17,322 4.7%
-------- ------ -------- ------
Income before income taxes, equity income of
affiliates and discontinued operations...... 11,459 6.1% 4,713 1.3%
Income tax expense........................... 4,281 2.2% 3,004 0.8%
-------- ------ -------- ------
Income before equity income of affiliates
and discontinued operations affiliates and
discontinued operations................... 7,178 3.9% 1,709 0.5%
Equity income of affiliates.................. 1,356 0.7% 1,289 0.3%
-------- ------ -------- ------
Income from continuing operations.......... 8,534 4.6% 2,998 0.8%
Discontinued operations, net of income
taxes....................................... 16,959 9.2% (24,721) (6.6%)
-------- ------ -------- ------
Net income (loss)........................ $ 25,493 13.8% $(21,723) (5.8%)
======== ====== ======== ======
Revenues for the year ended December 31, 1999 increased $187.4 million or
101.5% to $371.8 million, from $184.4 million for the year ended December 31,
1998. This increase is due primarily to the acquisition of TIMCO in September
1998 which has been accounted for under the purchase method of accounting and
therefore is only included in the results of operations from the date of
acquisition.
Gross profit increased $20.9 million or 48.8%, from $42.9 million for the
year ended December 31, 1998 to $63.8 million for the year ended December 31,
1999 primarily due to the TIMCO acquisition. Gross profit
47
margin for the year ended December 31, 1999 was 17.2%, a decrease of 6.0% from
a gross profit margin of 23.2% for the year ended December 31, 1998. During the
fourth quarter of 1999, we recorded a non-recurring reduction in the carrying
value of our inventory at December 31, 1999 including a reduction in the
carrying value of the four A-300 aircraft which we owned, totaling $12.7
million. Excluding these charges, the gross profit margin for 1999 was 21.5%,
compared to 23.2% for 1998. The gross profit margin for our MR&O operations
decreased slightly in 1999 due to an increase in labor expenses coupled with
increased competition and pressure to maintain level pricing for services. In
addition, MR&O gross profit margin decreased slightly due to the increased
relative significance of TIMCO, which realizes lower gross profit margins than
our other MR&O operations, to our total MR&O operations.
Operating expenses increased $24.1 million to $41.8 million for the year
ended December 31, 1999, compared with $17.7 million for the year ended
December 31, 1998. Operating expenses as a percentage of operating revenues
were 11.2% for the 1999 fiscal year, compared to 9.6% for 1998. During the
fourth quarter of 1999, we recorded a non-recurring primarily non-cash charge
of $5.3 million related to an addition to the allowance for doubtful accounts
receivable and the write-off of miscellaneous deposits and other assets which
have been determined to not be collectible. The remaining increase was
primarily attributable to professional fees aggregating approximately $2.0
million relating to several large transactions that were not completed and
start up costs associated with the opening of five new facilities during the
fiscal year.
As a result of all of these factors, income from operations was $22.0
million for 1999, compared to $25.2 million for 1998.
Interest expense and other from continuing operations for the year ended
December 31, 1999 increased $3.6 million compared to interest expense for 1998.
The increase in interest expense was due to increased interest rates on
variable rate debt, coupled with increased net borrowings during 1999 to
finance the growth in our MR&O operations, including the acquisition of the
assets of Kitty Hawk, Inc.'s maintenance operations and additional substantial
investments in facilities, equipment and computer systems to support our
operations. During 1999, we opened four new MR&O facilities in addition to the
MR&O facilities that we acquired from Kitty Hawk, Inc. We also installed new
computer systems in our MR&O operations. Interest expense and other includes a
profit of $1.4 million realized in 1999 relating to the sale of real estate.
Discontinued operations incurred a loss of $24.7 million for the year ended
December 31, 1999 compared to a profit of $17.0 million for the year ended
December 31, 1998. The variance is primarily attributable to adjustments
recorded as of December 31, 1999 to the carrying value of certain assets and
other charges totaling approximately $44.4 million. These charges were
comprised primarily of an adjustment to the carrying value of redistribution
inventory and a write-down of capitalized costs previously expended relating to
the development of a new software system which has not been implemented and
will not be completed.
The net loss for the year ended December 31, 1999 was $21.7 million ($1.56
per diluted share), compared to net income of $25.5 million ($2.02 per diluted
share) for the year ended December 31, 1998. Weighted average common and common
equivalent shares outstanding (diluted) were 14.2 million for the year ended
December 31, 1999, compared to 12.6 million for the year ended December 31,
1998. This increase is primarily the result of the public offering of
additional common shares that we completed in June 1999 and which resulted in
the issuance of 2.3 million additional shares of our common stock.
Liquidity and capital resources
Liquidity
As of June 30, 2001, we had outstanding indebtedness of approximately $195.3
million (excluding letters of credit), of which $26.9 million was senior debt
and $168.4 million was other indebtedness. As of June 30, 2000, we had $425.4
million of outstanding indebtedness. Our ability to make payments of principal
and
48
interest will depend upon our future operating performance, which will be
subject to economic, financial, competitive and other factors beyond our
control. The level of our indebtedness is also important due to:
. our vulnerability to adverse general economic and industry conditions,
. our ability to obtain additional financing for future working capital
expenditures, general corporate and other purposes, and
. the dedication of a substantial portion of our future cash flow from
operations to the payment of principal and interest on indebtedness,
thereby reducing the funds available for operations and future business
opportunities.
In prior years, we relied primarily upon significant borrowings under our
credit facility, and sales of our securities, including our senior subordinated
notes, to satisfy our funding requirements relating to acquisitions of several
businesses and to finance the growth of our business. During 2000 and 2001 to
date, we have relied upon borrowings under our credit facility and the proceeds
of term loans obtained, along with the proceeds from our asset sales, to meet
our working capital requirements. We cannot assure you that financing
alternatives will be available to us in the future to support our existing
operations' working capital requirements.
Cash
Net cash provided by continuing operating activities during the six months
ended June 30, 2001 and 2000 was $5.0 million and $9.1 million, respectively.
Cash provided by (used in) investing activities during the six months ended
June 30, 2001 and 2000 was $21.7 million and $(6.0) million, respectively. The
cash provided by investing activities for the six months ended June 30, 2001
primarily related to the sale of a note receivable to an affiliate coupled with
an initiative to reduce capital expenditures associated with tooling
investments in our MR&O operations and equipment purchases. Cash used in
financing activities for the six months ended June 30, 2001 and 2000 was $27.2
million and $23.0 million, respectively. Cash used in financing activities for
the six months ended June 30, 2001 is primarily comprised of the proceeds of a
$10.0 million term loan executed in February 2001, net of payments of financing
costs offset by continued reductions in our revolving loan made possible by the
sale of Caribe Aviation.
Senior credit facilities
Prior to May 31, 2000, we had a revolving loan and letter of credit facility
of $300.0 million with a group of financial institutions. Effective May 31,
2000, the credit facility was amended and restated and the commitment was
reduced to $285.0 million. Following the asset sales described above, the
commitment was reduced to $57.7 million. The credit facility has been amended
on several occasions since May 31, 2000. The credit facility as amended to date
(the "senior revolving credit facility") expires in July 2002. Interest under
the senior revolving credit facility is, at our option, (a) prime plus 3.0%, or
(b) LIBOR plus 4.5%. As of June 30, 2000 and June 30, 2001, the outstanding
balance on the senior revolving credit facility was $268.0 million and $4.9
million, respectively. Borrowings under the senior revolving credit facility
are secured by a lien on substantially all of our assets and the borrowing base
primarily consists of certain of our receivables and inventory.
The senior revolving credit facility contains certain financial covenants
regarding our financial performance and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the suspension of the senior revolving credit
facility and repayment of all debt in the event of a material adverse change in
the business or a change in control. In addition, the senior revolving credit
facility requires mandatory repayments from the proceeds of a sale of assets or
an issuance of equity or debt securities or as a result of insufficient
collateral to meet the borrowing base requirements there under. We were
committed to pay a $1.0 million financing fee on June 30, 2001, which we paid
on July 2, 2001, and we paid an additional $0.2 million in financing fees in
August 2001. To the extent the senior revolving credit facility remains
outstanding as of certain dates, we are committed to pay incremental financing
fees as follows: November 14, 2001 - 2% of outstanding commitment and February
14, 2002 - 2% of outstanding commitment.
49
In February 2000, we obtained a $15.5 million senior term loan with the
financial institution that is agent for the senior revolving credit facility.
The proceeds from the term loan were used to repay debt outstanding under the
senior revolving credit facility. The term loan, as amended, bears interest at
12%, contains financial covenants that are consistent with the senior revolving
credit facility and matures in July 2002. We repaid $3.5 million of the term
loan from the proceeds of the sale of Caribe. Remaining principal payments of
$0.5 million per month are due beginning in January 2002 with a final principal
payment of $8.5 million due in July 2002. Under the term loan agreement, we
also granted warrants to the lender to purchase 129,000 shares of our common
stock exercisable for nominal consideration at any time until December 31,
2005. The warrants entitle the holder to require us to repurchase the warrants
or common shares issued upon prior exercise of the warrants at $8.50 per share.
Our senior lenders have agreed to forbear until December 31, 2001 in regard
to the default which existed in the senior credit facilities resulting from our
failure to make the August 15, 2001 interest payment on the old notes. This
forbearance effectively cures the cross-default under the term loan through the
end of the forbearance period. Subsequent to the end of the forbearance period
(if the restructuring is not completed by that date or if the forbearance
period is not otherwise extended), the holder of the term loan will have the
ability to accelerate payment of the outstanding term loan balance. As a
result, the entire $12.0 million balance of the term loan as of June 30, 2001
has been classified as a current liability in the accompanying condensed
consolidated balance sheet at that date.
In February 2001, we obtained a $10.0 million senior term loan from a
financial institution. The term loan bears interest at LIBOR plus 2% and
matures in August 2002. The proceeds of the term loan were used to pay the
semi-annual interest payment on the senior subordinated notes in February 2001
of $6.7 million and for working capital purposes. In connection with the term
loan, we issued warrants to purchase 250,000 shares of our unissued common
stock at an exercise price of $4.00 per share to each of four individuals. Of
these individuals, one of them is an officer and a director, and a second is
one of our principal stockholders. Each of these four individuals provided
credit support to the financial institution which advanced the term loan
proceeds. In May 2001, we obtained a short-term increase of up to $3.0 million
in the term loan. We borrowed $2.0 million under the increased term loan in May
2001 and thereafter repaid the additional borrowing from the proceeds of the
Caribe sale. One of our principal stockholders provided credit support for the
increased amount of the term loan. In return for providing credit support, the
stockholder received a cash fee of $0.1 million and warrants to purchase
333,334 shares of our common stock at an exercise price of $1.40 per share.
Senior subordinated notes
In February 1998, we sold $165.0 million of our old notes. For a description
of the old notes, please read "Description of Old Notes" in this prospectus and
consent solicitation.
Other notes
In connection with the acquisition of Kratz-Wilde Machine Company, one of
our subsidiaries delivered a non-interest-bearing promissory note (guaranteed
by us) to the sellers in the original principal amount of $2.5 million
(discounted to $2.2 million). A payment of $1.2 million was made during January
1999 and the remaining principal balance of $1.3 million was paid in January
2000. Interest on this note has been imputed at 8%.
In connection with the acquisition of Caribe and AIDI, one of our
subsidiaries delivered to the sellers a promissory note in the original
principal amount of $5.0 million, which was guaranteed by us. The note was
payable over a two-year period with an interest rate of 8% per annum. The first
payment of $2.5 million was made during March 1999 and the final payment was
paid in March 2000.
Lease for Miramar facilities
During 1998, we decided to move our redistribution operation and one of our
MR&O operations to new facilities in Miramar, Florida. On December 17, 1998, we
entered into an operating lease for the new facility
50
with Wells Fargo, as successor to First Security Bank, National Association, as
trustee of a newly created trust, as lessor. The lease has an initial term of
five years and is a triple net lease. The lease contains financial covenants
regarding our financial performance and other affirmative and negative
covenants. Substantially all of our subsidiaries have guaranteed our
obligations under the lease. Additionally, we have an option to acquire the new
facility at the end of the lease and, if we do not purchase the new facility at
the end of the lease, we will be obligated to pay a fee. Management estimates
that the current fair value of the facility exceeds our purchase option.
Accordingly, no fee has been accrued by us. Lease payments are currently at the
rate of LIBOR plus 4.5%, and we are responsible for all property taxes,
insurance and maintenance of the facility. We moved our corporate headquarters
and redistribution operations into one of the new facilities in April 2000 and
one of our MR&O operations, Caribe Aviation, into another building adjacent to
the redistribution operations facility during October 2000. In conjunction with
the sale of our redistribution operations (see "Recent developments concerning
our operations" above), we subleased the corporate headquarters and
redistribution operation facility to the purchaser of our redistribution
operations for a period of five years with the right to renew for five
consecutive five-year periods at a market rental rate. Further, in May 2001 the
purchaser of the Caribe business acquired the land and building on which that
business operates.
The lessor has financed the development of the new facility through a $43.0
million loan from a financial institution. In conjunction with the sale of
Caribe, the purchaser of that business also acquired the real estate and
facility in which Caribe operates for $8.5 million. These proceeds were used to
repay a portion of the financing provided to develop the facility. We and
substantially all of our subsidiaries have guaranteed the repayment of $29.3
million of the lessor's obligations under its loan agreement. The lessor's
obligations under the agreement are secured by a lien on the real property and
on the new facility. Further, we have posted an irrevocable letter of credit in
the amount of $9.0 million to secure both our obligations under the lease and
certain of the lessor's obligations under the related loan agreement.
The lease agreement has been amended on several occasions. Under the terms
of an April 19, 2001 amendment, two stockholders of the Company provided a
guarantee in an amount up to $1.0 million. Such guarantee was released in
conjunction with the sale of Caribe and repayment of proceeds relating to the
sale of the real estate and facility as discussed above. As part of the April
19, 2001 amendment, the lessor has agreed to waive non-compliance with
financial covenants, if any, through the period ended December 31, 2001.
Further, under a September 10, 2001 agreement, we have agreed that the
lender may draw down in full, at any time, the $9.0 million letter of credit
which we have posted as security for this loan and apply the proceeds from such
letter of credit draw against balances outstanding under the loan agreement.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
The table below provides information about our market sensitive financial
instruments and constitutes a "forward-looking statement." Our major market
risk exposure is changing interest rates in the United States and fluctuations
in the London Interbank Offered Rate. Our policy is to manage interest rates
through use of a combination of fixed and floating rate debt. All items
described are non-trading. The table below assumes the December 31, 2000
interest rates remain constant (dollars in thousands).
Fair Value
December 31,
2001 2002 2003 2004 2005 Thereafter Total 2000
------- ------- ---- ---- ---- ---------- -------- ------------
Long term debt:
Fixed rate debt........ $ 29 $16,498 -- -- -- $164,345 $180,872 $82,527
Average interest rate.. 12.00% 12.00% -- -- -- 8.13%
Variable interest rate
debt.................. $35,959 -- -- -- -- -- $ 35,959 $35,959
Average interest
rates................. 11.31% -- -- -- -- --
51
BUSINESS
General
We are a leading provider of aviation maintenance, repair and overhaul
("MR&O") services. We believe that we are the largest independent provider of
heavy maintenance services for aircraft in North America. We sell and provide
aircraft maintenance, repair and overhaul services to commercial passenger
airlines and air cargo carriers throughout the world.
We offer maintenance and repair services through our eight repair stations
licensed by the Federal Aviation Authority (FAA). These services include
maintenance, repair and modification services for aircraft, and repair and
overhaul services on a wide range of aircraft components, flight control
surfaces, aircraft interiors and Pratt & Whitney JT8D engines. In addition, we
also provide modification services for the conversion of passenger aircraft to
freighter configuration as well as aircraft engineering services.
Our strategy is to be the vendor of choice to our customers, providing total
aircraft maintenance solutions to meet our customers' maintenance, repair and
overhaul requirements. The services we offer allow our customers to reduce
their costs by outsourcing some or all of their maintenance, repair and
overhaul functions.
We were incorporated as a Delaware corporation in 1996.
Recent developments in our continuing operations
During 2000 and through the second quarter of 2001, competition in the
market for airframe maintenance and repair services increased as certain
competitors expanded capacity. Additionally, during this same period, some
airlines, in response to rising costs primarily related to fuel prices, reduced
or deferred their levels of maintenance, resulting in some cases in less
outsourcing of aircraft maintenance. In addition, during 2000 concern existed
with some of our customers and potential customers regarding the status of our
credit facility and regarding our financial stability. We believe that these
factors adversely affected the amount and timing of work that we received from
our customers. Additionally, because of our financial situation and the
competition in our industry, our facilities (and the facilities of most other
third-party maintenance service providers) had excess capacity during 2000.
During 2000 and through the second quarter of 2001, in an attempt to fill our
excess capacity and to meet competitive pressures, we offered pricing discounts
and performed services for a greater volume of single aircraft customers, which
had a significant negative impact on our overall efficiency.
In March 2001, in an effort to reduce our operating expenses, we temporarily
closed our Oscoda, Michigan heavy airframe maintenance facility and reduced
headcount at certain of our other MR&O facilities. We also consolidated our
Winston-Salem, North Carolina airframe maintenance facility into our
Greensboro, North Carolina Facility, our Aircraft Interior Design operation
into a single facility in Dallas, Texas and entered into a three-year agreement
with a customer to dedicate our Macon, Georgia heavy airframe maintenance
facility to servicing that customer's airframe maintenance requirements. These
initiatives, which reduced our total headcount by approximately 400, are
expected to reduce our operating expenses by approximately $12.0 million on an
annual basis.
As of August 2001, our customer base is primarily comprised of a small
number of large commercial airlines and cargo carriers and other smaller
airlines, cargo carriers and leasing companies for whom we provide a lesser
volume of services. During 2000, our four largest continuing customers in the
aggregate represented approximately 31.7% of our total revenues and our largest
customer represented 14.0% of our total revenues. We consider our relationship
with each of these customers to be good and, although there can be no
assurance, we expect that these customers will continue to represent a
significant portion of our total revenues in the future. However, the loss of
one or more of our large customers would likely have a material adverse effect
on our future results of operations.
52
Recent sales of businesses to reduce senior debt and to focus our continuing
operations on our MR&O businesses
During 2000 and the first six months of 2001, we engaged in a restructuring
of our business and operations intended to focus our business on our
maintenance, repair and overhaul operations and to reduce our senior debt.
In May 2001, we completed the sale of the assets of our Caribe Aviation,
Inc. component repair subsidiary for $22.5 million, of which we received $21.75
million at closing with the balance to be paid within one year, subject to
post-closing adjustments. We used $13.5 million of the proceeds from the sale
to repay senior debt and the remainder for working capital.
In September 2000, our board of directors made the decision to dispose of
our Dixie Aerospace Bearings new parts distribution operation. On December 26,
2000, we completed the sale of our Dixie Aerospace new parts distribution
operation to Wencor West, Inc. for $17.7 million, including debt assumed by
Wencor West. We used the net cash proceeds of the sale, which approximated
$13.5 million, to repay senior debt. In addition, we retained certain accounts
receivable and inventory of Dixie's new parts distribution operation which are
being liquidated pursuant to collection and consignment agreements executed
with the purchaser.
On December 1, 2000, we completed the sale of substantially all of the
assets and business of our redistribution operation in a series of transactions
which were intended to constitute a single transaction (the "Transaction"). The
Transaction was entered into with Kellstrom Industries, Inc. ("Kellstrom") and
KAV Inventory, LLC ("KAV"). KAV is a 50/50 limited liability company organized
by Kellstrom and us. The aggregate purchase price received by us in the
Transaction was $156.4 million, approximately $127.0 million of which was paid
in cash ($122.0 million after payment of transaction expenses). The net
proceeds of the Transaction were used by us to repay senior debt.
The first component of the Transaction consisted of KAV's acquisition of
substantially all of the aircraft and engine spare parts inventory and the
engine inventory of our redistribution operation, as well as certain rotable
parts inventories from two of our MR&O operations. The purchase price paid for
this inventory was 89% of the closing date adjusted book value of such
inventory ($148.6 million), subject to post-closing adjustment as set forth in
the agreement relating to the inventory sale. As part of the Transaction, KAV
consigned the inventory to Kellstrom.
The cash portion of the purchase price paid for the inventory ($105.5
million) was obtained by KAV from a syndicate of financial institutions led by
Bank of America, N.A., with the balance paid in the form of three subordinated
promissory notes. The KAV institutional financing is secured by a lien on all
of the assets of KAV. The first two subordinated notes, each in the principal
amount of $13.7 million, are five-year senior subordinated notes bearing
interest at the rate of 14% per annum (see below for a description of
Kellstrom's purchase of one of these notes). The first two notes are
subordinated in all respects to the KAV institutional financing. The third
subordinated note is a five-year junior subordinated note in the principal
amount of $15.7 million bearing interest at the rate of 14% per annum. The
junior subordinated note is subordinated in all respects to both the KAV
institutional financing and to repayment of the two senior subordinated notes.
These amounts will be paid with funds available after repayment of the KAV
institutional financing and before repayment of the $13.7 million senior
subordinated notes.
We have agreed with Kellstrom to equally share the operational expenses of
KAV beyond amounts permitted under the loan agreement relating to KAV's
institutional financing. Additionally, we posted an $8.5 million letter of
credit and Kellstrom posted a $6.5 million letter of credit with Bank of
America to secure (in part) KAV's institutional financing. The letters of
credit will only be drawn upon a default by KAV of its loan obligations and if
drawn, such amounts will be treated as loans to KAV and will be repaid prior to
repayment of the senior subordinated notes. Additionally, we and Kellstrom will
each be repaid the approximately $2.3 million which we each advanced to KAV for
use in paying bank fees and expenses relating to obtaining their institutional
financing. We and Kellstrom will be repaid these amounts prior to repayment of
the senior subordinated notes.
53
The second component of the Transaction consisted of a sale to Kellstrom of
certain non-inventory assets of our redistribution operation and the assumption
by Kellstrom of a portion of the redistribution operation's accounts payable.
Kellstrom also acquired one of the $13.7 million senior subordinated notes
described above. The net purchase price for these assets (including the $13.7
million senior subordinated note), after adjustment for assumed debt, was $21.5
million, all of which was paid in cash. The purchase price of the non-inventory
assets purchased by Kellstrom is subject to post-closing adjustment as set
forth in the agreement relating to the asset sale.
Additionally, as part of the Transaction:
(1) Kellstrom leased certain furniture, fixtures and equipment (the
"FF&E") used in the redistribution operation and the redistribution
operation's warehouse facility in Pearland, Texas for a one-year term;
(2) Kellstrom leased the redistribution operation's 545,000 square foot
headquarters and warehouse facility located in Miramar, Florida. Pursuant
to a sublease agreement, Kellstrom will pay us the lesser of $384,000 or
the actual lease payment due under our lease for this facility for each
year during the initial five year lease term. We also granted Kellstrom the
right to renew the sublease for five consecutive five year periods, at a
fair market rental rate;
(3) Kellstrom has an option to acquire the FF&E and/or the Pearland,
Texas property during the term of the above-described leases, and for a
period of 60 days thereafter, for a purchase price equal to the net book
value of such assets (approximately $9.4 million in the aggregate). We have
an option after one year to require Kellstrom to purchase the FF&E and/or
the Pearland, Texas property for the same purchase prices; provided,
however, that if we exercise either or both of our options, Kellstrom may
defer its purchases of and continue to lease the FF&E and/or the Pearland,
Texas property for up to an additional six months under certain
circumstances;
(4) We entered into a cooperation agreement under which we agreed to
provide repair services for the KAV parts inventory as well as repair
services to Kellstrom with respect to Kellstrom's parts inventory, and
Kellstrom agreed to supply parts to our MR&O operations, on an ongoing
basis;
(5) We entered into a non-competition agreement with Kellstrom whereby
we are restricted for a period of up to five years from engaging in the
redistribution business; and
(6) We granted Kellstrom a limited license to use the name "Aviation
Sales" (if combined with the Kellstrom name) in connection with Kellstrom's
redistribution business.
On September 7, 2000, we completed the sale to Barnes Group Inc. of
substantially all of the assets of our Kratz-Wilde Machine Company and Apex
Manufacturing manufacturing operations for $41.0 million, excluding transaction
expenses and possible post-closing adjustments as set forth in the agreement
relating to the sale. The net proceeds of the sale were used to repay senior
debt. In addition, as part of the sale, Barnes assumed the closing date
ordinary course liabilities of these businesses.
In July 2000, we executed agreements to sell three of the A-300 aircraft
which we owned for $12.0 million each. The sales closed on August 15, 2000
(with respect to the first aircraft), September 15, 2000 (with respect to the
second aircraft) and September 30, 2000 (with respect to the third aircraft).
The net proceeds of this sale were used by us to repay senior debt.
These transactions, along with cash flow generated from other asset sales in
the ordinary course of our business, allowed us to reduce our senior debt from
$269.6 million as of December 31, 1999 to $26.9 million as of June 30, 2001.
54
Industry overview
We believe that the total worldwide market for maintenance, repair and
overhaul services is approximately $44.6 billion annually and that $5.3 billion
of that amount represents maintenance, repair and modification services being
provided in North America. We believe airlines perform approximately 75% of the
North American services, outsourcing the balance to independent providers like
Aviation Sales.
Due to the trends currently affecting our industry, we believe that in the
long-term the demand for maintenance and repair services from large independent
service providers such as Aviation Sales will continue to increase. Some of the
trends currently affecting our industry include:
Growth in the market for aircraft maintenance and repair services
The Boeing 2001 Current Market Outlook report projects that:
. the worldwide fleet of commercial aircrafts will more than double by
2020;
. the worldwide freighter airplane fleet will more than double by 2020; and
. the aircraft fleet will continue to age.
We believe that a combination of these factors will in the long term
increase the demand for maintenance and repair services.
Increased outsourcing of maintenance and repair requirements
Airlines incur substantial expenditures in connection with fuel, labor and
aircraft ownership. Airlines have come under increasing pressure during the
last decade to reduce the costs associated with providing air transportation
services. While several of the expenditures required to operate an airline are
beyond the direct control of airline operators, such as the price of fuel and
labor costs, we believe that outsourcing maintenance and repair functions are
areas in which airlines can reduce their operating costs. Outsourcing of
maintenance and repair functions by airlines allows an integrated service
provider such as Aviation Sales to achieve economies of scale unavailable to
individual airlines and to handle these functions less expensively and more
efficiently on its customers' behalf.
Diversified services and competitive strengths
We believe that the breadth of our services, including a wide range of
aircraft maintenance and repair services, allows us to be a vendor of choice to
our customers in a highly fragmented industry. In addition to our heavy
airframe maintenance and modification services, by providing engineering
services, repair and overhaul services on flight surfaces, aircraft components
and interiors, we believe that we maintain a competitive advantage in the MR&O
market through our ability to ensure that each of the individual parts that
need repair or overhaul are completed on a timely basis and to our quality
standards. Our customers include commercial passenger airlines, air cargo
carriers, aircraft leasing companies and maintenance and repair facilities.
Emphasis on quality
All of our MR&O facilities are licensed by the FAA. We emphasize quality and
on-time delivery to our customers. We are focused on meeting and exceeding FAA
requirements. As industry, regulatory and public awareness have focused on
safety, our ability to meet and exceed these requirements on a consistent basis
has become important to customers.
55
Airline consolidation
During 2000 and through the second quarter of 2001, the trend toward
consolidation in the airline industry continued, as many of the major
commercial airlines and cargo carriers moved toward execution of mergers,
acquisitions and enhancement of affiliations with other carriers. We believe
that these events could have a positive impact on the maintenance and repair
market as additional maintenance services related to integration of fleet types
may be outsourced to third parties such as Aviation Sales. We also believe that
fleet integration will likely create opportunities for aircraft modification
and engineering services.
Operations
Our core business is the providing of maintenance, repair and overhaul
services for aircraft and aircraft components.
Since our customers consist of airlines, aircraft leasing companies, and
maintenance and repair facilities that service airlines and redistributors of
aircraft parts, economic factors affecting the airline industry tend to impact
our business. When economic factors adversely affect the airline industry, they
tend to reduce the overall demand for aircraft maintenance and repair services,
causing downward pressure on pricing and increasing the credit risks associated
with doing business within the industry. Additionally, the price of fuel
affects the aircraft maintenance and repair markets, since older aircraft,
which consume more fuel and which account for most of our aircraft maintenance
and repair business, become less viable as the price of fuel increases. We
cannot assure you that economic and other factors which have affected the
airline market in the past and may affect the airline industry in the future
will not adversely impact our business, financial condition or results of
operations.
During 2000 and through the second quarter of 2001, the market for
maintenance and repair services was impacted by rising fuel cost, increased
capacity of competitors, changes in fleet mix by some airlines, interest rates
and other factors. These factors caused certain airlines and other carriers to
reduce the volume of services to be outsourced to third party providers such as
Aviation Sales. This has resulted in excess capacity among many of the
maintenance and repair service providers, which has caused pricing pressures to
maintain market share. We have been able to substantially maintain our relative
market share by continuing to focus on quality service, turn time and by
expanding its array of services including increased opportunities in aircraft
modification and engineering services and by, where necessary, offering price
concessions and fixed prices for certain services.
Aircraft heavy maintenance
We perform maintenance, repair and modification services on aircraft at
TIMCO's five repair stations in Greensboro, North Carolina, Lake City, Florida,
Winston Salem, North Carolina, Macon, Georgia, and Oscoda, Michigan (the
Oscoda, Michigan airframe facility was temporarily closed in March 2001). The
services we offer principally consist of "C" and "D" level maintenance checks
and the modification of passenger aircrafts to freighter configurations. "C"
and "D" checks each involve a different degree of inspection, and the services
performed at each level vary depending upon the individual aircraft operator's
FAA-approved maintenance program. "C" and "D" level checks are comprehensive
checks and usually take a minimum of several weeks to complete, depending upon
the scope of the work to be performed.
The "C" level check is an intermediate level service inspection that
typically includes testing and servicing of the aircraft's operational systems,
external and internal cleaning and refurbishing, and servicing of the interior.
Trained mechanics visually inspect the external and internal structure of the
aircraft, repair defects and remove corrosion found, all in a manner as
required by the manufacturer's maintenance and structural repair manuals. The
"D" level check includes all of the work accomplished in the "C" level check,
but places a more detailed emphasis on the integrity of the structure. In the
"D" level check, the aircraft is disassembled to the point where the entire
structure can be inspected and evaluated. Once the inspection, evaluation and
56
repairs have been completed, the aircraft is reassembled and its systems
reinstalled to the detailed tolerances demanded in each system's
specifications. Depending upon the type of aircraft and the FAA-certified
maintenance program being followed, intervals between "C" level checks can
range from 12 to 18 months and 1,000 to 5,000 flight hours, and intervals
between "D" level checks can range from four to eight years and 10,000 to
25,000 flight hours. Structural inspections performed during "C" level and "D"
level checks provide personnel with detailed information about the condition of
the aircraft and the need to perform additional work or repairs not provided
for in the original work scope. Project coordinators and customer support
personnel work closely with the aircraft's customer service representative in
evaluating the scope of any additional work required and in the preparation of
a detailed cost estimate for the labor and materials required to complete the
job.
Each aircraft certified by the FAA is constructed under a "Type
Certificate." Anything which is done subsequently to modify the aircraft from
its original type design requires the review and approval of the FAA. These
modifications are authorized by the issuance of a Supplemental Type Certificate
(STC) or an engineering order issued by the airline's engineering department.
Typical modification services include reconfiguring of passenger interiors,
installing passenger amenities such as telephones and installing crew rest
areas.
We also convert passenger aircraft to freighter configuration. When we
convert a passenger plane to freighter configuration we:
. completely strip the interior;
. strengthen the load-bearing capacity of the flooring;
. install the bulkhead or cargo net;
. cut into the fuselage for the installation of a cargo door;
. reinforce the surrounding door structures;
. replace windows with metal plugs;
. fabricate and install the cargo doors; and
. install fire detection and suppression systems.
We also need to line the aircraft interior to protect the fuselage structure
from pallet damage and modify the air conditioning system. Conversion contracts
also typically require "C" or "D" level maintenance checks as these conversion
aircraft have usually been out of service for some time and maintenance is
required for the aircraft to comply with current FAA standards. Additional
modification services performed may include cockpit reconfiguration to upgrade
the avionic systems to current technology and the integration of traffic
control and avoidance systems, windshear detection systems and navigational
aids.
Component repair and overhaul services
We provide repair and overhaul services at our three FAA-licensed repair
stations. Aerocell specializes in the maintenance, repair and overhaul of
airframe components, including flight surfaces, doors, fairing panels, nacelle
systems and exhaust systems. Aircraft Interior Design refurbishes aircraft
interior components, including passenger and crew seats. Timco Engine Center
refurbishes JT8D engines.
Engineering services
Our engineering services group provides integrated aircraft engineering,
including aircraft certification, design and approval of modifications to
aircraft systems and structures, for customers of our heavy aircraft
maintenance operations, and for airlines, leasing companies and aerospace
original equipment manufacturers.
Joint venture to convert 727 aircraft
We own a 50% interest in a joint venture which has an STC for conversion of
Boeing 727 aircraft which is fully compliant with FAA regulations and
requirements for aftermarket aircraft cargo conversions. We
57
manufacture the kits required to complete conversions of the aircraft based
upon the STC, and we operate one of the aircraft maintenance facilities which
has been licensed by the joint venture to install the kits on passenger
aircraft being converted to cargo configuration.
Management information systems
During 1999, we implemented new management information systems in several of
our maintenance, repair and overhaul operations. These systems provide access
to and improved timeliness of information which can be used in the management
of these operations. Currently, we operate our business using two
decentralized, network based systems. Each system is fully integrated in
regards to the respective business unit. One system is utilized in the
operation of our heavy airframe maintenance and modification business. The
other system is used at each of our component MR&O businesses. Due to the
investments which were made in 1999 in developing and maintaining these
systems, we do not currently anticipate that any significant systems related
capital expenditures will be required during 2001.
Competition
The airline industry and the markets for our products and services are
extremely competitive, and we face competition from a number of sources. Our
competitors include airline and aircraft service companies, and other companies
providing maintenance, repair and overhaul services. Some of our competitors
have substantially greater financial and other resources than us. We cannot
assure you that competitive pressures will not materially adversely affect our
business, financial condition or results of operations. In the maintenance and
repair market, our major competitors are B.F. Goodrich, Dee Howard Company and
ST Mobile Aerospace Engineering, Inc.
Government regulation
The aviation industry is highly regulated by the FAA in the United States
and by similar agencies in other countries. We must be certified by the FAA,
and in some cases authorized by the original equipment manufacturers, in order
to repair aircraft components and to perform maintenance and repair services on
aircraft.
The FAA regulates the manufacture, repair and operation of all aircraft and
aircraft equipment operated in the United States. Its regulations are designed
to ensure that all aircraft and aircraft equipment are continuously maintained
in proper condition to ensure safe operation of the aircraft. Similar rules
apply in other countries. All aircraft must be maintained under a continuous
condition monitoring program and must periodically undergo thorough inspection
and maintenance. The inspection, maintenance and repair procedures for the
various types of aircraft and aircraft equipment are prescribed by regulatory
authorities and can be performed only by certified repair facilities utilizing
certified technicians. Certification and conformance is required prior to
installation of a part on an aircraft. We closely monitor the FAA and industry
trade groups in an attempt to understand how possible future regulations might
impact us.
We cannot assure you that new and more stringent government regulations will
not be adopted in the future or that any such new regulations, if enacted, will
not materially adversely affect our business, financial condition or results of
operations.
Further, our operations are also subject to a variety of worker and
community safety laws. In the United States, the Occupational Safety and Health
Act mandates general requirements for safe workplaces for all employees.
Specific safety standards have been promulgated for workplaces engaged in the
treatment, disposal or storage of hazardous waste. We believe that our
operations are in material compliance with health and safety requirements under
the Occupational Safety and Health Act.
Product liability
Our business exposes us to possible claims for personal injury or death
which may result from the failure of an aircraft or aircraft part repaired or
maintained by us or from our negligence in the repair or maintenance
58
of an aircraft or an aircraft part. While we maintain what we believe to be
adequate liability insurance to protect us from claims of this type, based on
our review of the insurance coverages maintained by similar companies in our
industry, we cannot assure you that claims will not arise in the future or that
our insurance coverage will be adequate. Additionally, there can be no
assurance that insurance coverages can be maintained in the future at an
acceptable cost. Any liability of this type not covered by insurance could
materially adversely affect our business financial condition or results of
operations.
Employees
As of June 30, 2001, we employed approximately 2,900 persons. None of our
employees are covered by collective bargaining agreements. We believe that our
relations with our employees are good.
Properties
Our executive offices are located in Greensboro, North Carolina at the
headquarters of our TIMCO heavy airframe maintenance operations. Our interest
in both our owned and leased facilities are pledged to our senior lenders as
collateral for amounts borrowed under our credit agreements. See Note 7 to our
Consolidated Financial Statements included in this prospectus and consent
solicitation. The following table identifies, as of June 30, 2001, our
principal properties:
Owned or
Facility Description Location Square Footage Leased
-------------------- ----------------- -------------- ------------
Office and Warehouse.... Miramar, FL 545,000 Leased(1)
Office and Aircraft
Maintenance............ Greensboro, NC 910,000 Leased(2)
Office and Aircraft
Maintenance............ Lake City, FL 650,000 Leased
Office and Aircraft
Maintenance............ Oscoda, MI 396,000 Leased(3)
Office and Maintenance.. Hot Springs, AK 260,000 Owned
Office and Aircraft
Maintenance............ Winston-Salem, NC 250,000 Leased
Office and Aircraft
Maintenance............ Macon, GA 140,000 Leased
Office and Maintenance.. Dallas, TX 80,000 Owned
Office and Maintenance.. Miami, FL 55,000 Leased(4)(5)
Office and Maintenance.. Minneapolis, MN 34,000 Leased(4)
Office and Maintenance.. Miami, FL 30,000 Leased(4)(5)
Warehouse............... Pearland, TX 100,000 Owned(1)
Warehouse............... Covington, KY 38,200 Owned
--------
(1) Currently subleased to Kellstrom Industries, Inc.
(2) Our corporate headquarters is currently located at this facility.
(3) Airframe maintenance facility has been closed on a temporary basis; engine
repair facility is currently operating.
(4) These facilities have either been closed or are in the process of being
closed.
(5) These facilities are leased from a related party.
Legal Proceedings
Several lawsuits have been filed against us and certain of our current and
former officers and directors, and our auditors, in the United States District
Court for the Southern District of Florida, which have now been consolidated
into a single lawsuit. The consolidated complaint, as amended in March 2000 and
in September 2000, alleges violations of Sections 11 and 15 of the Securities
Act of 1933 in connection with our June 1999 public offering, and alleges
violations of Sections 10(b) and 20(a) of, and Rule 10b-5 under, the Securities
Exchange Act of 1934 (the "Exchange Act"). Among other matters, the amended
consolidated complaint alleges that our reported financial results were
materially misleading and violated generally accepted accounting principles.
The amended consolidated complaint seeks damages and certification of two
classes, one consisting
59
of purchasers of our common stock in the June 1999 public offering and one
consisting of purchasers of our common stock during the period between April
30, 1997 and April 14, 2000. On August 22, 2001, the District Court granted our
motion to dismiss the pending claims under the Exchange Act, with leave to
amend, but denied our motion to dismiss the pending claims under the Securities
Act, and on September 22, 2001, the plaintiffs filed a third amended
consolidated complaint. We believe that the allegations contained in the third
amended consolidated complaint are without merit and we intend to vigorously
defend this and any related actions. Nevertheless, unfavorable resolution of
this lawsuit could have a material adverse effect on our financial position and
results of operations.
The U.S. Securities and Exchange Commission is conducting an inquiry into
our accounting for certain transactions. We are cooperating with the SEC in its
inquiry.
We are also involved in various lawsuits and other contingencies arising out
of operations in the normal course of business. In the opinion of management,
the ultimate resolution of these claims and lawsuits will not have a material
adverse effect upon our business financial position or results of operations.
Environmental matters
We are taking remedial action pursuant to Environmental Protection Agency
and Florida Department of Environmental Protection ("FDEP") regulations at
TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact upon us and the magnitude of
required remediation efforts. Based upon the most recent cost estimates
provided by environmental consultants, we believe that the total remaining
testing, remediation and compliance costs for this facility will be
approximately $1.4 million. Testing and evaluation for all known sites on
TIMCO-Lake City's property is substantially complete and we have commenced a
remediation program at several sites. We are currently monitoring the
remediation, which will extend into the future. Subsequently, our accounts were
increased because of this monitoring, which indicated a need for new equipment
and additional monitoring. Based on current testing, technology, environmental
law and clean-up experience to date, we believe that we have established an
accrual for our best estimate of the probable liabilities associated with our
current remediation strategies. To comply with the financial assurances
required by the FDEP, we have issued a $1.4 million standby letter of credit in
favor of the FDEP.
Additionally, there are other areas adjacent to TIMCO-Lake City's facility
that could also require remediation. We do not believe that we are responsible
for these areas; however, it may be asserted that TIMCO and other parties are
jointly and severally liable and are responsible for the remediation of these
properties. No estimate of any such costs is available at this time.
We own a parcel of real estate on which Whitehall previously operated an
electronics business. We are currently assessing environmental issues with
respect to this property. When we acquired Whitehall, our environmental
consultants estimated that remediation costs relating to this property could be
up to $1.0 million.
Accrued expenses in our financial statements at December 31, 2000 and June
30, 2001 include $1.7 million and $1.4 million, respectively, relating to
obligations to remediate all of the environmental matters described above.
Future information and developments will require us to continually reassess
the expected impact of the environmental matters discussed above. Actual costs
to be incurred in future periods may vary from the estimates, given the
inherent uncertainties in evaluating environmental exposures. These
uncertainties include the extent of required remediation based on future
testing and evaluation and the varying costs and effectiveness of remediation
methods.
60
OUR MANAGEMENT
Board of Directors
Our certificate of incorporation and Bylaws presently provide for a board of
directors divided into three classes, as equal in size as possible, with
staggered terms of three years. At the date of this prospectus, the current
members of the board and the expiration of their terms as directors were as
follows:
Term
Name Age Positions Expires
---- --- --------- -------
Roy T. Rimmer, Jr. .... 60 Chairman of the Board and Chief Executive 2004
Officer
Ben Quevedo............ 47 Director, President and Chief Operating 2002
Officer
Sam Humphreys.......... 41 Director 2002
Steven L. Gerard....... 56 Director 2003
Philip B. Schwartz..... 47 Director and Corporate Secretary 2003
Business experience of the Board
Roy T. Rimmer, Jr. has been our Chairman and Chief Executive Officer since
June 2001. Prior to becoming our Chairman and Chief Executive Officer, for more
than the last five years Mr. Rimmer was a private investor and the operator of
a private company in the business of transporting crude oil and natural gas.
Mr. Rimmer has been a director since January 2000. Mr. Rimmer serves on our
board as a representative of Lacy Harber, who is one of our principal
stockholders.
Ben Quevedo has been our President and a director since September 2000. Mr.
Quevedo was, from July 1998 until September 2000, our Senior Vice President,
President of our maintenance and repair operations and, from April 2000,
President of our distribution operations. Prior to joining us, Mr. Quevedo was
the principal stockholder and President of Caribe Aviation and Aircraft
Interior Design.
Sam Humphreys is a Co-Chief Executive Officer of Syntek Capital, A.G., which
invests in and operates businesses in the wireless, broadband and advanced
technologies fields. Mr. Humphreys is also a director of IFCO Systems. Mr.
Humphreys has been a director since June 1996.
Steven L. Gerard has been the Chief Executive Officer and a director of
Century Business Services, Inc., a diversified services company providing
professional outsourced business services, since October 2000. Prior thereto,
from 1997 to October 2000 Mr. Gerard was the Chairman and Chief Executive
Officer of Great Point Capital, Inc., a provider of operational and advisory
services, and from 1991 to 1997, Mr. Gerard was Chairman and Chief Executive
Officer of Triangle Wire and Cable, Inc. and its successor, Ocean View Capital,
Inc., a manufacturer of insulated wire and cable. Mr. Gerard's prior experience
includes 16 years in various senior corporate finance and banking positions
with Citibank, N.A. and seven years with the American Stock Exchange. Mr.
Gerard has been a director since September 2000 and also serves on the boards
of directors of Fairchild Company, Inc., Lennar Corporation and Joy Global,
Inc.
Philip B. Schwartz is a shareholder in the Florida law firm of Akerman,
Senterfitt & Eidson, P.A. Prior to joining Akerman Senterfitt in September
1995, Mr. Schwartz was a partner in the law firm of Broad and Cassel. Mr.
Schwartz is a member of The Florida Bar and the American Bar Association and a
former Chair of the Business Law Section of The Florida Bar. Akerman Senterfitt
performs legal services for Aviation Sales. Mr. Schwartz has been a director
since June 1998 and Corporate Secretary since March 1999.
Nominee to the Board
Under our agreement with the holders of 73.02% of our old notes, we have
agreed that a representative of the holders of the new notes will be appointed
to the board upon the completion of the exchange offer and consent
solicitation. Thereafter, a representative of the holders of the new notes will
be elected to serve on the board during future periods by a vote of a majority
of the holders of the new notes.
61
Executive officers
The following list reflects our executive officers, as of this date, the
capacity in which they serve us, and when they assumed office:
Executive
Name Positions Age Officer Since
---- --------- --- --------------
Roy T. Rimmer, Jr. ...... Chairman and Chief Executive 60 June 2001
Officer
Ben Quevedo.............. President 47 July 1998
Gil West................. Executive Vice President and Chief 40 September 2001
Operating Officer
Harold M. Woody.......... Executive Vice President, 55 February 1992
President of Aerocell Structures
Michael C. Brant......... Vice President and Chief Financial 38 November 1999
Officer
Laura DeCespedes......... Vice President, Human Resources 44 January 1999
Executive officers' business experience
The business experience of Roy T. Rimmer, Jr. and Ben Quevedo is included
above under "Business experience of the Board."
Gil West joined us in September 2001. Prior to joining us, he served as an
executive at Northwest Airlines since 1996. In his most recent position as
Northwest's Vice President of Engine and Component Technical Operations, Mr.
West managed over 2,000 Northwest maintenance employees in Northwest's
Minneapolis and Atlanta maintenance facilities, as well as managing outside
vendor maintenance operations. Prior to joining Northwest, Mr. West served in
various managerial positions with United Airlines, Rohr Industries, Sundstrand
Corporation and Boeing Commercial Aircraft.
Harold M. Woody has been the Executive Vice President of Aviation Sales and
its predecessors since February 1992. Additionally, Mr. Woody has been
President of our leasing operations since March 1997 and President of our
Aerocell Structures operation since October 2000.
Michael C. Brant has been Vice President and Chief Financial Officer of
Aviation Sales since November 1999. Prior to joining us, from April 1999 to
October 1999, Mr. Brant was a Vice President of Becker Financial Services.
Prior thereto, for more than five years, Mr. Brant held senior financial
positions at John Alden Life Insurance Company, the principal subsidiary of
John Alden Financial Corporation. Prior to joining John Alden, Mr. Brant also
held various positions, including senior manager, for a period of nine years,
with Price Waterhouse.
Laura DeCespedes has been our Vice President, Human Resources since January
1999. Prior to joining us, from September 1997 to December 1998, Ms. DeCespedes
was the Vice President of Human Resources for Productivity Point International,
and from June 1995 to September 1997, Ms. DeCespedes was Director of Field
Human Resources for Sensormatic Electronics Corp.
Family relationships
There are no family relationships between or among any of the directors
and/or executive officers.
62
Executive compensation
The following table sets forth information about the compensation paid or
accrued during 2000, 1999 and 1998 to our Chief Executive Officer and to each
of the four other most highly compensated executive officers whose aggregate
direct compensation exceeded $100,000.
Annual Compensation
--------------------
Salary Bonus Other Annual All Other
Name and Principal Position Year ($) ($) Compensation Compensation
--------------------------- ---- ------- ------- ------------ ------------
Dale S. Baker(1)............... 1998 263,797 197,848 (2) --
Chief Executive Officer 1999 550,000 -- (2)
2000 550,000 -- (2)
Harold M. Woody................ 1998 236,029 177,021 -- --
Executive Vice President 1999 249,164 --
2000 252,915 --
Ben Quevedo.................... 1998 149,760 122,511 -- --
President and Chief Operating
Officer 1999 350,000 --
2000 350,000 --
Michael C. Brant............... 1999 11,538 -- -- --
Chief Financial Officer 2000 232,667 120,000
--------
(1) Mr. Baker resigned as Chief Executive Officer in June 2001.
(2) Mr. Baker also received $5,000 per year for life insurance premiums
pursuant to his employment agreement with us.
No long-term compensation awards were made to management during the three
years ended December 31, 2000.
In April 2001, in connection with various cost cutting initiatives being
undertaken by Aviation Sales, each of our senior management took a voluntary
pay cut in an amount equal to between 15% and 20% of their base salary.
Option grants during last fiscal year
The following table sets forth information concerning options to purchase
shares of common stock granted during the fiscal year ended December 31, 2000
to those persons named in the Summary Compensation Table.
Potential
Realizable
Value At
Assumed
Annual Rates Of
Stock Price
% Of Total Appreciation
Options For Option
Number Of Granted To Term(1)
Shares Underlying Employees Exercise Price Expiration ---------------
Name Options Granted In Fiscal Year ($/Share) Date 5% ($) 10% ($)
---- ----------------- -------------- -------------- ---------- ------- -------
Dale S. Baker(2)........ 150,000 24.6% 3.31 11/10/10 581,748 884,230
Harold M. Woody......... 25,000 4.1% 5.00 9/13/10 96,958 147,372
Ben Quevedo............. 125,000 20.5% 3.31 11/10/10 485,178 737,448
Michael C. Brant........ 100,000 16.4% 3.31 9/13/10 387,832 589,487
--------
(1) These amounts represent assumed rates of appreciation in the price of
common stock during the term of the options in accordance with rates
specified in applicable federal securities regulations. Actual gains, if
any, on stock option exercises will depend on the future price of common
stock and overall stock market conditions. There is no representation that
the rates of appreciation reflected in the table will be achieved.
(2) Mr. Baker resigned as Chief Executive Officer in June 2001.
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Aggregated option exercises in last fiscal year and fiscal year end option
values
The following table sets forth information concerning the exercise of stock
options to purchase common stock during the 2000 fiscal year and the value of
unexercised stock options to purchase common stock at the end of the 2000
fiscal year for the persons named in the Summary Compensation Table.
Number of Share
Underlying
Number of Unexercised Options Value of Unexercised In-the-
Shares at Fiscal Money Options at Fiscal
Acquired on Value Year-End Exercisable/ Year-End($)
Name Exercise Realized ($) Unexercisable Exercisable/Unexercisable(1)
---- ----------- ------------ --------------------- ----------------------------
Dale S. Baker(2)........ -- -- 348,333/216,667 0/0
Harold M. Woody......... -- -- 70,000/50,000 0/0
Ben Quevedo............. -- -- 183,333/141,666 0/0
Michael C. Brant........ -- -- 50,000/75,000 0/0
--------
(1) Computed based upon the difference between the closing price of common
stock at December 31, 2000 and the exercise price. All options were out-
of-the-money on December 31, 2000, and no value has been assigned to
options which are not in-the-money.
(2) Mr. Baker resigned as Chief Executive Officer in June 2001.
Employment agreements
We have employment agreements with Ben Quevedo, Gil West and Harold Woody.
Each provides for the payment of a base salary and for bonus compensation based
on performance. Each employment agreement also contains a "change of control"
severance arrangement if the employee does not continue in our employment after
a change of control.
Stock option plans
Our board of directors and stockholders adopted two stock option plans (the
"stock option plans"). Pursuant to the 1996 director stock option plan, options
to acquire a maximum of the greater of 150,000 shares or 2% of the number of
shares of common stock then outstanding may be granted to our directors.
Pursuant to the 1996 stock option plan, options to acquire a maximum of the
greater of 2,250,000 shares of common stock or 15% of the number of shares of
common stock then outstanding may be granted to our executive officers,
employees (including employees who are directors), independent contractors and
consultants. At the date of this prospectus, options to purchase 1,357,500 pre-
reverse split shares of common stock at exercise prices ranging from $1.70 per
share to $39.50 per share were outstanding under the stock option plans.
The compensation committee administers both stock option plans. The
compensation committee determines which persons will receive options and the
number of options to be granted to such persons. The director plan also
provides for annual mandatory grants of options to directors. The compensation
committee also interprets the provisions of the stock option plans and makes
all other determinations that it deems necessary or advisable for the
administration of the stock option plans.
Pursuant to the stock option plans, we may grant incentive stock options as
defined in Section 422(b) ("NQSOs") of the Internal Revenue Code of 1986, as
amended, (the "Code"), and non-qualified stock options, not intended to qualify
under Section 422(b) of the Code. The price at which our common stock may be
purchased upon the exercise of options granted under the stock option plans
will be required to be at least equal to the per share fair market value of the
common stock on the date the particular options are granted. Options granted
under the stock option plans may have maximum terms of not more than 10 years
and are not transferable, except by will or the laws of descent and
distribution. None of the incentive stock options under the stock option plans
may be granted to an individual owning more than 10% of the total combined
voting power of all classes of stock issued by us unless the purchase price of
the common stock under such option is
64
at least 110% of the fair market value of the shares issuable on exercise of
the option determined as of the date the option is granted, and such option is
not exercisable more than five years after the grant date.
Generally, options granted under the stock option plans may remain
outstanding and may be exercised at any time up to three months after the
person to whom such options were granted is no longer employed or retained by
us or serving on our board of directors.
Pursuant to the stock option plans, unless otherwise determined by the
compensation committee, one-third of the options granted to an individual are
exercisable upon grant, one-third are exercisable on the first anniversary of
such grant and the final one-third are exercisable on the second anniversary of
such grant. However, options granted under the stock option plans shall become
immediately exercisable if the holder of such options is terminated by us or is
no longer a director of Aviation Sales, as the case may be, subsequent to
certain events that are deemed to be a "change in control" of Aviation Sales. A
"change in control" of Aviation Sales generally is deemed to occur when (a) any
person becomes the beneficial owner of or acquires voting control with respect
to more than 20% of the common stock (or 35% if such person was a holder of
common stock on July 2, 1996, the effective date of our initial public
offering); (b) a change occurs in the composition of a majority of our board of
directors during a two-year period, provided that a change with respect to a
member of our board of directors shall be deemed not to have occurred if the
appointment of a member of our board of directors is approved by a vote of at
least 75% of the individuals who constitute the then existing board of
directors; or (c) our stockholders approve the sale of all or substantially all
of our assets.
Incentive stock options granted under the stock option plans are subject to
the restriction that the aggregate fair market value (determined as of the date
of grant) of options which first become exercisable in any calendar year cannot
exceed $100,000.
The stock option plans provide for appropriate adjustments in the number and
type of shares covered by the stock option plans and options granted thereunder
in the event of any reorganization, merger, recapitalization or certain other
transactions involving us.
We have also granted options to certain of our executive officers outside of
our stock option plan. Options to purchase 375,000 pre-reverse split shares at
an exercise price of $3.31 were granted outside of the stock option plans in
November 2000, and options to purchase 700,000 pre-reverse split shares at an
exercise price of $40.63 were granted outside of the stock option plans in
January 1999.
65
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
At the date of this prospectus and consent solicitation, we had 15,015,317
pre-reverse split shares of common stock outstanding. The following table sets
forth, as of the date of this prospectus and consent solicitation, certain
information regarding the shares of pre-reverse split common stock, owned of
record or beneficially by (i) each person who owns beneficially more than 5% of
the outstanding common stock; (ii) each of our directors and named executive
officers; and (iii) all directors and executive officers as a group.
Shares Beneficially Owned(1)
---------------------------------
Name Number Percentage
---- ---------------- ----------------
Lacy J. Harber(2)............................. 4,601,734 29.4%
Roy T. Rimmer, Jr.(3)......................... 4,779,234 30.3%
Robert Alpert(4).............................. 3,249,400 21.0%
Dimensional Fund Advisors, Inc.(5)............ 910,257 6.1%
George F. Baker and Richard Nye(6)............ 973,774 6.5%
Harold M. Woody(7)............................ 189,800 1.3%
Sam Humphreys(8).............................. 80,000 *
Steven L. Gerard(9)........................... 10,000 *
Philip B. Schwartz(10)........................ 78,900 *
Ben Quevedo(11)............................... 524,472 3.4%
Michael C. Brant(12).......................... 52,000 *
All directors and executive officers as a
Group--8 persons(13)......................... 5,731,073 34.7%
--------
* Less than one percent
(1) Unless otherwise indicated, each person named in the table has the sole
voting and investment power with respect to the shares beneficially
owned. Further, unless otherwise noted, the address for each person named
in this table is c/o Aviation Sales.
(2) Shares are owned of record by LJH Corporation, which is wholly-owned by
Mr. Harber. LJH has granted a proxy with respect to the voting of these
shares to Roy T. Rimmer, Jr., and as a result Mr. Rimmer is also deemed
to beneficially own these shares for U.S. securities law purposes. Also
includes warrants to purchase: (i) 250,000 shares at an exercise price of
$4.00 per share, (ii) 25,000 shares at an exercise price of $3.63 per
share, (iii) 50,000 shares at an exercise price of $1.75 per share, and
(iv) 333,334 shares at an exercise price of $1.40 per share. See "Certain
Relationships and Related Transactions".
(3) Mr. Rimmer shares the power to vote the securities owned by LJH
Corporation. See Note 2 above. Also includes 62,500 shares owned by an
entity controlled by Mr. Rimmer and vested options to purchase an
aggregate of 115,000 shares (105,000 shares at exercise prices ranging
from $4.53 per share to $6.06 per share and 10,000 at an exercise price
of $15.31 per share).
(4) Shares are primarily owned of record by entities controlled by Mr.
Alpert. Also includes (i) vested options to purchase 130,000 shares
(105,000 at exercise prices ranging from $4.53 per share to $6.06 per
share and 25,000 at exercise prices ranging from $19.00 per share to
$39.50 per share), (ii) a warrant to purchase 250,000 shares at an
exercise price of $4.00 per share, and (iii) a warrant to purchase 50,000
shares at an exercise price of $1.75 per share. See "Certain
Relationships and Related Transactions".
(5) As of December 31, 2000, based upon a Schedule 13G filed with the
Securities and Exchange Commission on February 2, 2001. The address shown
in the Schedule 13G is 1299 Ocean Avenue, 11th Floor, Santa Monica,
California.
(6) Information to our knowledge based upon the reporting persons last
filings with the SEC with regard to their interest in us. Includes shares
owned by Baker Nye, L.P. and Cambridge Capital Fund, L.P. The reporting
persons' last known address is 767 Fifth Avenue, Suite 2800, New York,
New York.
(7) Includes vested options to purchase 70,000 shares (20,000 at exercise
prices ranging from $4.39 per share to $6.06 per share and 50,000 at
exercise prices ranging from $19.00 per share to $39.50 per share).
Excludes unvested options to purchase 30,000 shares at exercise prices
ranging from $4.39 per share to $5.00 per share and 20,000 shares at an
exercise price of $20.00 per share.
66
(8) Includes vested options to purchase: (i) 55,000 shares at exercise prices
ranging from $4.53 per share to $6.06 per share, and (ii) 25,000 shares at
exercise prices ranging from $19.00 per share to $39.50 per share.
(9) Represents vested options to purchase 10,000 shares at an exercise price
of $5.00 per share.
(10) Includes vested options to purchase: (i) 55,000 shares at exercise prices
ranging from $4.53 per share to $6.06 per share, and (ii) 20,000 shares at
exercise prices ranging from $37.00 per share to $39.50 per share.
(11) Includes: (i) vested options to purchase 41,667 shares at an exercise
price of $3.31 per share, (ii) vested options to purchase 141,667 shares
at exercise prices ranging from $35.25 per share to $40.63 per share, and
(iii) a warrant to purchase 250,000 shares at an exercise price of $4.00
per share. See "Certain Relationships and Related Transactions." Excludes
unvested options to purchase 83,333 shares at an exercise price of $3.31
per share and 58,333 shares at an exercise price of $40.63 per share.
(12) Includes vested options to purchase (i) 33,333 shares at an exercise price
of $3.31 per share, and (ii) 16,667 shares at an exercise price of $18.00
per share. Excludes unvested options to purchase 66,667 shares at an
exercise price of $3.31 per share and 8,333 shares at an exercise price of
$18.00 per share.
(13) Includes vested options and warrants to purchase an aggregate of 1,508,334
shares.
67
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of December 2, 1994, we entered into a 20-year lease with Aviation
Properties, a Delaware general partnership ("Aviation Properties"), pursuant to
which we leased our corporate headquarters and warehouse in Miami, Florida (the
"Miami Property"). We were obligated to make annual payments under such lease
in the amount of approximately $893,000. Aviation Properties was an entity
controlled by Robert Alpert, a principal stockholder and a former director of
Aviation Sales. In connection with the purchase of the Miami Property, we
loaned Aviation Properties $2.5 million and the loan was being repaid with
interest at the rate of 8% per annum. In January 2001, we sold the loan to Lacy
Harber, one of our principal stockholders, for 90% of the then outstanding
balance of $2.0 million. In connection with this purchase of the loan, Mr.
Harber received a warrant to purchase 25,000 pre-reverse split shares at an
exercise price of $3.63 per share. In March 2001, the Miami Property was sold
and we were relieved of our remaining obligation under the lease agreement.
During 1999, 2000 and 2001, we leased certain real property from entities
controlled by Ben Quevedo, an Aviation Sales officer and director. These
facilities were utilized as the headquarters of two of our maintenance, repair
and overhaul operations. We have subsequently moved out of these facilities,
although we remain liable on the leases. We recently subleased one of these
facilities and are currently taking actions to defray our obligations under the
second lease. During 1999 and 2000, we also utilized aircraft owned by an
entity controlled by Mr. Quevedo. Payments for all of these items were $1.4
million in 1999 and $2.7 million in 2000.
In February 2001, we obtained a term loan from a financial institution. In
connection with obtaining the term loan, four individuals provided credit
support to the financial institution that advanced the loan. In return for
providing credit support, each of these individuals (or entities under their
control) were granted warrants to purchase 250,000 pre-reverse split shares of
our common stock at an exercise price of $4.00 per share. Those providing
credit support to the financial institution included Ben Quevedo, an executive
officer and director of Aviation Sales, Robert Alpert, a former director and
principal stockholder of Aviation Sales and Lacy Harber, a principal
stockholder of Aviation Sales.
In April and May 2001, Messrs. Harber and Alpert provided credit support to
us relating to our tax operating retention lease facility and with respect to a
short-term increase in our term loan with Bank of America. In return for
providing credit support, Mr. Alpert received a warrant to purchase 50,000 pre-
reverse split shares at an exercise price of $1.75 per share and Mr. Harber
received warrants to purchase 50,000 pre-reverse split shares and 333,334 pre-
reverse split shares at exercise prices of $1.75 and $1.40 per share,
respectively.
Mr. Schwartz is a stockholder in Akerman, Senterfitt & Eidson, P.A., which
has in the past and continues to perform significant legal services for us. The
fees paid by us to Akerman, Senterfitt & Eidson, P.A. for legal services
rendered are no greater than those that would be charged to us by an unrelated
third party law firm.
In April 2000, we loaned Mr. Woody $250,000 payable in one year or upon the
sale of certain shares of Japan Fleet Services Singapore (PTE) Ltd. that have
been pledged to secure the loan. The note bears interest equal to the rate
being paid by us from time to time on our senior loan. This maturity date of
this note has recently been extended until April 2002.
We believe that the terms of the above-described related party transactions
were no less favorable than could be obtained from unaffiliated third parties.
68
THE EXCHANGE OFFER AND CONSENT SOLICITATION
This section of the prospectus and consent solicitation describes material
aspects of the proposed exchange offer and consent solicitation. While we
believe that the description covers the material terms of the exchange offer
and consent solicitation, this summary may not contain all of the information
that is important to you. You should read this entire document and the other
documents we refer to carefully for a more complete understanding of the
exchange offer and consent solicitation.
Purpose of this exchange offer and consent solicitation
We are making this exchange offer and consent solicitation as part of a
strategic plan to reduce and refinance our indebtedness and to provide working
capital for our business.
During the past few months, our management, board of directors and advisers
have studied our needs, the requirements of our investors and the overall
capital markets. Based upon this assessment, our objectives in this transaction
are as follows:
. Establish a capital structure that provides support for our operating
strategy for the next three to five years. The establishment of ample
long-term liquidity is expected to be favorable for both note holders
and stockholders.
. Improve cash flow by immediate execution of our restructuring plan.
Achieving this goal will provide our business with needed working
capital and will protect our debt holders and enhance equity values.
. Manage financial risk by holding total interest costs at present levels
and reducing public debt. The exchange offer, which reduces our public
debt through the use of the new notes and equity in exchange for a
portion of the old notes, is expected to achieve this goal.
We believe this exchange offer and consent solicitation, if successful, will
assist us in achieving these objectives. We believe we are providing old
noteholders with an incentive to approve the required amendments to the old
indenture, as well as protecting the rights of the new noteholders through a
carefully designed financial plan.
In August 2001, we entered into an agreement with the holders of 73.02% of
our old notes to restructure those notes. Under the agreement, the note holders
will exchange their old notes in the exchange offer. Under the agreement, the
holders of more than a majority of the outstanding notes have agreed to waive
the default arising as a result of the failure to pay the interest payment due
August 15, 2001 until December 31, 2001. Also, our senior lenders have agreed
to forbear on the default in the senior loan agreements resulting from the
failure to make the note interest payment.
Interests of our officers, directors and principal stockholders in the exchange
offer
None of our officers, directors or principal stockholders hold old notes
except for Lacy Harbor, who beneficially owns approximately 29.4% of our
currently outstanding pre-reverse split common stock and approximately 7.1%, or
$11,750,000 aggregate principal amount, of our old notes. Pursuant to the
agreement with our old note holders, Mr. Harber has agreed to exchange all of
his old notes in the exchange offer and consent solicitation. In addition, Mr.
Harber has agreed to purchase unsold allotments in the rights offering. Mr.
Harber will beneficially own approximately 82.6% of our outstanding common
stock if he purchases all of the shares available in our rights offering and
elects the non-cash option in the exchange offer consent solicitation with
respect to all of the old notes and, as a result, exchanges all of his old
notes for new notes, shares and warrants. Roy T. Rimmer, Jr., our Chairman and
Chief Executive Officer, holds a proxy to vote the shares of common stock owned
by Mr. Harber and serves on our board as a representative of Mr. Harber.
Pursuant to the agreement with our old note holders, we may issue options or
warrants to purchase up to 8% of our reorganized company to our officers,
directors and employees.
69
Terms of the exchange offer and consent solicitation
Upon the terms and subject to the conditions of the exchange offer and
consent solicitation set forth in this prospectus and consent solicitation and
in the accompanying consent and letter of transmittal, we are offering to
exchange all of the outstanding old notes for cash or a combination of new
notes, shares of common stock and warrants.
You can select the form of consideration that you will receive for your old
notes from the following two options:
. Limited Cash Option
$303 in cash for every $1,000 in principal amount of old notes tendered
under this option, up to an aggregate maximum of $10 million in cash for
$33 million in principal amount of old notes. If less than all of the
outstanding old notes are exchanged, then the $10 million in cash
available will be reduced $303 for every $1,000 principal amount of old
notes not exchanged. If more than $33 million in principal amount of old
notes are tendered under this option, we will exchange $757.58 in
principal amount of new notes, 34.12 post-reverse split shares of our
common stock and warrants to purchase 22.75 post-reverse split shares of
our common stock (at an exercise price of $5.16 per share) for each
additional $1,000 in principal amount of old notes tendered. We will
distribute the $10 million in cash so that everyone who tenders old notes
under this option will receive cash, new notes, common stock and warrants
in the same proportion as everyone else who tenders old notes under this
option. We may issue new notes in denominations of less than $1,000.
. New Note, Common Stock and Warrants Option
$757.58 in principal amount of new notes, 34.12 post-reverse split shares
of our common stock and warrants to purchase 22.75 post-reverse split
shares of our common stock (at an exercise price of $5.16 per share) for
every $1,000 in principal amount of old notes tendered under this option.
We may issue new notes in denominations of less than $1,000. Up to $100
million principal amount of new notes, up to 4,504,595 shares of our
post-reverse split common stock and warrants to purchase up to 3,003,063
shares of our post-reverse split common stock (at an exercise price of
$5.16 per share) will be exchanged for $132 million in principal amount
of old notes. If more than $132 million in principal amount are tendered
for new notes, common stock and warrants, each additional $1,000
principal amount tendered will be exchanged for $303 in cash. We will
distribute the new notes, common stock and warrants so that everyone who
tenders under this option will receive new notes, common stock, warrants
and cash in the same proportion as everyone else who tenders old notes
under this option.
You do not have to choose the same option for all of the old notes that you
tender. You do not have to tender all of your old notes to participate in this
exchange offer and consent solicitation. However, this exchange offer and
consent solicitation is conditioned on our receiving valid tenders of at least
$132 million of the aggregate principal amount of the old notes. You may
withdraw your tender of old notes or change your choice of consideration
options at any time before the expiration of this exchange offer and consent
solicitation.
The limited cash option may be over-subscribed. In such case, if you choose
the limited cash option you should expect to receive a combination of cash, new
notes, shares of common stock and warrants to purchase common stock for a
significant portion of the old notes that you tender for cash.
We will not determine whether the limited cash option is over-subscribed
until after this exchange offer and consent solicitation closes. You will not
be able to withdraw your tender of old notes once we make this determination
even though it may affect the type of exchange consideration that you will
receive in this exchange offer and consent solicitation. We will make a press
announcement regarding the extent to which the limited cash option is over-
subscribed and the amount of cash, new notes, common stock and warrants that
persons who choose the limited cash option can expect to receive as soon as
practicable following the expiration date of this exchange offer and consent
solicitation.
70
Upon the terms and subject to the conditions of the solicitation, we are
also soliciting consents to the proposed amendments to the indenture governing
the old notes.
. If you desire to tender your old notes in the exchange offer and consent
solicitation and receive the exchange consideration, you are required to
tender validly your old notes, and thereby consent to the proposed
amendments, on or before the expiration of the exchange offer and
consent solicitation.
. Your completion, execution and delivery of the consent and letter of
transmittal in connection with your tender of old notes will constitute
your consent to the proposed amendments with respect to the old notes.
Our obligation to accept and exchange old notes validly tendered in the
exchange offer and consent solicitation is conditioned upon the valid tender,
and nonwithdrawal, of at least $132 million in aggregate principal amount of
the old notes, along with consents to amendments to the indenture governing the
old notes, and to the general conditions described in this prospectus and
consent solicitation. See "--Conditions to the Exchange Offer and Consent
Solicitation." Subject to applicable securities laws and the terms and
conditions in this prospectus and consent solicitation, we reserve the right,
on or before the expiration of the exchange offer, to:
. waive any and all conditions to the exchange offer;
. extend or terminate the exchange offer; or
. otherwise amend the exchange offer in any respect.
These reserved rights are in addition to our right to terminate the exchange
offer and consent solicitation described under "--Conditions to the Exchange
Offer and Consent Solicitation."
Our board of directors makes no recommendation to holders of the old notes
whether or not to tender their old notes in the exchange offer or which
election each holder should make. Our board of directors is not making a
recommendation regarding the exchange offer because holders of the old notes
must make their own decision whether to tender their old notes in the exchange
offer and as to which type of election to make. We have not authorized anyone
to make a recommendation on our behalf regarding the exchange offer.
Period for tendering your old notes
Subject to applicable securities laws and the terms and conditions in this
prospectus and consent solicitation, we will accept for exchange any and all
old notes that are validly tendered and not withdrawn before 5:00 p.m., New
York City time, on the expiration date of the exchange offer. The expiration
date of the exchange offer is , 2001.
If we make a material change in the terms of the exchange offer and consent
solicitation or the information concerning the exchange offer and consent
solicitation or waive a material condition to the exchange offer and consent
solicitation, we will disseminate additional exchange offer materials and
extend the exchange offer and consent solicitation to the extent required by
law. In addition, we may, if we deem appropriate, extend the exchange offer and
consent solicitation for any other reason. If the consideration to be paid in
the exchange offer and consent solicitation is increased or decreased or the
principal amount of old notes subject to the exchange offer is decreased, the
exchange offer and consent solicitation will remain open at least 10 business
days from the date we first give notice to you, by public announcement or
otherwise, of that increase or decrease. In the case of an extension of the
exchange offer and consent solicitation, the announcements will be issued no
later than 9:00 a.m., New York City time, on the next business day after the
previously scheduled expiration of the exchange offer and consent solicitation.
Without limiting the manner in which any public announcement may be made, we
will have no obligation to publish, advertise or otherwise communicate any
public announcement other than by issuing a release to the Dow Jones News
Service.
71
Rights offering and issuance of new common stock
As part of the restructuring, we intend to conduct an offering of rights to
purchase up to 24,024,507 post-reverse split shares of our common stock to all
existing stockholders to raise $20 million. Lacy Harber, who beneficially owns
approximately 29.4% of our pre-reverse split common stock and is our largest
stockholder, has agreed to purchase any unsold allotments in the rights
offering. Investors who purchase the $20 million of shares in our reorganized
company will receive 80% of our to-be-outstanding common stock. Our existing
stockholders will own 5% of the reorganized company, and the holders of our new
notes will own 15% of the reorganized company. Additionally, the new note
holders and existing stockholders will each as a group be granted warrants at a
fixed price to purchase additional shares of our post-reverse split common
stock.
Approval of the sale of equity in the rights offering, including the sale of
our common stock to our largest stockholder, will require approval of a
majority of our stockholders. Completion of the rights offering and consent
solicitation will be subject to the requirement that the exchange offering be
consummated at the same time. Although there can be no assurances, the rights
offering and restructuring are expected to close by the end of 2001.
We intend to file a registration statement relating to the rights offering.
Proposed amendments to the indenture
This section sets forth a brief description of the proposed amendments to
the indenture for the old notes for which we are seeking consents in the
exchange offer and consent solicitation. The proposed amendments constitute a
single proposal, and if you tender and consent, you must consent to the
proposed amendments as an entirety and may not consent selectively to specific
proposed amendments. The valid tender by you of your old notes in the exchange
offer and consent solicitation will be deemed to constitute your consent to all
proposed amendments to the old indenture.
The proposed amendments will be set forth in an amendment to the indenture
in the form set forth in the supplemental indenture. The supplemental indenture
will become effective after it is approved by the holders of the required
amount of old notes, as described below, and is signed by us and the trustee on
the expiration of the exchange offer and consent solicitation. The proposed
amendments, however, will not become operative until we accept the old notes
for exchange in the exchange offer and consent solicitation. Thereafter, the
proposed amendments will be binding on all nontendering holders of old notes.
The indenture will remain in effect, without giving effect to the proposed
amendments, until the proposed amendments become operative. If the exchange
offer and consent solicitation is terminated or withdrawn, or the old notes are
never accepted for exchange, the supplemental indenture will never become
operative.
Under the terms of the indenture, the proposed amendments require the
consent of the holders of at least a majority in aggregate principal amount of
the old notes outstanding and not owned or held by us or any person or entity
controlling, controlled by or under common control with us.
Deletion of covenants in the indenture. The proposed amendments would delete
in their entirety the following covenants and references thereto from the
indenture as well as the events of default related to such covenants:
SECTION 3.09 Offer to Purchase by Application of Excess
Proceeds. This provision requires us, within 270
days of an asset sale by us, to use the excess
proceeds of such sale to either repay senior debt,
acquire other businesses or assets or purchase old
notes.
SECTION 4.03
Reports. This provision requires us to file and
furnish certain reports.
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Compliance Certificate. This provision requires us
SECTION 4.04 to deliver to the trustee certificates regarding
our compliance with certain provisions of the
indenture.
Taxes. This provision requires us and our
SECTION 4.05 restricted subsidiaries to pay uncontested taxes,
assessments and other governmental levies.
SECTION 4.06 Stay, Extension and Usury Laws. This provision
requires us and our restricted governmental
subsidiaries to not use, plead, make a claim under
or take the benefit or advantage of any stay,
extension or usury laws that may affect the
covenants in the indenture for the old notes.
SECTION 4.07 Limitation on Restricted Payments. This provision
currently restricts our ability or the ability of
any restricted subsidiary to make certain
restricted payments, including (i) dividends or
distributions on any of our equity interests or the
equity interests of our restricted subsidiaries,
(ii) purchases, redemptions or acquisitions of any
of our equity
interests or the equity interests of any direct or
indirect parent, (iii) purchases, redemptions or
other acquisitions of subordinated or pari passu
obligations and (iv) investments in any person
(other than permitted investments).
SECTION 4.08 Limitations on Dividends and Other Payments
Affecting Subsidiaries. This provision currently
restricts us and our restricted subsidiaries from
creating or permitting to exist certain
encumbrances or restrictions on any restricted
subsidiary's ability, among other things, to (i)
pay dividends, make distributions on its capital
stock or pay indebtedness owed to us or any of our
restricted subsidiaries, (ii) make any loans or
advances to us or any of our restricted
subsidiaries or (iii) transfer any of its property
to us or any of our restricted subsidiaries.
SECTION 4.09 Limitation on Incurrence of Indebtedness and
Issuance of Preferred Stock. This provision
currently restricts our ability and the ability of
our restricted subsidiaries to incur certain
indebtedness or issue any disqualified stock and
restricts the ability of any restricted subsidiary
to issue preferred stock.
SECTION 4.10 Limitation on Asset Sales. This provision restricts
our ability, and the ability of our restricted
subsidiaries under certain circumstances, to sell
or otherwise transfer any of their assets or
property unless such sales are used to either repay
senior debt, acquire other businesses or assets or
repurchase old notes.
SECTION 4.11 Limitation on Transactions with Affiliates. This
provision currently restricts our ability and the
ability of our restricted subsidiaries to engage in
certain transactions with our affiliates.
SECTION 4.12 Limitation on Liens. This provision limits our
ability and the ability of our restricted
subsidiaries to place liens on assets which secure
debt junior to the old notes.
SECTION 4.13 Limitation on Lines of Business. This provision
restricts us and our restricted subsidiaries from
engaging in any lines of business other than a
permitted business.
SECTION 4.14 Corporate Existence. This provision requires us to
preserve our corporate existence and the corporate
or other existence of each of our restricted
subsidiaries in accordance with their respective
organizational documents.
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SECTION 4.15 Offer to Repurchase Upon Change of Control. This
provision requires that we make an offer to
purchase the old notes at a price equal to 101% of
their principal amount after a change in control
event.
SECTION 4.16 Limitation on Senior Subordinated Debt. This
provision currently restricts our ability to issue
debt junior to our senior indebtedness but senior
to the old notes.
SECTION 4.17 Additional Subsidiary Guarantees. This provision
currently requires that when we create or acquire a
wholly-owned subsidiary, the wholly-owned
subsidiary must execute a supplemental indenture
containing a guarantee of the old notes.
SECTION 4.18 Payments for Consents. This provision restricts our
ability and the ability of our restricted
subsidiaries to pay any consideration for any
consent, waiver or amendment to terms of the
indenture or the old notes unless such
consideration is offered to be paid and is paid to
all holders of the old notes that so consent, waive
or agree to consent.
ARTICLE V Limitation on Merger Consolidation and Sales of
Assets. These provisions currently restrict our
ability to consolidate with, merge with or into any
other person or convey, transfer or lease its
assets substantially as an entirety to any person.
SECTION 6.01(c)-(i) Events of Default. These provisions define as
events of default under the indenture: Our failure
to comply with Sections 4.07, 4.09, 4.10 and 4.15,
our failure to comply with other provisions of the
indenture, our default under any mortgage or loan
agreement due to failure to make payment or which
causes the lender to accelerate payment of the
indebtedness, our failure to pay substantial final
judgments rendered against us, our filing of a
bankruptcy proceeding or any subsidiary guarantee
of the old notes is found to be unenforceable.
SECTION 6.03 Other Remedies. This provision allows the trustee
to pursue any available remedy to collect the
payment of principal, premium, if any, and interest
on the old notes or to enforce the provisions of
the old notes or the indenture for the old notes.
Deletion of Definitions. The proposed amendments would delete certain
definitions from the indenture made irrelevant as a result of the foregoing.
Acceptance for exchange of old notes; acceptance of consents
Upon the terms and subject to the conditions of the exchange offer and
consent solicitation and applicable law, we will exchange all old notes validly
tendered and not withdrawn under the exchange offer that are accompanied by
consents validly delivered and not revoked under the consent solicitation, all
on or before the expiration of the exchange offer.
This exchange will be made by the deposit by us of the exchange
consideration, consisting of cash, new notes, shares of common stock and
warrants, with the exchange agent as soon as practicable after the expiration
of the exchange offer so that the exchange consideration may be paid to you on
the exchange date. The exchange agent will act as agent for you for the purpose
of issuing the exchange consideration for the old notes and consents. Under no
circumstances will interest on the exchange consideration be paid by us due to
any delay on behalf of the exchange agent in making the exchange.
We expressly reserve the right, in our sole discretion and subject to Rule
14e-1(c) under the Securities Exchange Act of 1934, to delay acceptance for
exchange of, or the exchange of, old notes to comply, in whole or in part, with
any applicable law. See "--Conditions to the Exchange Offer and Consent
Solicitation."
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In all cases, exchange by the exchange agent of cash, new notes, shares of
common stock and warrants for old notes accepted for exchange under the
exchange offer will be made only after timely receipt by the exchange agent of:
. certificates representing your old notes or timely confirmation of a
book-entry transfer of your old notes into the exchange agent's account
at DTC;
. a properly completed and duly executed consent and letter of
transmittal, or a manually signed facsimile thereof or, in the case of a
book-entry transfer, a properly transmitted "agent's message" (as
described below); and
. any other documents required by the letter of transmittal.
For purposes of the exchange offer and consent solicitation, validly
tendered old notes, or defectively tendered old notes for which we have waived
that defect, will be deemed to have been accepted for exchange by us if, as and
when we give written notice thereof to the exchange agent. Consents to the
proposed amendments will be deemed to have been accepted by us if, as and when
the supplemental indenture is executed.
If the exchange offer and consent solicitation is terminated or withdrawn,
or the old notes are not accepted for exchange, no exchange offer consideration
will be paid or payable. If any tendered old notes are not exchanged under the
exchange offer and consent solicitation for any reason, or certificates are
submitted evidencing more old notes than are tendered, those old notes not
exchanged will be returned without expense, to you, or, in the case of old
notes tendered by book-entry transfer, those old notes will be credited to the
account maintained at DTC from which those old notes were delivered, unless
otherwise requested by you under the "Special Delivery Instructions" heading in
the letter of transmittal, promptly after the expiration of the exchange offer
and consent solicitation.
Procedures for exchanging old notes and delivering consents
To receive the exchange consideration you must tender your old notes under
the exchange offer and consent solicitation on or before its expiration. By
tendering your old notes, you will automatically be delivering your consent to
the proposed amendments with respect to those old notes.
The method of delivery of old notes and consents and letters of transmittal,
any required signature guarantees and all other required documents, including
delivery through DTC and any acceptance of any agent's message transmitted
through ATOP, is at your election and risk. Except as otherwise provided in the
consent and letter of transmittal, delivery will be deemed made only when
actually received by the exchange agent. If delivery is by mail, we suggest
that you use properly insured registered mail with return receipt requested,
and that the mailing be made sufficiently in advance of the expiration of the
exchange offer.
It is contemplated that our new notes, shares and warrants will be delivered
only in book-entry form through DTC. Accordingly, if you anticipate tendering
other than through DTC, you are urged to contact promptly a bank, broker or
other intermediary that has the capability to hold securities custodially
through the DTC, to arrange for the receipt of any new notes, shares and
warrants to be delivered as the exchange offer consideration and to obtain the
information necessary in the consent and letter of transmittal.
If you have any questions or need help in tendering your old notes, please
call the information agent whose address and phone number are on the back cover
of this prospectus and consent solicitation.
Tenders of old notes and delivery of consents
Your tender of old notes, and subsequent acceptance by us, by one of the
procedures set out below will constitute a binding agreement between us in
accordance with the terms and subject to the conditions set forth in this
prospectus and consent solicitation, in the consent and letter of transmittal
and, if applicable, in the notice of guaranteed delivery.
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Tenders of old notes held in physical form and consents
To tender effectively old notes held in physical form and deliver the
related consents:
. you must complete and duly execute a consent and letter of transmittal
and any other documents required by the consent and letter of
transmittal, and the consent and letter of transmittal and other
required documents must be received by the exchange agent at its address
set out on the back cover of this prospectus and consent solicitation on
or before the expiration of the exchange offer and consent solicitation;
and
. you must ensure that certificates representing those old notes are
received by the exchange agent at that address on or before the
expiration of the exchange offer and consent solicitation.
Consents and letters of transmittal and old notes should be sent only to the
exchange agent and should not be sent to us or the trustee.
If your old notes are registered in the name of a person other than the
signatory to the consent and letter of transmittal, then, to tender those old
notes under the exchange offer and consent solicitation, the old notes must be
endorsed or accompanied by an appropriate written instrument or instruments of
transfer signed exactly as that name appears on the old notes, with the
signature on the old notes or instruments of transfer guaranteed as provided
below. If these procedures are followed by a beneficial owner tendering old
notes on or before the expiration of the exchange offer and consent
solicitation, the registered holder of these old notes must sign a valid proxy
because only registered holders may deliver consents.
Tender of old notes held through a custodian
If your old notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee and if you wish to tender old notes and
deliver a consent and letter of transmittal, you should contact that registered
holder promptly and instruct him, her or it to tender old notes and deliver a
consent and letter of transmittal on your behalf. A letter of instructions is
enclosed in the solicitation materials provided along with this prospectus and
consent solicitation which may be used by you in this process to instruct the
registered holder to tender old notes and deliver consents. If you wish to
tender those old notes and deliver consents yourself, you must, prior to
completing and executing the consent and letter of transmittal and delivering
those old notes, either make appropriate arrangements to register ownership of
the old notes in your name or follow the procedures described in the
immediately preceding paragraph. The transfer of record ownership may take
considerable time.
Tender of old notes held through DTC
To tender effectively old notes that are held through DTC, if you are a DTC
participant, you must electronically transmit your acceptance through DTC's
Automated Tender Offer Program, for which the transaction will be eligible. By
transmitting your acceptance, you will also be giving your consent to the
proposed amendments to the indenture for the old notes. Upon receipt of your
acceptance through ATOP, DTC will edit and verify the acceptance and send an
agent's message, as described below, to the exchange agent for its acceptance.
The exchange agent will establish accounts with respect to the old notes at
DTC for purposes of the exchange offer within two business days after the date
of this prospectus and consent solicitation. Any financial institution that is
a participant in DTC may make book-entry delivery of the old notes by causing
DTC to transfer those old notes into the exchange agent's account in accordance
with DTC's procedures for that transfer.
Although delivery of old notes may be effected through book-entry transfer
into the exchange agent's account at DTC, the consent, letter of transmittal,
or a manually signed facsimile thereof, with any required signature guarantees,
or an agent's message, as described below, in connection with a book-entry
transfer, and
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any other required documents, must, in any case, be transmitted to and received
by the exchange agent at the address set out on the back cover of this
prospectus and consent solicitation on or before the expiration of the exchange
offer and consent solicitation in connection with the tender of the old notes.
Delivery of documents to DTC does not constitute delivery to the exchange
agent.
The confirmation of a book-entry transfer into the exchange agent's account
at DTC as described above is referred to in this prospectus and consent
solicitation as a "book-entry confirmation." The term "agent's message" means a
message transmitted by DTC to, and received by, the exchange agent and forming
a part of the book-entry confirmation, which states that DTC has received an
express acknowledgment from a DTC participant that the participant has received
and agrees to be bound by the terms of the consent and letter of transmittal,
including the consent to the proposed amendments, and that we may enforce that
agreement against the participant.
Signature guarantees
Signatures on all consents and letters of transmittal must be guaranteed by
a recognized participant in the Securities Transfer Agents Medallion Program,
unless your tender of old notes tendered and delivery of consents delivered are
tendered and delivered:
. by a registered holder of old notes, or by a participant in DTC whose
name appears on a security position listing as the owner of those old
notes, who has not completed any of the boxes entitled "Special Payment
Instructions" or "Special Delivery Instructions" on the consent and letter
of transmittal; or
. for the account of a member firm of a registered national securities
exchange, a member of the National Association of Securities Dealers, Inc.
or a commercial bank or trust company having an office or correspondent in
the United States. We refer to these entities as "eligible institutions."
If your old notes are registered in the name of a person other than the
signatory to the consent and letter of transmittal or if old notes not accepted
for exchange or not tendered are to be returned to a person other than the
registered holder, then the signature on the consent and letter of transmittal
accompanying the tendered old notes must be guaranteed. See Instruction 4 of
the consent and letter of transmittal.
Mutilated, lost, stolen or destroyed certificates
If you desire to tender old notes, but the certificates evidencing those old
notes have been mutilated, lost, stolen or destroyed, you should contact the
trustee to receive information about the procedures for obtaining replacement
certificates for old notes at the following address or telephone number: ,
, , , , Attention: , telephone ( ) - .
Defective tenders
Except as provided below, unless the old notes being tendered are deposited
with the exchange agent on or before the expiration of the exchange offer and
consent solicitation, accompanied by a properly completed and duly executed
consent and letter of transmittal or a properly transmitted agent's message, we
may at our option treat that tender as defective for purposes of the right to
receive the exchange offer consideration. Exchange for the old notes will be
made only against deposit of the tendered old notes and delivery of any other
required documents.
Guaranteed delivery
If you want to tender old notes under the exchange offer and consent
solicitation and
. your certificates representing those old notes are not immediately
available,
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. time will not permit your consent and letter of transmittal, the
certificates representing your old notes and all other required
documents to reach the exchange agent on or before the expiration of the
exchange offer and consent solicitation, or
. the procedures for book-entry transfer, including delivery of an agent's
message, cannot be completed on or before the expiration of the exchange
offer and consent solicitation,
you may nevertheless tender your old notes with the effect that tender will be
deemed to have been received on or before the expiration of the exchange offer
and consent solicitation if all the following conditions are satisfied:
. the tender is made by or through an eligible institution;
. a properly completed and duly executed notice of guaranteed delivery or
an agent's message with respect to guaranteed delivery that is accepted
by us is received by the exchange agent on before the expiration of the
exchange offer and consent solicitation as provided below; and
. the certificates for the tendered old notes, in proper form for
transfer, or a book-entry confirmation of the transfer of those old
notes into the exchange agent's account at DTC as described above,
together with a consent and letter of transmittal that is properly
completed and duly executed, with any signature guarantees and any other
documents required by the consent and letter of transmittal, or a
properly transmitted agent's message, are received by the exchange agent
within two business days after the date of execution of the notice of
guaranteed delivery.
The notice of guaranteed delivery may be sent by hand delivery, facsimile
transmission or mail to the exchange agent and must include a guarantee by an
eligible institution in the form set out in the notice of guaranteed delivery.
Under no circumstances will interest be paid by us by reason of any delay in
exchanging old notes for the exchange offer consideration to any person using
the guaranteed delivery procedures that results from this guaranteed delivery.
The exchange offer consideration for old notes tendered under the guaranteed
delivery procedures will be the same as for old notes delivered to the exchange
agent after the expiration of the consent solicitation and on or prior to the
expiration of the exchange offer and consent solicitation, even if the old
notes to be delivered subject to the guaranteed delivery procedures are not so
delivered to the exchange agent, and therefore exchange by the exchange agent
on account of those old notes is not made, until after the exchange date.
Backup United States federal income tax withholding
To prevent backup federal income tax withholding you must provide the
exchange agent with your current taxpayer identification number and certify
that you are not subject to backup federal income tax withholding by completing
the Substitute Form W-9 included in the consent and letter of transmittal.
Determination of validity
All questions as to the validity, form, eligibility, including time of
receipt, and acceptance of any tendered old notes subject to any of the
procedures described above will be determined by us, in our sole discretion,
and our determination will be final and binding.
We reserve the right to reject any or all tenders of any old notes that we
determine not to be in proper form or, in the case of old notes, if the
acceptance for tender of those old notes may, in the opinion of our counsel, be
unlawful. We also reserve the right to waive any of the conditions of the
exchange offer and consent solicitation or any defect or irregularity in any
tender of your old notes, whether or not similar defects or irregularities are
waived in the case of other holders of old notes.
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Our interpretation of the terms and conditions of the exchange offer and
consent solicitation, including the consent and letter of transmittal and the
instructions thereto, will be final and binding. Neither we, the exchange
agent, the trustee nor any other person will be under any duty to give
notification of any defects or irregularities in tenders or will incur any
liability for failure to give any such notification. If we waive our right to
reject a defective tender of old notes, you will be entitled to the exchange
offer consideration.
Withdrawal of tendered old notes and revocation of consents
You may withdraw tenders of old notes at any time on or before the
expiration of the exchange offer and consent solicitation, but the exchange
offer consideration will not be payable in respect of old notes so withdrawn. A
valid withdrawal of tendered old notes effected on or before the expiration of
the exchange offer and consent solicitation will constitute the concurrent
valid revocation of your related consent. A valid revocation of a consent on or
before the expiration date of the exchange offer will constitute a concurrent
valid withdrawal of your tendered old notes.
Tenders of old notes may be validly withdrawn if the exchange offer and
consent solicitation is terminated without any old notes being exchanged. In
this case, the old notes tendered under the exchange offer and consent
solicitation will be promptly returned to you, the supplemental indenture will
not become operative and the consents will be deemed revoked.
If the consent solicitation is amended on or before the expiration of the
exchange offer and consent solicitation in a manner determined by us, in our
sole discretion, to constitute a material adverse change to you, we promptly
will disclose that amendment and, if necessary, extend the exchange offer for a
period deemed by us to be adequate to permit you to withdraw your old notes and
revoke your consents.
For a withdrawal of tendered old notes and the revocation of consents to be
effective, a written or facsimile transmission notice of withdrawal and
revocation must be received by the exchange agent on or before the expiration
of the exchange offer at its address set out on the back cover of this
prospectus and consent solicitation. Any such notice of withdrawal must:
. specify the name of the person who tendered the old notes to be
withdrawn;
. contain the description of the old notes to be withdrawn and identify
the aggregate principal amount represented by those old notes as well as
the certificate number or numbers shown on the particular certificates
evidencing those old notes unless those old notes were tendered by book-
entry transfer; and
. be signed in the same manner as the original signature on the consent
and letter of transmittal by which those old notes were tendered,
including any required signature guarantees, and the related consent was
given, or be accompanied by evidence sufficient to us that the person
withdrawing the tender and revoking the consent has succeeded to the
beneficial ownership of the old notes.
If the old notes to be withdrawn have been delivered or otherwise identified
to the exchange agent, a signed notice of withdrawal is effective immediately
upon written or facsimile notice of that withdrawal even if physical release is
not yet effected.
Any permitted withdrawal of old notes and revocation of consents may not be
rescinded, and any old notes properly withdrawn will thereafter be deemed not
validly tendered for purposes of the exchange offer and consent solicitation.
Any consents revoked will be deemed not validly delivered for purposes of the
exchange offer and consent solicitation. Withdrawn old notes may, however, be
re-tendered again following one of the appropriate procedures described in this
prospectus and consent solicitation at any time on or before the expiration of
the exchange offer and consent solicitation.
If we extend the exchange offer and consent solicitation or if for any
reason the acceptance for tender of old notes is delayed or if we are unable to
accept the tender of old notes under the exchange offer and consent
solicitation, then, without prejudice to our rights under the exchange offer
and consent solicitation, tendered old
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notes may be retained by the exchange agent on our behalf and may not be
withdrawn except as otherwise provided in this section. This is subject,
however, to Rule 14e-l(c) under the Exchange Act, which requires that an
offeror pay the consideration offered or return the securities deposited by or
on behalf of the investor promptly after the termination or withdrawal of a
tender offer.
All questions as to the validity, form and eligibility, including time of
receipt, of notices of withdrawal will be determined by us, in our sole
discretion, and our determination will be final and binding. Neither we, the
exchange agent, the trustee nor any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal, or
incur any liability for failure to give any such notification.
Market and trading information regarding the old notes
The old notes currently are traded over-the-counter. However, there is no
established reporting system and there are no publicly available quotations for
the old notes. Accordingly, Houlihan Lokey Howard & Zukin Capital has advised
us that there is no practical way to determine the trading history of the old
notes. We believe that trading in the old notes has been limited and sporadic.
We believe that opportunities to trade old notes that remain outstanding after
this exchange offer and consent solicitation will be extremely limited.
Conditions to the exchange offer and consent solicitation
This exchange offer and consent solicitation is subject to the following
conditions:
. we must receive valid tenders under this exchange offer and consent
solicitation of at least $132 million of the aggregate principal amount
of the outstanding old notes, along with consents to amendments to the
indenture governing the old notes and those tenders and consents are not
withdrawn or revoked;
. our senior bank lenders and the parties to our tax retention operating
lease must consent to this exchange offer and consent solicitation;
. we must receive $20 million in cash in our rights offering in exchange
for 80% of the to-be-outstanding common stock of our reorganized company
in the rights offering;
. we must increase the number of authorized shares of our common stock to
500 million shares by means of an amendment to our certificate of
incorporation and reduce the number of our issued and outstanding shares
of common stock by converting every ten shares into one share in a
reverse split;
. we must receive the approval of a majority of our stockholders for:
. the issuance of the new notes, shares of our common stock and warrants
to purchase common stock in the exchange offer and consent
solicitation;
. the issuance to existing stockholders of warrants to purchase
3,003,363 shares of our post-reverse split common stock (at an
exercise price of $5.16 per share);
. the sale of 80% of the to-be-oustanding common stock of the
reorganized company for $20 million in the rights offering;
. the sale of post-reverse split common stock to Lacy Harber in
accordance with his agreement to purchase unsold allotments in the
rights offering; and
. the change in the number of our authorized shares to 500 million
shares and the reduction of our issued and outstanding shares on a
ten-for-one basis in the reverse split.
. this exchange offer and consent solicitation must comply with applicable
laws and applicable interpretations of the staff of the SEC;
. this exchange offer and consent solicitation complies with all
applicable state securities or "blue sky" laws;
. no action or proceeding may have been instituted or threatened in any
court or before any governmental agency and no law, rule, regulation,
judgment, order or injunction have been proposed, including any proposal
which is in existence as of the date of this prospectus and consent
solicitation, enacted, entered or enforced by any court or government
agency that would reasonably be expected to:
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. prohibit, prevent or materially impair our ability to proceed with
this exchange offer and consent solicitation;
. materially adversely affect our business; or
. materially impair the benefits to us of this exchange offer and
consent solicitation.
. no event may have occurred or be reasonably likely to occur affecting
our business that would reasonably be expected to:
. prohibit, prevent or significantly delay consummation of this exchange
offer and consent solicitation; or
. materially impair our contemplated benefits of this exchange offer and
consent solicitation.
. the trustee of the old notes may not have objected or taken any action
that would reasonably be expected to prevent, prohibit or materially
adversely affect the consummation of this exchange offer and consent
solicitation; and
. no tender or exchange offer for any class of our equity securities and
no merger, acquisition, business continuation or similar transaction
involving us may have occurred, been proposed or announced.
All conditions to this exchange offer and consent solicitation must be
satisfied or waived on or before the expiration date for this exchange offer
and consent solicitation. Subject to the satisfaction or waiver of the
conditions, we will accept for exchange any and all old notes that are validly
tendered and not withdrawn at any time prior to acceptance for payment. Failure
by us to enforce any conditions will not be considered a waiver of that
condition. Subject to satisfaction or waiver of the conditions, we will accept
for exchange any and all old notes that are validly tendered and not withdrawn
before , New York City time, on , 2001, the expiration date of this
exchange offer and consent solicitation. However, we reserve the right to:
. delay the acceptance of the old notes for exchange;
. terminate this exchange offer and consent solicitation;
. extend the expiration date and retain all old notes that have been
tendered, subject to the right of owners of old notes to withdraw their
tendered old notes;
. refuse to accept the old notes and return all old notes that have been
tendered to us; or
. waive any condition or otherwise amend the terms of this exchange offer
and consent solicitation in any respect.
We will not waive or amend any condition after the expiration date of this
exchange offer and consent solicitation.
United States federal income tax consequences
You are referred to the discussion about federal income tax consequences of
the exchange offer and consent solicitation under "United States Federal Income
Tax Consequences". Tax matters are very complicated and the tax consequences of
the exchange offer and consent solicitation to you will depend on your own
situation. You should consult with your own tax advisor for a full
understanding of the consequences of the exchange and consent solicitation to
you.
Advisor, Exchange Agent and Dealer Manager
Advisor
Houlihan Lokey Howard & Zukin Capital has acted as an advisor to us in
connection with the exchange offer and consent solicitation. As advisor,
Houlihan Lokey participated with us in determining the terms and
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conditions of the exchange offer and consent solicitation and has provided
information to us regarding comparable transactions in the marketplace.
Houlihan Lokey was not asked to and will not render an opinion regarding the
fairness of the exchange offer and consent solicitation to the holders of our
old notes. We have agreed to indemnify the advisor against liabilities incurred
in connection with any actions taken or omitted to be taken by us, or by the
advisor with our consent, under the terms of the engagement, except to the
extent any such liability is the result of the advisor's gross negligence or
willful misconduct.
The advisor will receive compensation for its services in connection with,
and upon the completion of, the exchange offer and consent solicitation of $2.0
million. The advisor is also receiving certain monthly service fees and is
being reimbursed for its reasonable out-of-pocket expenses in connection with
the exchange offer.
Exchange agent
We have appointed as exchange agent for the exchange offer and consent
solicitation. We have agreed to pay reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses. All
executed consents and letters of transmittal and any other required documents
in connection with the exchange offer should be sent or delivered by you or
your broker, dealer, commercial bank, trust company or other nominee to the
exchange agent at the addresses and telephone numbers set forth on the back
cover page of this prospectus and consent solicitation. The exchange agent will
receive reasonable and customary fees and reimbursement for its reasonable out-
of-pocket expenses in connection with the exchange offer. Questions and
requests for assistance, requests for additional copies of this prospectus and
consent solicitation or of the consent and letter of transmittal and requests
for notices of guaranteed delivery should be directed to the exchange agent at
such address.
Dealer manager
We have retained Houlihan Lokey Howard & Zukin Capital as our exclusive
dealer manager in connection with the exchange offer and consent solicitation.
We will pay Houlihan Lokey Howard & Zukin Capital a customary fee for its
services. We have also agreed to reimburse Houlihan Lokey Howard & Zukin
Capital for its reasonable out-of-pocket expenses and to indemnify it against
certain expenses and liabilities, including liabilities under federal
securities laws. These expenses are not included in the fees set forth below.
Fees and expenses
We will bear the expenses of soliciting tenders for the exchange offer and
consent solicitation. We are making the principal solicitation by mail.
However, we may make additional solicitations by telephone, facsimile, e-mail
or in person by officers and regular employees of ours and those of our
affiliates. In addition, we may make payments to brokers, dealers or others
soliciting acceptance of the exchange offer and consent solicitation.
We will pay the cash expenses to be incurred in connection with the exchange
offer and consent solicitation and the rights offering, which are estimated in
the aggregate to be approximately $4.0 million. Such expenses include fees and
expenses of the information agent, the exchange agent and trustee, expenses of
soliciting dealers, accounting and legal fees and printing costs, among others.
In addition to the solicitation of consents by mail, our directors, officers
or employees may solicit consents by telephone, facsimile or in person without
receiving additional compensation.
Restrictions on sales of securities by affiliates of Aviation Sales
The shares of our common stock and new notes to be issued in connection with
the exchange offer and consent solicitation will be registered under the
Securities Act of 1933 and will be freely transferable under the Securities
Act, except for those securities issued to any person in the exchange who is
deemed to be an
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"affiliate" of Aviation Sales under the Securities Act at the time of the
exchange offer and consent solicitation. Persons who may be deemed to be
affiliates include individuals or entities that control, are controlled by, or
are under common control with Aviation Sales and may include some officers and
directors, as well as principal stockholders. Affiliates may not sell their
shares of our common stock or new notes acquired in connection with the
exchange except by means of:
. an effective registration statement under the Securities Act covering
the resale of those securities;
. any other applicable exemption under the Securities Act.
No appraisal rights
You will not have any right to dissent and receive an appraisal of your old
notes in connection with the exchange offer and consent solicitation.
Transfer taxes
Owners who tender their old notes for exchange will not be obligated to pay
any transfer taxes. If, however,
. new notes, shares and warrants are to be delivered to, or issued in the
name of, any person other than the registered owner of the old notes; or
. old notes are registered in the name of any person other than the person
signing the consent and letter of transmittal; or
. a transfer tax is imposed for any reason other than the exchange of new
notes, shares and warrants for old notes in connection with the exchange
offer and consent solicitation,
then the amount of any transfer taxes, whether imposed on the registered owner
or any other persons, will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption from them is not submitted with
the consent and letter of transmittal, the amount of such transfer taxes will
be billed directly to the tendering holder.
Listing on the New York Stock Exchange
Our common stock is listed on the New York Stock Exchange. We will use our
best efforts to cause the shares of our common stock to be issued in the
exchange offer and consent solicitation and the shares of our common stock
issuable upon exercise of the warrants issued in the exchange offer and consent
solicitation to be approved for listing on the New York Stock Exchange, subject
to official notice of issuance, before the completion of the exchange offer and
consent solicitation.
"Blue Sky" compliance
We are making this exchange offer and consent solicitation to all holders of
old notes. We are not aware of any jurisdiction in which the making of the
exchange offer and consent solicitation is not in compliance with applicable
law. If we become aware of any jurisdiction in which the making of the exchange
offer would not be in compliance with applicable law, we will make a good faith
effort to comply with any such law. If, after such good faith effort, we cannot
comply with any such law, the exchange offer will not be made to, and tenders
of old notes and consents will not be accepted from, the holders of old notes
residing in that jurisdiction.
No person has been authorized to give any information or make any
representation on behalf of us not contained in this prospectus and consent
solicitation or in the consent and letter of transmittal and, if given or made,
such information or representation must not be relied upon as having been
authorized.
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COMPARISON OF THE OLD NOTES AND THE NEW NOTES
Old Notes New Notes
--------- ---------
Aggregate principal $165 million Up to $100 million
amount outstanding on
initial issuance
Maturity date February 15, 2008 December 31, 2006
Interest rate 8 1/8% annual rate, payable in 8.0% annual rate, payable at
cash on February 15 and August our option either in cash or in
15 of each year. additional new notes, on
and of each year,
commencing .
Guarantees Our obligations under the old Our obligations under the new
notes are fully and notes will be fully and
unconditionally guaranteed by unconditionally guaranteed by
certain of our wholly owned certain of our wholly owned
subsidiaries. United States subsidiaries.
Redemption at our option We can redeem the old notes at We can redeem the new notes at
any time after February 15, any time after January 1, 2002
2003 in whole or part for their in whole or part for a
principal amount plus accrued combination of cash and the
and unpaid interest, if any, to common stock of the reorganized
the date of redemption. The company. The terms of
initial redemption price is redemption are described in
104.063% of principal amount. "Description of New Notes--
Redemption."
Repurchase at option of Upon a change of control, Upon a change of control,
holders upon a change of holders of the old notes can holders of the new notes can
control require us to purchase their require us to purchase their
old notes at a price equal to new notes at a price equal to
101% of their principal amount, the redemption price which we
plus accrued and unpaid would be obligated to pay if we
interest, if any, to the date redeemed the notes on the date
of repurchase, so long as we of such change of control.
have satisfied other of our
payment obligations.
Repurchase at option of Holders of the old notes can Upon an applicable asset sale,
holders upon asset sale require us to purchase their holders of the new notes can
old notes at 100% of the require us to purchase their
principal amount thereof with new notes at a price equal to
the excess proceeds of an the redemption price which we
applicable asset sale that we would be obligated to pay if we
do not use to repay redeemed the new notes on the
indebtedness senior to the new date of the applicable asset
notes or to acquire replacement sale, with the excess proceeds
assets. of the applicable asset sale
that we do not use to repay
indebtedness senior to the new
notes or to acquire replacement
assets.
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Old Notes New Notes
--------- ---------
Conversion The old notes are not The new notes (inclusive of all
convertible. accrued but unpaid interest
thereon) will automatically
convert on December 31, 2006
into an aggregate of
270,275,706 post-reverse split
shares of our common stock.
Ranking and security The old notes rank in right of The new notes will rank in
payment behind our senior bank right of payment behind our
debt and all of our other senior bank debt and all of our
existing and future senior other existing and future
debt. The old notes will rank senior debt. The new notes will
in right of payment behind the rank senior in right of payment
new notes. If we issue to any remaining old notes. If
additional subordinated debt in we issue additional
the future, the old notes will subordinated debt in the
rank in right of payment future, the new notes will rank
behind, or equal to, that debt. in right of payment ahead of,
The old notes are unsecured. or equal to, that debt. The new
notes will be unsecured.
Affirmative Covenants The old notes include the The new notes include the
following required actions: following required actions:
. maintenance of an office for . maintenance of an office for
notices in New York, New notices in New York, New
York; York;
. maintenance of property and . maintenance of property and
liability insurance; liability insurance;
. a compliance certificate . a compliance certificate
delivered by an officer at delivered by an officer at
least once yearly; least once yearly;
. maintenance of corporate . maintenance of corporate
existence; existence;
. timely payment of principal . timely payment of principal
and interest on the old and interest on the new
notes; notes;
. addition of subsidiary . addition of subsidiary
guarantees in specified guarantees in specified
circumstances; and circumstances; and
. filing of public reports. . filing of public reports.
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Old Notes New Notes
--------- ---------
Negative Covenants The old notes include The new notes include
limitations on our and our limitations on our and our
subsidiaries' ability to, subsidiaries' ability to, among
among other things: other things:
. incur additional . incur additional indebtedness
indebtedness or issue or issue capital or preferred
preferred stock; stock; however, the indenture
governing the new notes
permits us to incur more
indebtedness than the
indenture governing the old
notes and does not decrease
our ability to incur senior
debt when we repay senior
debt with the proceeds of
asset sales;
. pay dividends on our . pay dividends on our shares,
shares, purchase or purchase or redeem our
redeem our shares, make shares, make investments or
investments or make make payments on debt which
payments on debt which is is pari passu or subordinated
subordinated to the old to the new notes;
notes;
. create or permit any . create or permit any
encumbrance or encumbrance or restriction on
restriction on the the ability of our
ability of our subsidiaries to pay money to
subsidiaries to pay money us;
to us;
. create liens; . create liens;
. engage in transactions . engage in transactions with
with our affiliates; our affiliates;
. merge or consolidate; and . merge or consolidate; and
. transfer or sell . transfer or sell
substantially all of our substantially all of our
assets. assets.
Events of default The following are events of The following are events of
default under the terms of default under the terms of the
the old notes: new notes:
. our failure to pay . our failure to pay principal
principal when due; when due;
. our failure to pay . our failure to pay interest
interest when due, if when due, if such failure
such failure continues continues for 30 days;
for 30 days;
. our failure to comply . our failure to comply with
with the covenants the covenants regarding
regarding change of change of control, asset
control, asset sales, sales, restricted payments or
restricted payments or incurrence of indebtedness
incurrence of and issuance of capital or
indebtedness and issuance preferred stock;
of preferred stock;
. our failure to perform . our failure to perform any
any other covenant for 60 other covenant for 60 days
days after written after written notice;
notice;
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Old Notes New Notes
--------- ---------
. if we or our subsidiaries . default by us or our
default on any indebtedness subsidiaries on any
which in aggregate exceeds indebtedness which in the
$10 million; aggregate exceeds $10
million;
. the rendering of a final . the rendering of a final
judgment against us or any judgment against us or any
of our subsidiaries in of our subsidiaries in
excess of $10 million excess of $10 million which
remains unpaid for over 60 remains unpaid for over 60
days; days;
. some events of bankruptcy, . some events of bankruptcy,
insolvency or insolvency or
reorganization; or reorganization; or
. any subsidiary guarantee is . any subsidiary guarantee is
held unenforceable or held unenforceable or
invalid or any subsidiary invalid or any subsidiary
guarantor denies its guarantor denies its
obligations under its obligations under its
subsidiary guarantee. subsidiary guarantee.
Remedies upon default If an event of default occurs, If an event of default occurs,
either the trustee or holders either the trustee or holders
of at least 25% in aggregate of at least 25% in aggregate
principal amount of the old principal amount of the
notes may accelerate the outstanding new notes may
maturity of all of the old accelerate the maturity of all
notes. of the new notes.
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DESCRIPTION OF NEW NOTES
The new notes will be issued under an indenture dated as of , 2001
among Aviation Sales, the subsidiary guarantors named therein and , as
Trustee. The terms of the new notes include those stated in the indenture and
those made part of the indenture by reference to the Trust Indenture Act of
1939. The new notes will be Aviation Sales' general, unsecured obligations and
will be guaranteed by the subsidiary guarantors named in the indenture. The new
notes will be subordinated to certain of Aviation Sales' Senior Debt on the
terms set forth in the indenture and described below under the caption "--
Subordination" and will be senior to any remaining old notes. The following
descriptions are summaries of the material provisions of the indenture. They do
not restate the indenture in its entirety. We urge you to read the indenture
because it, and not the summary descriptions below, defines your rights. A copy
of the indenture is filed as an exhibit to the registration statement of which
this prospectus and consent solicitation forms a part and is also available for
inspection at the office of the trustee. The definitions of some terms used in
the following summary of the new notes are set forth below under "--
Definitions." For purposes of this summary, the terms "Aviation Sales," we, our
and us refer to Aviation Sales Company and not to any of its subsidiaries.
General terms of new notes
The general terms of the new notes are substantially identical to those of
the old notes, except that:
. the new notes (including interest previously paid in kind through the
issuance of additional new notes and all accrued but unpaid interest)
will automatically convert on December 31, 2006 into an aggregate of
270,275,706 post-reverse split shares of our common stock (subject to
adjustment as described below), if the new notes are not earlier
redeemed or otherwise repurchased;
. interest on the new notes may be payable either in cash or in additional
new notes, at our option; and
. the new notes are redeemable by us for a combination of cash and common
stock.
The new notes will mature on December 31, 2006. They will bear interest from
, 2001, at the rate of 8.0% per annum. Interest will be payable at
Aviation Sales' option either in cash or paid-in-kind through the issuance of
additional new notes, semiannually on and of each year, commencing
, to the persons in whose names the new notes are registered at the close
of business on the and , as the case may be, immediately preceding
the interest payment date. We expect to elect to pay interest in-kind, although
if we make cash payments they will be made to the depositary as described below
under "--Book-Entry System."
The new notes will be our general unsecured obligations and will be
subordinated in right of payment to all current and future Senior Debt (as
defined below under "--Definitions") and will be senior in right of payment to
any remaining old notes. The new notes will be fully and unconditionally
guaranteed by our subsidiary guarantors.
As of the date of this prospectus and consent solicitation, substantially
all of our subsidiaries are "restricted subsidiaries" as defined below. The
indenture provides that under certain circumstances, we may be able to
designate current or future subsidiaries as unrestricted subsidiaries.
Unrestricted subsidiaries will not be subject to many of the restrictive
covenants set forth in the indenture.
Indenture
The indenture for the new notes is substantially identical to the existing
indenture for the old notes except that (i) the indenture governing the new
notes permits us to incur Indebtedness equal to the greater of $95 million or
an amount that satisfies a fixed charge coverage ratio of 2.25 to 1, whereas
the indenture for the old notes permits in addition to previously existing
senior debt, the incurrence of Indebtedness equal to the greater of $30 million
or an amount that satisfies a fixed charge coverage ratio of 2.25 to 1; (ii)
the new indenture requires us, upon a change of control or certain asset sales,
to repurchase the new notes at a price equal to the
88
redemption price which we would be obligated to pay if we redeemed the notes on
the date of the change of control or asset sale, whereas the old indenture
requires us to pay 101% and 100% of the principal amount of the old notes upon
a change of control or asset sale, respectively; and (iii) the new indenture
does not contain a provision requiring acceleration of any premium due upon
acceleration of the new notes upon an Event of Default by reason of any willful
action (or inaction) taken (or not taken) by Aviation Sales with the intention
of avoiding the prohibition on the redemption of new notes.
Except for provisions described in the preceding paragraph and the
provisions relating to redemption, conversion, and payment of interest in
additional new notes, all other provisions of the indenture for the new notes
are substantively identical to the provisions of the existing indenture for the
old notes and are as described below.
The indenture limits the aggregate principal amount of new notes that may be
issued to $100,000,000. Please read the section entitled "--Covenants" for a
description of provisions in the indenture governing the new notes that limit
other Indebtedness or securities that may be incurred or issued by Aviation
Sales or any of Aviation Sales' subsidiaries and contain financial or similar
restrictions on Aviation Sales and any of its subsidiaries.
Redemption
The new notes are not redeemable at our option prior to January 1, 2002.
After that time, the new notes may be redeemed at any time at our option, in
whole or in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices set forth below, which are based upon percentages of the sum
of (a) principal amount, plus (b) accrued and unpaid interest thereon
(including paid-in-kind interest previously paid through the issuance of
additional new notes) to the applicable redemption date, if redeemed during the
twelve-month period beginning on January 1 of the years indicated below. The
applicable cash redemption percentages are as follows: (i) 70% in 2002, (ii)
72.5% in 2003, (iii) 73% in 2004, (iv) 75.625% in 2005 and 77.5% in 2006.
Further, in addition to the cash redemption price, we will issue the following
shares of our post-reverse split common stock ratably to the new noteholders
upon redemption of the new notes:
Aggregate
Number of Shares
Year of Redemption to be Issued
------------------ ----------------
2002 and 2003............... 4,504,595
2004, 2005 and 2006......... 3,003,063
For example the redemption prices set forth below are expressed as (i) the
amount of cash payable ratably to the holders of the new notes (assuming all
interest previously paid has been paid in kind and including all accrued but
unpaid interest) and (ii) the number of shares of Aviation Sales' post-reverse
split common stock issuable ratably to the holders of the new notes if the new
notes were redeemed on December 31 of the applicable year:
Aggregate Post-Reverse Split
Redemption Date Amount of Number of Shares
December 31, Cash of Common Stock
--------------- --------- ------------------
2002............ $ 75,700,000 4,504,595
2003............ $ 84,800,000 4,504,595
2004............ $ 92,400,000 3,003,063
2005............ $103,500,000 3,003,063
2006 prior to
maturity....... $114,700,000 3,003,063
The number of shares of common stock issuable will be adjusted if we:
. declare a dividend in common stock on any class of our capital stock;
. issue to our stockholders rights, options or warrants to purchase common
stock at less than the then current market price for our common stock;
provided, that if these rights, options or warrants are only exercisable
upon certain triggering events, then we will not adjust the conversion
price until the triggering events occur;
89
. subdivide, combine or reclassify our outstanding common stock; or
. distribute to our stockholders evidences of debt, shares of capital
stock other than common stock, cash or other assets, excluding
distributions in connection with our liquidation and excluding dividends
that we pay exclusively in cash.
Automatic conversion upon maturity
If the new notes have not already been redeemed or repurchased, the new
notes, including those new notes previously issued as paid-in-kind interest and
all accrued but unpaid interest, will automatically convert on December 31,
2006 into an aggregate of 270,275,706 post-reverse split shares of Aviation
Sales' common stock. Holders of new notes will not receive any cash payment
representing principal or accrued and unpaid interest upon conversion; instead,
holders will receive a fixed number of shares of common stock and a cash
payment to account for fractional shares, if any. The cash payment for
fractional shares will be based on the closing price of the common stock on the
last trading day immediately preceding December 31, 2006. Delivery of shares of
Aviation Sales' common stock will be deemed to satisfy Aviation Sales'
obligation to pay the principal amount of the new notes, including new notes
previously issued to pay interest in kind and all accrued and unpaid interest.
Accrued and unpaid interest will be deemed paid in full, rather than canceled,
extinguished or forfeited. Aviation Sales will not adjust the conversion rates
to account for any accrued and unpaid interest.
The conversion rate will be adjusted if we:
. declare a dividend in common stock on any class of our capital stock;
. issue to our stockholders rights, options or warrants to purchase common
stock at less than the then current market price for our common stock;
provided, that if these rights, options or warrants are only exercisable
upon certain triggering events, then we will not adjust the conversion
price until the triggering events occur;
. subdivide, combine or reclassify our outstanding common stock;
. distribute to our stockholders evidences of debt, shares of capital
stock other than common stock, cash or other assets, excluding
distributions in connection with our liquidation and excluding dividends
and distributions that we pay exclusively in cash and in certain mergers
and consolidations;
. distribute cash to all or almost all holders of our common stock that,
combined with: (1) All other all-cash distributions we have made in the
prior 12 months for which no adjustment has been made; and (2) the fair
market value of consideration paid or payable for any tender offer by us
or any of our subsidiaries for common stock concluded within the prior
12 months for which no adjustment has been made, exceeds 15% of the
market value of our then-outstanding common stock on the record date of
that distribution; and
. complete a tender offer for our common stock or any of our subsidiaries
completes a tender offer for our common stock, if the aggregate
consideration, together with: (1) any consideration payable in other
similar tender offers expiring within the 12 months before the
expiration of the tender offer for which no adjustment has been made;
and (2) the aggregate amount of any all-cash distributions to all
holders of our common stock within the 12 months before the expiration
of the tender offer for which we have made no adjustments, exceeds 15%
of the market value of our then-outstanding common stock on the
expiration of the tender offer.
If we distribute to our stockholders any other rights, warrants or options
to purchase securities, we will either adjust the conversion price of the new
notes or, when you convert your new notes, under certain conditions, we will
issue you shares of common stock, plus the appropriate number of those rights,
warrants or options. We are not required to adjust the conversion price until
all required adjustments together amount to one percent or more of the
conversion price.
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We may make reductions in the conversion price that our board of directors
believes are appropriate to reduce federal income taxes to holders of our
common stock that result from a dividend or distribution of stock.
If we:
. reclassify or change our outstanding shares of common stock issuable
upon conversion of the new notes;
. consolidate or merge with another entity, with certain exceptions; or
. sell or transfer most of our assets,
then:
. we will issue to you, when you convert your new notes, the kind and
amount of securities, cash and other property from that event that you
would have received had you converted your new notes into common stock
immediately prior to that event.
Subordination
The payment of principal of premium, if any, and interest on the new notes
is subordinated in right of payment to the prior payment in full of all Senior
Debt, whether outstanding on the date of the indenture or thereafter incurred.
Upon any distribution to Aviation Sales' creditors in a liquidation or
dissolution or in a bankruptcy, reorganization, insolvency, receivership or
similar proceeding relating to us or Aviation Sales' property, an assignment
for the benefit of creditors or any marshalling of our assets and liabilities,
the holders of Senior Debt (as defined below) will be entitled to receive
payment in full in cash of all Obligations (as defined below) due in respect of
such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt) before the
holders of new notes will be entitled to receive any payment with respect to
the new notes, and until all new notes would be entitled, shall be made to the
holders (except that holders of new notes may receive and retain Permitted
Junior Securities (as defined below) and payments made from the trust described
under "--Discharge defeasance and covenant defeasance").
Aviation Sales also may not make any payment upon or in respect of the new
notes (except in Permitted Junior Securities or from the trust described under
"--Discharge defeasance and covenant defeasance") if (i) a default in the
payment of principal of premium, if any, or interest on Designated Senior Debt
occurs and is continuing beyond any applicable period of grace or (ii) any
other default occurs and is continuing with respect to Designated Senior Debt
that permits holders of the Designated Senior Debt as to which such default
relates to accelerate its maturity and the Trustee receives a notice of such
default (a "Payment Blockage Notice") from Aviation Sales or the holders of any
Designated Senior Debt. Payments on the new notes may and shall be resumed (a)
in the case of a payment default, upon the date on which such default is cured
or waived and (b) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 1 day after the date on
which the applicable Payment Blockage Notice is received, unless the maturity
of any Designated Senior Debt has been accelerated. No new Payment Blockage
Notice shall be effective unless and until (i) 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the new notes
that have come due have been paid in full in cash. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been waived for a period of not
less than 90 days.
The indenture requires that Aviation Sales promptly notify holders of Senior
Debt if payment of the new notes is accelerated because of an Event of Default.
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As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, holders of new notes may recover less ratably than
creditors of Aviation Sales who are holders of Senior Debt. On a pro forma
basis, after giving effect to the exchange offer, the principal amount of
Senior Debt of Aviation Sales and the Subsidiary Guarantors outstanding at June
30, 2001 would have been approximately $ million. The indenture governing the
new notes limits, subject to certain financial tests, the amount of additional
Indebtedness, including Senior Debt, that Aviation Sales and its subsidiaries
can incur. See "--Covenants--Incurrence of indebtedness and issuance of
preferred stock."
Subsidiary guarantees
Aviation Sales' payment obligations under the new notes are jointly and
severally guaranteed by the subsidiary guarantors named in the indenture. The
subsidiary guarantee of each subsidiary guarantor is unsecured and is
subordinated to the prior payment in full in cash of all Senior Debt of such
subsidiary guarantor. The obligations of each subsidiary guarantor under its
subsidiary guarantee are limited so as not to constitute a fraudulent
conveyance under applicable law. See, however, "Risk Factors." A court may void
the guarantees of the new notes or subordinate the guarantees to other
obligations of the guarantors.
The indenture provides that no subsidiary guarantor may consolidate with or
merge with or into (whether or not such subsidiary guarantor is the surviving
Person), another corporation, Person or entity whether or not affiliated with
such subsidiary guarantor unless (i) except in the case of a merger of a
subsidiary guarantor with or into Aviation Sales or another subsidiary
guarantor but subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
subsidiary guarantor) assumes all the obligations of such subsidiary guarantor
pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the new note, and the indenture (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; (iii) except in the case of a merger of a subsidiary guarantor,
with or into Aviation Sales or another subsidiary guarantor such subsidiary
guarantor, or any Person formed by or surviving any such consolidation or
merger, would have Consolidated Net Worth (immediately after giving effect to
such transaction), equal to or greater than the Consolidated Net Worth of such
subsidiary guarantor immediately preceding the transaction; and (iv) except in
the case of a merger of a subsidiary guarantor with or into Aviation Sales or
another subsidiary guarantor, Aviation Sales would be permitted by virtue of
Aviation Sales' pro forma Fixed Charge Coverage Ratio, immediately after giving
effect to such transaction, to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the covenant
described below under the caption "--Covenants--Incurrence of indebtedness and
issuance of preferred stock."
The indenture provides that in the event of (i) a sale or other disposition
of all of the assets of any subsidiary guarantor, by way of merger,
consolidation or otherwise; (ii) a sale or other disposition of all of the
capital stock of any subsidiary guarantor; or (iii) such subsidiary guarantor
is designated as an Unrestricted Subsidiary in accordance with the indenture,
then such subsidiary guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock
of such subsidiary guarantor or designation as a Unrestricted Subsidiary) or
the corporation acquiring the property (in the event of a sale or other
disposition of all of the assets of such subsidiary guarantor) will be released
and relieved of any obligations under its subsidiary guarantee; provided that,
in the case of a sale or other disposition, the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the indenture. See "--Asset Sales."
Selection and notice
If less than all of the new notes are to be redeemed at any time, selection
of new notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the new notes are listed, or, if the new notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no new notes of $1,000 or less shall
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be redeemed in part. Notices of redemption shall be mailed by first class mail
at least 30 but not more than 60 days before the redemption date to each Holder
of new notes to be redeemed at its registered address. Notices of redemption
may not be conditional. If any new note is to be redeemed in part only, the
notice of redemption that relates to such new note shall state the portion of
the principal amount thereof to be redeemed. A new note in principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original new note. New notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on new notes or portions of them
called for redemption.
Mandatory redemption
Aviation Sales is not required to make mandatory redemption or sinking fund
payments with respect to the new notes.
Repurchase at the option of the holders upon a change of control
Upon the occurrence of a Change of Control, each holder of new notes will
have the right to require Aviation Sales to repurchase all or any part (equal
to $1,000 or an integral multiple thereof) of such holder's new notes pursuant
to the offer described below (the "Change of Control Offer") at an offer price
in cash equal to the amount in cash and common stock payable by Aviation Sales
if we redeemed the new notes on the date of the Change of Control (the "Change
of Control Payment"). Within ten days following any Change of Control, Aviation
Sales will mail a notice to each holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
new notes on the date specified in such notice, which date shall be no earlier
than 30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
indenture and described in such notice. Aviation Sales will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the new notes as a result of a
Change of Control.
On the Change of Control Payment Date, Aviation Sales will, to the extent
lawful, (1) accept for payment all new notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all new
notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the Trustee the new notes so accepted together with an Officers' Certificate
stating the aggregate principal amount of new notes or portions thereof being
purchased by Aviation Sales. The Paying Agent will promptly mail to each Holder
of notes so tendered the Change of Control Payment for such new notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by book
entry) to each holder a new note equal in principal amount to any unpurchased
portion of the new notes surrendered, if any; provided that each such new note
will be in a principal amount of $1,000 or an integral multiple thereof. The
indenture will provide that, prior to complying with the provisions of this
covenant, but in any event within 90 days following a Change of Control,
Aviation Sales will either repay or cause to be repaid all outstanding Senior
Debt or obtain the requisite consents, if any, under all agreements governing
outstanding Senior Debt to permit the repurchase of new notes required by this
covenant. Aviation Sales will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the holders of the new notes to require that
Aviation Sales repurchase or redeem the new notes in the event of a takeover,
recapitalization or similar transaction.
The Credit Facility currently prohibits Aviation Sales from purchasing any
new notes prior to maturity, and also provides that certain change of control
events with respect to Aviation Sales would constitute a default thereunder.
Any future credit agreements or other agreements relating to Senior Debt to
which Aviation Sales
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becomes a party may contain similar restrictions and provisions. In the event a
Change of Control occurs at a time when Aviation Sales is prohibited from
purchasing new notes, Aviation Sales could seek the consent of its lenders to
the purchase of new notes or could attempt to refinance the borrowings that
contain such prohibition. If Aviation Sales does not obtain such a consent or
repay such borrowings, Aviation Sales will remain prohibited from purchasing
new notes upon a Change of Control. In such case, Aviation Sales' failure to
purchase tendered new notes would constitute an Event of Default under the
indenture which would, in turn, constitute a default under the Credit Facility.
In such circumstances, the subordination provisions in the indenture would
likely restrict payments to the holders of new notes.
Aviation Sales will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by Aviation
Sales and purchases all new notes validly tendered and not withdrawn under such
Change of Control Offer.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of Aviation Sales and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act), (ii) the adoption of a plan relating to the
liquidation or dissolution of Aviation Sales, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above) becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a
subsequent condition), directly or indirectly, of more than 50% of the Voting
Stock of Aviation Sales (measured by voting power rather than number of
shares), or (iv) the first day on which a majority of the members of the Board
of Directors of Aviation Sales are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Aviation Sales and its Restricted Subsidiaries taken as a
whole. Although there is a developing body of case law interpreting the phrase
"substantially all," there is no precise established definition of the phrase
under applicable law. Accordingly, the ability of a holder of new notes to
require Aviation Sales to repurchase such new notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of Aviation Sales and its Restricted Subsidiaries taken as a whole to another
Person or group may be uncertain.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Aviation Sales who (i) was a member of such Board of
Directors on the date of the indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
Asset sales
The indenture provides that Aviation Sales will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) Aviation
Sales (or the Restricted Subsidiary, as the case may be) receives consideration
at the time of such Asset Sale at least equal to the fair market value of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii) at
least 80% of the consideration therefor received by Aviation Sales or such
Restricted Subsidiary is in the form of cash; provided that the amount of (x)
any liabilities (as shown on Aviation Sales' or such Restricted Subsidiary's
most recent balance sheet), of Aviation Sales or any Restricted Subsidiary
(other than contingent liabilities and liabilities that are by their terms
subordinated to the new notes or any guarantee thereof) that are assumed by the
transferee of any such assets pursuant to a customary novation agreement that
releases Aviation Sales or such Restricted Subsidiary from further liability
and (y) any securities, notes or other obligations received by Aviation Sales
or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods)
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converted by Aviation Sales or such Restricted Subsidiary into cash (to the
extent of the cash received), shall be deemed to be cash for purposes of this
provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
Aviation Sales may apply such Net Proceeds, at its option, (a) to repay or
cause to be repaid Senior Debt, or (b) to the acquisition of a majority of the
assets of, or a majority of the Voting Stock of, another Permitted Business,
the making of a capital expenditure or the acquisition of other long-term
assets that are used or useful in a Permitted Business. Pending the final
application of any such Net Proceeds, Aviation Sales may temporarily reduce
revolving credit borrowings or otherwise invest such Net Proceeds in any manner
that is not prohibited by the indenture. Any Net Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of this paragraph
will be deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $10.0 million, Aviation Sales will be required to make
an offer to all holders of new notes and all holders of pari passu Indebtedness
containing provisions similar to those set forth in the indenture with respect
to offers to purchase or redeem with the proceeds of sales of assets (an "Asset
Sale Offer") to purchase the maximum principal amount of new notes and such
other Indebtedness that may be purchased out of the Excess Proceeds, at an
offer price in an amount equal to the amount in cash and common stock payable
by us if we redeemed the new notes on the date of the applicable Asset Sale in
accordance with the procedures set forth in the indenture and such other
Indebtedness. To the extent that any Excess Proceeds remain after consummation
of an Asset Sale Offer, Aviation Sales may use such Excess Proceeds for any
purpose not otherwise prohibited by the indenture. If the aggregate principal
amount of new notes and such other Indebtedness tendered into such Asset Sale
Offer surrendered by holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the new notes and such other Indebtedness to be purchased
on a pro rata basis. Upon completion of such offer to purchase, the amount of
Excess Proceeds shall be reset at zero. In determining the fair market value of
any assets or Equity Interests issued, sold or otherwise disposed of, such
determination shall be evidenced by a resolution of the Board of Directors set
forth in an Officers' Certificate delivered to the Trustee if such fair market
value exceeds $15.0 million.
Covenants
Restricted Payments
The indenture provides that Aviation Sales will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of Aviation
Sales' or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving Aviation Sales or any of its Restricted Subsidiaries) or to the
direct or indirect holders of Aviation Sales' or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than dividends
or distributions payable in Equity Interests (other than Disqualified Stock) of
Aviation Sales or to Aviation Sales or a Restricted Subsidiary of Aviation
Sales); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving Aviation Sales) any Equity Interests of Aviation Sales or any direct
or indirect parent of Aviation Sales; (iii) make any payment on or with respect
to, or purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is pari passu with or subordinated to the new notes, except a
payment of interest or principal at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments")
unless, at the time of and after giving effect to such Restricted Payment:
. no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
. Aviation Sales would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "--incurrence of
indebtedness and issuance of preferred stock"; and
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. such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by Aviation Sales and its Restricted
Subsidiaries after the date of the indenture (excluding Restricted
Payments permitted by clauses (ii), (iii), (iv) and (vi) of the next
succeeding paragraph), is less than the sum, without duplication, of (i)
50% of the Consolidated Net Income of Aviation Sales for the period
(taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the date of the indenture to the end of
Aviation Sales' most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net
cash proceeds received by Aviation Sales since the date of the indenture
as a contribution to its common equity capital or from the issue or sale
of Equity Interests of Aviation Sales (other than Disqualified Stock) or
from the issue or sale of Disqualified Stock or debt securities of
Aviation Sales that have been converted into such Equity Interests
(other than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of Aviation Sales), plus (iii) to the
extent that any Restricted Investment that was made after the date of
the indenture is sold for cash or otherwise liquidated or repaid for
cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) 50% of any
dividends received by Aviation Sales or a Subsidiary Guarantor after the
date of the indenture from an Unrestricted Subsidiary of Aviation Sales,
to the extent that such dividends were not otherwise included in
Consolidated Net Income of Aviation Sales for such period, plus (v) to
the extent that any Unrestricted Subsidiary is redesignated as a
Restricted Subsidiary after the date of the indenture, the lesser of (A)
the fair market value of Aviation Sales' Investment in such Subsidiary
as of the date of such redesignation or (B) such fair market value as of
the date on which such Subsidiary was originally designated as an
Unrestricted Subsidiary.
The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment
would have complied with the provisions of the indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or subordinated Indebtedness or Equity
Interests of Aviation Sales in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a
Subsidiary of Aviation Sales) of, other Equity Interests of Aviation
Sales (other than any Disqualified Stock); provided that the amount
of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c) (ii) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of pari
passu or subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness;
(iv) the payment of any dividend by a Subsidiary of Aviation Sales to the
holders of its common Equity Interests on a pro rata basis;
(v) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Aviation Sales or any Subsidiary of
Aviation Sales held by any member of Aviation Sales' (or any of its
Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement in effect as of the
date of the indenture; provided that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $3.0 million in any twelve-month period and no
Default or Event of Default shall have occurred and be continuing
immediately after such transaction;
(vi) the making and consummation of (A) an Asset Sale Offer to holders of
Indebtedness pari passu with or subordinate to the new notes in
accordance with the provisions described above under "Asset Sales",
or (B) a Change of Control Offer to holders of indebtedness pari
passu with or subordinate to the new notes in accordance with
provisions similar to those described above under
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"Repurchase at the option of the holders upon a change of control";
provided, that prior to consummation of a Change of Control Offer
with respect to subordinated Indebtedness and concurrently with
consummation of a Change of Control Offer with respect to pari
passu Indebtedness, Aviation Sales shall have consummated the
Change of Control Offer with respect to the new notes; and
(vii) the making of additional Restricted Payments in an amount not to
exceed $10.0 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by Aviation
Sales and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments (to the
extent they otherwise fall within the definition thereof) at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the fair market value of
such Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Aviation Sales or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment in excess of $10.0 million
shall be determined by the Board of Directors whose resolution with respect
thereto shall be delivered to the Trustee, such determination to be based upon
an opinion or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if such fair market value exceeds $15.0
million. Not later than the date of making any Restricted Payment, Aviation
Sales shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Restricted Payments" were computed,
together with a copy of any fairness opinion or appraisal required by the
indenture.
Incurrence of indebtedness and issuance of preferred stock
The indenture provides that Aviation Sales will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that Aviation Sales will not issue any Disqualified Stock
and will not permit any of its Subsidiaries to issue any shares of preferred
stock, provided, however, that Aviation Sales may incur Indebtedness (including
Acquired Debt) or issue shares of Disqualified Stock and the Subsidiary
Guarantors may incur Indebtedness or issue preferred stock if the Fixed Charge
Coverage Ratio for Aviation Sales' most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock or preferred stock is issued would have been at least 2.25
to 1, determined on a pro forma basis (including a pro forma application of the
net proceeds therefrom) as if the additional Indebtedness had been incurred, or
the Disqualified Stock or preferred stock had been issued, as the case may be,
at the beginning of such four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
. the incurrence by Aviation Sales and the Subsidiary Guarantors of
Indebtedness under the Credit Facility; provided that the aggregate
principal amount of all such Indebtedness (with letters of credit being
deemed to have a principal amount equal to the maximum potential
liability of Aviation Sales and the Subsidiary Guarantors thereunder)
outstanding under the Credit Facility after giving effect to such
incurrence does not exceed an amount equal to $95.0 million;
. the incurrence by Aviation Sales and its Restricted Subsidiaries of the
Existing Indebtedness;
. the incurrence of Indebtedness relating to our tax retention operating
lease financing, to the extent such financing is considered
Indebtedness;
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. the incurrence by Aviation Sales and the Subsidiary Guarantors of
Indebtedness represented by the new notes and the Subsidiary Guarantees;
. the incurrence by Aviation Sales or any of the Subsidiary Guarantors of
Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of Aviation Sales or such Subsidiary Guarantor, in an aggregate
principal amount not to exceed $10.0 million at any time outstanding;
. the incurrence by Aviation Sales or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace Indebtedness
(other than intercompany Indebtedness) that was permitted by the
indenture to be incurred under the first paragraph hereof or clause (ii)
of this paragraph;
. the incurrence by Aviation Sales or any of the Subsidiary Guarantors of
intercompany Indebtedness or preferred stock between or among Aviation
Sales and any of the Subsidiary Guarantors; provided, however, that (A)
any subsequent issuance or transfer of Equity Interests that results in
any such Indebtedness or preferred stock being held by a Person other
than Aviation Sales or a Subsidiary Guarantor and (B) any sale or other
transfer of any such Indebtedness or preferred stock to a Person that is
not either Aviation Sales or a Subsidiary Guarantor shall be deemed, in
each case, to constitute an incurrence of such Indebtedness or an
issuance of such Preferred Stock by Aviation Sales or such Subsidiary
Guarantor, as the case may be, that was not permitted by this clause
(vi);
. the incurrence by Aviation Sales or any of the Subsidiary Guarantors of
Hedging Obligations;
. the guarantee by Aviation Sales or any of the Subsidiary Guarantors of
Indebtedness of Aviation Sales or a Subsidiary Guarantor that was
permitted to be incurred by another provision of this covenant;
. the incurrence by Aviation Sales' Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall
be deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of Aviation Sales that was not permitted by this clause; and
. the incurrence by Aviation Sales or any of the Subsidiary Guarantors of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause, not to exceed $30.0
million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in the clauses above or is entitled to be incurred
pursuant to the first paragraph of this covenant, Aviation Sales shall, in its
sole discretion, classify such item of Indebtedness in any manner that complies
with this covenant. Accrual of interest, accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Stock for purposes of this covenant; provided, in each
such case, that the amount thereof is included in Fixed Charges of Aviation
Sales as accrued.
Liens
The indenture provides that Aviation Sales will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien securing Indebtedness or trade payables on any asset now
owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, except Permitted Liens.
Dividend and other payment restrictions affecting subsidiaries
The indenture provides that Aviation Sales will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or
98
restriction on the ability of any Restricted Subsidiary to (i) (a) pay
dividends or make any other distributions to Aviation Sales or any of its
Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to any
other interest or participation in, or measured by, its profits, or (b) pay any
indebtedness owed to Aviation Sales or any of its Restricted Subsidiaries, (ii)
make loans or advances to Aviation Sales or any of its Restricted Subsidiaries
or (iii) transfer any of its properties or assets to Aviation Sales or any of
its Restricted Subsidiaries. However, the foregoing restrictions will not apply
to encumbrances or restrictions existing under or by reason of:
(a) Existing Indebtedness as in effect on the date of the indenture;
(b) the Credit Facility as in effect as of the date of the indenture,
and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more
restrictive, taken as a whole, with respect to such dividend and other
payment restrictions than those contained in the Credit Facility as in
effect on the date of the indenture;
(c) our tax retention operating lease financing;
(d) the indenture and the new notes;
(e) applicable law;
(f) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Aviation Sales or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
(g) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(h) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (c) above on the property so acquired;
(i) any agreement for the sale of a Restricted Subsidiary that restricts
distributions by that Restricted Subsidiary pending its sale;
(j) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(k) secured Indebtedness otherwise permitted to be incurred pursuant to
the provisions of the covenant described above under the caption "--Liens"
that limits the right of the debtor to dispose of the assets securing such
Indebtedness;
(l) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business; and
(m) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Additional subsidiary guaranties
The indenture provides that if we or any of our Restricted Subsidiaries
shall acquire or create another Subsidiary after the date of the indenture
(other than an Unrestricted Subsidiary properly designated as such), then such
newly acquired or created Subsidiary shall become a Subsidiary Guarantor and
execute a supplemental indenture and deliver an opinion of counsel, in
accordance with the terms of the indenture.
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Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales or leases of inventory in the ordinary course of
business or sales of leases or of assets subject to leases in the ordinary
course of business (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of Aviation Sales and its
Restricted Subsidiaries taken as a whole will be governed by the provisions of
the indenture described above under the caption "--Repurchase at the option of
the holder upon a change of control" and/or the provisions described below
under the caption "--Merger, consolidation, or sale, lease or conveyance" and
not by the provisions of the Asset Sale covenant), and (ii) the issue or sale
by Aviation Sales or any of its Restricted Subsidiaries of Equity Interests of
any of Aviation Sales' Restricted Subsidiaries, in the case of either clause
(i) or (ii), whether in a single transaction or a series of related
transactions (a) that have a fair market value in excess of $2.0 million or (b)
for net proceeds in excess of $2.0 million. Notwithstanding the foregoing, the
following items shall not be deemed to be Asset Sales: (i) a transfer of assets
by Aviation Sales to a Wholly Owned Restricted Subsidiary or by a Wholly Owned
Restricted Subsidiary to Aviation Sales or to another Wholly Owned Restricted
Subsidiary, (ii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary to Aviation Sales or to another Wholly Owned Restricted Subsidiary,
and (iii) a Restricted Payment that is permitted by the covenant described
above under the caption "--Covenants--Restricted Payments."
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in
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excess of $500 million and a Thompson Bank Watch Rating of "B" or better, (iv)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (ii) and (iii) above entered into
with any financial institution meeting the qualifications specified in clause
(iii) above, (v) commercial paper having the highest rating obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition and (vi) money
market funds at least 95% of the assets of which constitute Cash Equivalents of
the kinds described in clauses (i)-(v) of this definition.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or accrued
and whether or not capitalized (including, without limitation, amortization of
debt issuance costs and original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash expenses (excluding any such non-cash expense to the extent that
it represents an accrual of or reserve for cash expenses in any future period
or amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash expenses were deducted in
computing such Consolidated Net Income, plus (v) an amount equal to 1/3 of the
Consolidated Lease Expense of such Person and its Restricted Subsidiaries for
such period, to the extent that any such expense was deducted in computing such
Consolidated Net Income, minus (vi) non-cash items increasing such Consolidated
Net Income for such period, in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization and other non-cash expenses of, a Restricted Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person and only if a corresponding amount would
be permitted at the date of determination to be dividended to Aviation Sales by
such Restricted Subsidiary without prior governmental approval (that has not
been obtained), and without direct or indirect restriction pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Lease Expense" means, with respect to any Person for any
period, the aggregate rental obligations of such Person and its consolidated
Restricted Subsidiaries determined on a consolidated basis in accordance with
GAAP payable in respect of such period under leases of real and/or personal
property (net of income from subleases thereof, but including taxes, insurance,
maintenance and similar expenses that the lessee is obligated to pay under the
terms of such leases), whether or not such obligations are reflected as
liabilities or commitments on a consolidated balance sheet of such Person and
its Restricted Subsidiaries or in the notes thereto.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
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Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that
by its terms is not entitled to the payment of dividends unless such dividends
may be declared and paid only out of net earnings in respect of the year of
such declaration and payment, but only to the extent of any cash received by
such Person upon issuance of such preferred stock, less (x) all write-ups
(other than write-ups resulting from foreign currency translations and write-
ups of tangible assets of a going concern business made within 12 months after
the acquisition of such business) subsequent to the date of the indenture in
the book value of any asset owned by such Person or a consolidated Subsidiary
of such Person, (y) all investments as of such date in unconsolidated
Subsidiaries and in Persons that are not Subsidiaries (except, in each case,
Permitted Investments), and (z) all unamortized debt discount and expense and
unamortized deferred charges as of such date, all of the foregoing determined
in accordance with GAAP.
"Credit Facility" means that certain Fourth Amended and Restated Credit
Agreement dated as of May 31, 2000, by and among Aviation Sales, Aviation Sales
Distribution Services Company, Aviation Sales Leasing Company, Aviation Sales
Finance Company, AVSRE, L.P., AVS/M-3, Inc., AVS/CAI, Inc., AVS/M-2, Inc.,
Aircraft Interior Design, Inc., Triad International Maintenance Corporation,
Timco Engine Center, Inc., Aviation Sales Maintenance, Repair and Overhaul
Company, Timco Engineered Systems, Inc., Aviation Sales, Whitehall Corporation,
AVS/M-I, Inc., Aero Hushkit Corporation, Aviation Sales Property Management
Corp., Aerocell Structures, Inc. and Hydroscience, Inc., the Institutions from
time to time party thereto as Lenders, the Institutions from time to time party
thereto as Issuing Banks, Citicorp USA. Inc as Agent, and Citicorp Securities,
Inc., as Arranger, and the related term loans, including any related notes,
guarantees, collateral documents, instruments and agreements executed in
connection therewith. and in each case as amended, modified, renewed, refunded,
replaced or refinanced from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default as defined below.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Credit Facility and (ii) any other Senior Debt permitted under the indenture
the principal amount of which is $25.0 million or more and that has been
designated by Aviation Sales as Designated Senior Debt.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the new notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require Aviation Sales to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that Aviation
Sales may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Covenants--Restricted Payments."
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"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means up to $95.0 million in aggregate principal
amount of Indebtedness of Aviation Sales and its Subsidiaries (other than
Indebtedness under the Credit Facility) in existence on the date of the
indenture, until such amounts are repaid and amounts currently due under our
tax retention operating lease financing, to the extent such amounts are deemed
Indebtedness.
"Fixed Charges" means, with respect to any Person and its Restricted
Subsidiaries for any period, the sum, without duplication, of (i) the
consolidated interest expense of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations) and (ii) the consolidated interest of
such Person and its Restricted Subsidiaries that was capitalized during such
period, and (iii) any interest expense on Indebtedness of another Person that
is Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries
(whether or not such Guarantee or Lien is called upon), (iv) the product of (a)
all dividend payments, whether or not in cash, on any series of preferred stock
of such Person or any of its Restricted Subsidiaries, other than dividend
payments on Equity Interests payable solely in Equity Interests of Aviation
Sales (other than Disqualified Stock) or to Aviation Sales or a Restricted
Subsidiary of Aviation Sales, times (b) a fraction, the numerator of which is
one and the denominator of which is one minus the then current combined
federal, state and local statutory tax rate of such Person expressed as a
decimal in each case on a consolidated basis and in accordance with GAAP and
(v) an amount equal to 1/3 of the Consolidated Lease Expense of such Person and
its Restricted Subsidiaries for such period whether paid or accrued.
"Fixed Charge Coverage Ratio" means with respect to any Person and its
Restricted Subsidiaries for any period, the ratio of the Consolidated Cash Flow
of such Person and its Restricted Subsidiaries for such period to the Fixed
Charges of such Person for such period. In the event that the referent Person
or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems
any Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated but prior to the date on which
the event for which the calculation of the Fixed Charge Coverage Ratio is made
(the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, Guarantee or
redemption of Indebtedness, or such issuance or redemption of preferred stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. In addition, for purposes of making the computation referred
to above, (i) acquisitions that have been made by Aviation Sales or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the
Calculation Date shall be deemed to have occurred on the first day of the four-
quarter reference period and Consolidated Cash Flow for such reference period
shall be calculated without giving effect to clause (iii) of the proviso set
forth in the definition of Consolidated Net Income, and (ii) the Consolidated
Cash Flow attributable to discontinued operations, as determined in accordance
with GAAP, and operations or businesses disposed of prior to the Calculation
Date, shall be excluded, and (iii) the Fixed Charges attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Fixed Charges will
not be obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity
103
as have been approved by a significant segment of the accounting profession,
which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all Indebtedness of others
secured by a Lien on any asset of such Person (whether or not such Indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any indebtedness of any other Person. The amount of
any Indebtedness outstanding as of any date shall be (i) the accreted value
thereof, in the case of any Indebtedness issued with original issue discount,
and (ii) the principal amount thereof, together with any interest thereon that
is more than 30 days past due, in the case of any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If Aviation Sales or any Subsidiary of Aviation Sales sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of
Aviation Sales such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of Aviation Sales, Aviation Sales shall
be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--
Covenants--Restricted Payments."
"Liens" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by Aviation Sales
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or
104
other disposition of any non-cash consideration received in any Asset Sale),
net of the direct costs relating to such Asset Sale (including, without
limitation, legal, accounting and investment banking fees, and sales
commissions) and any relocation expenses incurred as a result thereof, taxes
paid or payable as a result thereof (after taking into account any available
tax audits or deductions and any tax sharing arrangements), any business or
activities conducted by Aviation Sales on the date of the indenture and any
business or activities reasonably related, ancillary or complementary to such
business or activities amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Aviation
Sales nor any of its Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the new notes) of Aviation Sales or any of its Restricted Subsidiaries to
declare a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of Aviation Sales or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business or activities conducted by Aviation
Sales on the date of the indenture and any business or activities related,
ancillary or complementary to such business or activities.
"Permitted Investments" means (a) any Investment in Aviation Sales or in a
Subsidiary Guarantor; (b) any Investment in Cash Equivalents; (c) any
Investment by Aviation Sales or any Subsidiary of Aviation Sales in a Person,
if as a result of such Investment (i) such Person becomes a Wholly Owned
Restricted Subsidiary of Aviation Sales or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, Aviation Sales or a Wholly Owned
Restricted Subsidiary of Aviation Sales; (d) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption "--
Repurchase at the option of the holders upon a change of control"; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of Aviation Sales; and (f) other Investments in
any Person having an aggregate fair market value (measured on the date each
such Investment was made and without giving effect to subsequent changes in
value), when taken together with all other Investments made pursuant to this
clause (f) that are at the time outstanding, not to exceed $10.0 million.
"Permitted Junior Securities" means Equity Interests in Aviation Sales or
any Subsidiary Guarantor or debt securities that are subordinated to all Senior
Debt (and any debt-securities issued in exchange for Senior Debt) to
substantially the same extent as, or to a greater extent than, the new notes
are subordinated to Senior Debt pursuant to Article 10 of the indenture.
"Permitted Liens" means (i) Liens on assets of Aviation Sales or any
Subsidiary Guarantor to secure Senior Debt of Aviation Sales or such Subsidiary
Guarantor that was permitted by the terms of the indenture to be incurred; (ii)
Liens in favor of Aviation Sales or a Subsidiary Guarantor; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with Aviation Sales or any Subsidiary of Aviation Sales; provided
that such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with Aviation Sales; (iv) Liens on property
existing at the time of acquisition thereof by Aviation Sales or any Subsidiary
of Aviation Sales, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance
105
bonds or other obligations of a like nature incurred in the ordinary course of
business; (v) Liens to secure Indebtedness (including Capital Lease
Obligations) permitted by clause (iv) of the second paragraph of the covenant
entitled "Incurrence of indebtedness and issuance of preferred stock" covering
only the assets acquired with such Indebtedness; (vi) Liens existing on the
date of the indenture; (vii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (viii) Liens
incurred in the ordinary course of business of Aviation Sales or any Subsidiary
of Aviation Sales with respect to obligations that do not exceed $10.0 million
at any one time outstanding and that (a) are not incurred in connection with
the borrowing of money or the obtaining of advances or credit (other than trade
credit in the ordinary course of business) and (b) do not in the aggregate
materially detract from the value of the property or materially impair the use
thereof in the operation of business by Aviation Sales or such Subsidiary; (ix)
Liens to secure the new notes or the Subsidiary Guarantees; and (x) Liens on
assets of Unrestricted Subsidiaries that secure Non-Recourse Debt of
Unrestricted Subsidiaries.
"Permitted Refinancing Indebtedness" means any Indebtedness of Aviation
Sales or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Aviation Sales or any of its Restricted
Subsidiaries (other than intercompany Indebtedness); provided that: (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the new notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the new notes on
terms at least as favorable to the Holders of new notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred
either by Aviation Sales or by the Restricted Subsidiary who is the obligor on
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means (i) all Indebtedness outstanding under the Credit
Facility, all Hedging Obligations with respect thereto and, after a default has
occurred and is continuing under the Credit Facility, all other Indebtedness
arising from intercompany loans and advances and owing by Aviation Sales or any
of the Subsidiary Guarantors which constitutes part of the collateral security
for the Credit Facility and such Hedging Obligations, including without
limitation, Indebtedness evidenced by intercompany notes pledged or assigned in
connection with the Credit Facility, (ii) any other Indebtedness permitted to
be incurred by Aviation Sales or a Subsidiary Guarantor under the terms of the
indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the new notes and (iii) all Obligations with respect to the
foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Debt will not include (w) any liability for federal, state, local or other
taxes owed or owing by Aviation Sales or a Subsidiary Guarantor, (x) any
Indebtedness between or among Aviation Sales, any of its Subsidiaries or any of
its other Affiliates except to the extent the same is subject to clause (i)
above, (y) any trade payables or (z) any Indebtedness that is incurred in
violation of the indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
106
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantors" means each of (i) Aero Hushkit Corporation, Aerocell
Structures, Inc., Aircraft Interior Design, Inc., Aviation Sales Distribution
Services Company, Aviation Sales Finance Company, Aviation Sales Leasing
Company, Aviation Sales Maintenance Repair & Overhaul Company, Aviation Sales
Property Management Corp., Aviation Sales SPS I, Inc., AVS/CAI, Inc., AVS/M-1,
Inc., AVS/M-2, Inc., AVS/M-3, Inc., AVSRE L.P., Hydroscience, Inc., Timco
Engine Center, Inc., Timco Engineered Systems, Inc., Triad International
Maintenance Corporation and Whitehall Corporation, and (ii) any other
subsidiary that executes a Subsidiary Guarantee in accordance with the
provisions of the indenture, and their respective successors and assigns.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with Aviation Sales or any Restricted
Subsidiary of Aviation Sales unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to Aviation Sales or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of Aviation Sales; (c) is a Person with respect
to which neither Aviation Sales nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of Aviation Sales or any of its Restricted Subsidiaries; and (e)
has at least one director on its board of directors that is not a director or
executive officer of Aviation Sales or any of its Restricted Subsidiaries and
has at least one executive officer that is not a director or executive officer
of Aviation Sales or any of its Restricted Subsidiaries. Any such designation
by the Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under
the caption "--Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
Aviation Sales as of such date (and, if such Indebtedness is not permitted to
be incurred as of such date under the covenant described under the caption "--
Covenants--incurrence of indebtedness and issuance of preferred stock."
Aviation Sales shall be in default of such covenant). The Board of Directors of
Aviation Sales may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary: provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of Aviation Sales of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant described under the caption "--Covenants--incurrence of indebtedness
and issuance of preferred stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period,
(ii) no Default or Event of Default would be in existence following such
designation, and (iii) such Subsidiary becomes a Subsidiary Guarantor and
executes a Supplemental indenture and delivers an Opinion of Counsel, in
accordance with the terms of the indenture.
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"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
Merger, consolidation, sale, lease or conveyance
The indenture provides that Aviation Sales may not consolidate or merge with
or into (whether or not Aviation Sales is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) Aviation Sales is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than Aviation Sales) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
Aviation Sales) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of Aviation Sales, the new notes and the indenture pursuant
to a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction no Default or Event of Default exists;
and (iv) except in the case of a merger of Aviation Sales with or into a
Subsidiary Guarantor, Aviation Sales or the entity or Person formed by or
surviving any such consolidation or merger (if other than Aviation Sales), or
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made (A) will have Consolidated Net Worth
immediately after the transaction equal to or greater than the Consolidated Net
Worth of Aviation Sales immediately preceding the transaction and (B) will, at
the time of such transaction and after giving pro forma effect thereto as if
such transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant described above under the caption "--Covenants--
Incurrence of indebtedness and issuance of preferred stock."
Transactions with affiliates
The indenture provides that Aviation Sales will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to Aviation Sales or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable transaction
by Aviation Sales or such Restricted Subsidiary with an unrelated Person and
(ii) Aviation Sales delivers to the Trustee (a) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $5.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate
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consideration in excess of $10.0 million (or, in the case of a purchase of
inventory from JFSS in the ordinary course of business, $15.0 million) an
opinion as to the fairness to the Holders of such Affiliate Transaction from a
financial point of view issued by an accounting, appraisal or investment
banking firm of national standing. Notwithstanding the foregoing, the following
items shall not be deemed to be Affiliate Transactions: (i) any employment
agreement entered into by Aviation Sales or any of its Restricted Subsidiaries
in the ordinary course of business and consistent with the past practice of
Aviation Sales or such Restricted Subsidiary, (ii) transactions between or
among Aviation Sales and/or its Restricted Subsidiaries, (iii) payment of
reasonable directors fees to Persons who are not otherwise Affiliates of
Aviation Sales, (iv) Restricted Payments that are permitted by the provisions
of the indenture described above under the caption "--Covenants--Restricted
Payments," and (v) any transactions undertaken pursuant to any contractual
obligations in existence on the date of the indenture (as in effect on such
date) as described herein under the caption "Certain Relationships and Related
Transactions."
Events of default
The indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the new
notes (whether or not prohibited by the subordination provisions of the
indenture); (ii) default in payment when due of the principal of or premium, if
any, on the new notes (whether or not prohibited by the subordination
provisions of the indenture); (iii) failure by Aviation Sales or any of its
Subsidiaries to comply with the provisions described under the captions "--
Change of Control," "--Asset Sales," "--Covenants--Restricted Payments" or "--
Covenants--Incurrence of indebtedness and issuance of preferred stock"; (iv)
failure by Aviation Sales or any of its Subsidiaries for 60 days after notice
to comply with any of its other agreements in the indenture or the new notes;
(v) default due to any failure by Aviation Sales or any of its Subsidiaries to
pay when due the principal of, or premium, if any, or interest on (prior to the
expiration of any applicable grace period), or acceleration of, any debt for
money borrowed by Aviation Sales or any of its Subsidiaries that aggregates $10
million or more; (vi) failure by Aviation Sales or any of its Subsidiaries to
pay final judgments (including foreign judgments only to the extent enforcement
thereof is sought in the United States or in any foreign jurisdiction where
Aviation Sales owns assets of $10.0 million or more) aggregating in excess of
$10.0 million, which judgments are not paid, discharged or stayed for a period
of 60 days; (vii) certain events of bankruptcy or insolvency with respect to
Aviation Sales or any of its Significant Subsidiaries; and (viii) except as
permitted by the indenture, any Subsidiary Guarantee shall be held in any
judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect or any Subsidiary Guarantor, or any
Person acting on behalf of any Subsidiary Guarantor, shall deny or disaffirm
its obligations under its Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding new notes may
declare all the new notes to be due and payable immediately. Notwithstanding
the foregoing, in the case of an Event of Default arising from certain events
of bankruptcy or insolvency, with respect to Aviation Sales, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute
a Significant Subsidiary, all outstanding new notes will become due and payable
without further action or notice. Holders of the new notes may not enforce the
indenture or the new notes except as provided in the indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding new notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the new notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of Aviation Sales
with the intention of avoiding payment of the premium that Aviation Sales would
have had to pay if Aviation Sales then had elected to redeem the new notes
pursuant to the optional redemption provisions of the indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the new notes.
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The Holders of a majority in aggregate principal amount of the new notes
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the new notes waive any existing Default or Event of Default and its
consequences under the indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the new notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the indenture, and Aviation Sales is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
Discharge, defeasance and covenant defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding new notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding new notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such new notes when such payments are due from the
trust referred to below, (ii) Aviation Sales' obligations with respect to the
new notes concerning issuing temporary new notes, registration of new notes,
mutilated, destroyed, lost or stolen new notes and the maintenance of an office
or agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and Aviation
Sales' obligations in connection therewith and (iv) the Legal Defeasance
provisions of the indenture. In addition, Aviation Sales may, at its option and
at any time, elect to have the obligations of Aviation Sales released with
respect to certain covenants that are described in the indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the new notes. In
the event Covenant Defeasance occurs, certain events (not including non-
payment, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of default" will no longer constitute an Event of
Default with respect to the new notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Aviation Sales must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the new notes, cash U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding new notes on the stated maturity or on
the applicable redemption date, as the case may be, and Aviation Sales must
specify whether the new notes are being defeased to maturity or to a particular
redemption date; (ii) in the case of Legal Defeasance, Aviation Sales shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) Aviation Sales has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding new notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, Aviation Sales shall have delivered
to the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that the Holders of the outstanding new notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the date of deposit; (v) such Legal Defeasance or Covenant
Defeasance will not result in a breach or violation of, or constitute a default
under any material agreement or instrument (other than the indenture) to which
Aviation Sales or any of its Subsidiaries is a party or by which Aviation Sales
or any of its Subsidiaries is bound; (vi) Aviation Sales must have delivered to
the Trustee an opinion of counsel to the effect that after the 91st day
110
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; (vii) Aviation Sales must deliver to the Trustee
an Officers' Certificate stating that the deposit was not made by Aviation
Sales with the intent of preferring the Holders of new notes over the other
creditors of Aviation Sales with the intent of defeating, hindering, delaying
or defrauding creditors of Aviation Sales or others; and (viii) Aviation Sales
must deliver to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that all conditions precedent provided for relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
Modification of the indenture
Except as provided in the next two succeeding paragraphs, the indenture or
the new notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the new notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, new notes), and any existing default
or compliance with any provision of the indenture or the new notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding new notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, new
notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any new notes held by a non-consenting Holder): (i) reduce the
principal amount of new notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the new
notes (other than provisions relating to the covenants described above under
the caption "--Repurchase at the option of the holders upon a change of
control"), (iii) reduce the rate of or change the time for payment of interest
on any Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the new notes (except a
rescission of acceleration of the new notes by the Holders of at least a
majority in aggregate principal amount of the new notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the new notes, (vi) make any change
in. the provisions of the indenture relating to waivers of past Defaults or the
rights of Holders of new notes to receive payments of principal of or premium,
if any, or interest on the new notes, (vii) waive a redemption payment with
respect to any Note (other than a payment required by one of the covenants
described above under the caption "--Repurchase at the option of the holders
upon a change of control") (viii) make any change in the foregoing amendment
and waiver provisions or (ix) release any Subsidiary Guarantor from any of its
obligations under its Subsidiary Guarantee or the indenture, except in
accordance with the terms of the indenture. In addition, any amendment to the
provisions of Article 10 or Article 12 of the indenture (which relate to
subordination) will require the consent of the Holders of at least 75% in
aggregate principal amount of the new notes then outstanding if such amendment
would adversely affect the rights of Holders of new notes.
Notwithstanding the foregoing, without the consent of any Holder of new
notes, Aviation Sales, the Subsidiary Guarantors and the Trustee may amend or
supplement the indenture or the new notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated new notes in addition to or in
place of certificated new notes, to provide for the assumption of Aviation
Sales' obligations to Holders of new notes in the case of a merger or
consolidation or sale of all or substantially all of Aviation Sales' assets, to
make any change that would provide any additional rights or benefits to the
Holders of new notes or that does not adversely affect the legal rights under
the indenture of any such Holder, to comply with requirements of the Commission
in order to effect or maintain the qualification of the indenture under the
Trust Indenture Act to provide for the issuance of additional new notes in
accordance with the limitations set forth in the indenture or to provide for
additional Subsidiary Guarantors in accordance with the terms of the indenture.
Meetings
The indenture contains provisions describing how meetings of the Holders of
notes may be convened. A meeting may be called at any time by the Trustee, and
also, upon request, by us or the Holders of at least 10% in principal amount of
the outstanding notes. A notice of the meeting must always be given in the
manner
111
described under "--Notices" below. Generally speaking, except for any consent
that must be given by all Holders of notes as described under "--Modifications
of indenture" above, any resolution presented at a meeting of the Holders of a
series of notes may be adopted by the affirmative vote of the Holders of a
majority in principal amount of the outstanding notes, unless the indenture
allows the action to be voted upon to be taken with the approval of the Holders
of a different specific percentage of principal amount of the notes. In that
case, the Holders of outstanding notes of at least the specified percentage
must vote in favor of the action. Any resolution passed or decision taken at
any meeting of Holders of notes in accordance with the indenture will be
binding on all Holders of notes unless, as discussed in "--Modification of
indenture" above the action is only effective against Holders that have
approved it. The quorum at any meeting called to adopt a resolution, and at any
reconvened meeting, will be Holders holding or representing a majority in
principal amount of the outstanding notes.
Governing Law
The Indenture and the notes will be governed by and construed in accordance
with the laws of the State of New York, without regard to conflicts of laws
principles.
Notices
Notices to Holders of notes will be given by mail to the addresses of such
Holders as they appear in the security register.
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DESCRIPTION OF OLD NOTES
The old notes were issued pursuant to an indenture dated February 17, 1998
among Aviation Sales governing the old notes, the subsidiary guarantors named
in the indenture and SunTrust Bank Central Florida, National Association, as
trustee. If at least $132 million of the outstanding old notes with related
consents are tendered for exchange, the indenture will be amended by a
supplemental indenture among Aviation Sales, the subsidiary guarantors and the
trustee. The indenture governing the old notes and the form of supplement to
the indenture is filed as an exhibit to the Registration Statement of which
this prospectus and consent solicitation is a part. The descriptions set forth
below contain a summary of the material provisions of the indenture governing
the old notes. We do not restate the indenture as supplemented in its entirety.
We urge you to read the indenture and indenture supplement because they, and
not the descriptions below, define your rights as a holder of old notes. The
terms of the old notes include those stated in the indenture, as amended, and
those made part of the indenture by reference to the Trust Indenture Act of
1939. The definitions of some terms used in the following summary of the old
notes are set forth below under "--Definitions." For purposes of this summary,
the terms "Aviation Sales," "we," "our" and "us" refer to Aviation Sales
Company and not to any of its subsidiaries.
General terms of old notes
The old notes are presently limited to $250,000,000 in aggregate principal
amount. The old notes will mature on February 15, 2008. They will continue to
bear interest at the rate of 8 1/8% per annum. Interest will continue to be
payable semiannually in arrears on February 15 and August 15 of each year to
the persons in whose names the old notes are registered at the close of
business on February 1 and August 1, as the case may be, immediately preceding
the interest payment date. Payments of interest will continue to be made in
immediately available funds to the depositary.
The old notes are our general unsecured obligations, are subordinated in
right of payment to all current and future Senior Debt (as defined below under
"--Definitions") and will rank in right of payment behind the new notes. The
old notes are fully and unconditionally guaranteed by the subsidiary guarantors
named in the indenture governing the old notes (the "Subsidiary Guarantors").
Redemption
The old notes are not redeemable at our option prior to February 15, 2003.
After that time, the old notes will be subject to redemption at any time at our
option, in whole or in part, upon not less than 30 nor more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
February 15 of the years indicated below:
Year Percentage
---- ----------
2003.............................. 104.063%
2004.............................. 102.708%
2005.............................. 101.354%
2006 and thereafter............... 100.000%
Subordination
The payment of principal of, or premium, if any, and interest on the old
notes is subordinated in right of payment to the prior payment in full of all
senior debt, whether outstanding on the date of the indenture or thereafter
incurred.
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Upon any distribution to our creditors in a liquidation or dissolution or in
a bankruptcy, reorganization, insolvency, receivership or similar proceeding
relating to us or our property, an assignment for the benefit of creditors or
any marshalling of the our assets and liabilities, the holders of Senior Debt
will be entitled to receive payment in full in cash of all Obligations (as
defined below) due in respect of such Senior Debt (including interest after the
commencement of any such proceeding at the rate specified in the applicable
Senior Debt) before the holders of old notes will be entitled to receive any
payment with respect to the old notes, and until all old notes would be
entitled, shall be made to the holders of Senior Debt (except that holders of
old notes may receive and retain Permitted Junior Securities (as defined below)
and payments made from the trust described under "--Legal Defeasance and
Covenant Defeasance").
Aviation Sales also may not make any payment upon or in respect of the old
notes (except in Permitted Junior Securities or from the trust described under
"--Legal Defeasance and Covenant Defeasance") if (i) a default in the payment
of the principal of, premium, if any, or interest on Designated Senior Debt
occurs and is continuing beyond any applicable period of grace or (ii) any
other default occurs and is continuing with respect to Designated Senior Debt
that permits holders of the Designated Senior Debt as to which such default
relates to accelerate its maturity and the Trustee receives a notice of such
default (a "Payment Blockage Notice") from Aviation Sales or the holders of any
Designated Senior Debt. Payments on the old notes may and shall be resumed (a)
in the case of a payment default, upon the date on which such default is cured
or waived and (b) in case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the date on
which the applicable Payment Blockage Notice is received, unless the maturity
of any Designated Senior Debt has been accelerated. No new Payment Blockage
Notice shall be effective unless and until (i) 360 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the old notes
that have come due have been paid in full in cash. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice unless such default shall have been waived for a period of not
less than 90 days.
The indenture requires that Aviation Sales promptly notify holders of Senior
Debt if payment of the old notes is accelerated because of an Event of Default.
Subsidiary guarantees
Aviation Sales' payment obligations under the old notes are jointly and
severally guaranteed (the "Subsidiary Guarantees") by the Subsidiary
Guarantors. The Subsidiary Guarantee of each Subsidiary Guarantor is unsecured
and is subordinated to the prior payment in full in cash of all Senior Debt of
such Subsidiary Guarantor. The obligations of each Subsidiary Guarantor under
its Subsidiary Guarantee are limited so as not to constitute a fraudulent
conveyance under applicable law. See, however, "Risk Factors--Fraudulent
Conveyances and Preferential Transfers."
The indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another corporation, Person or entity whether or not affiliated with
such Subsidiary Guarantor unless (i) except in the case of a merger of a
Subsidiary Guarantor with or into Aviation Sales or another Subsidiary
Guarantor but subject to the provisions of the following paragraph, the Person
formed by or surviving any such consolidation or merger (if other than such
Subsidiary Guarantor) assumes all the obligations of such Subsidiary Guarantor
pursuant to a supplemental indenture in form and substance reasonably
satisfactory to the Trustee, under the old notes, the indenture and the
Registration Rights Agreement; (ii) immediately after giving effect to such
transaction, no Default or Event of Default exists; (iii) except in the case of
a merger of a Subsidiary Guarantor, with or into Aviation Sales or another
Subsidiary Guarantor such Subsidiary Guarantor, or any Person formed by or
surviving any such consolidation or merger, would have Consolidated Net Worth
(immediately after giving effect to such transaction), equal to or greater than
the Consolidated Net Worth of such Subsidiary Guarantor immediately preceding
the transaction; and (iv) except in the case of a merger of a Subsidiary
Guarantor with or into
114
Aviation Sales or another Subsidiary Guarantor, Aviation Sales would be
permitted by virtue of Aviation Sales' pro forma Fixed Charge Coverage Ratio,
immediately after giving effect to such transaction, to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the covenant described below under the caption "Covenants--Incurrence
of indebtedness and issuance of preferred stock."
The indenture provides that in the event of (i) a sale or other disposition
of all of the assets of any Subsidiary Guarantor, by way of merger,
consolidation or otherwise; (ii) a sale or other disposition of all of the
capital stock of any Subsidiary Guarantor; or (iii) such Subsidiary Guarantor
is designated as an Unrestricted Subsidiary in accordance with the indenture,
then such Subsidiary Guarantor (in the event of a sale or other disposition, by
way of such a merger, consolidation or otherwise, of all of the capital stock
of such Subsidiary Guarantor or designation as a Unrestricted Subsidiary) or
the corporation acquiring the property (in the event of a sale or other
disposition of all of the assets of such Subsidiary Guarantor) will be released
and relieved of any obligations under its Subsidiary Guarantee; provided that,
in the case of a sale or other disposition, the Net Proceeds of such sale or
other disposition are applied in accordance with the applicable provisions of
the indenture. See "Repurchase at the option of the holders upon a change of
control."
Selection and notice
If less than all of the old notes are to be redeemed at any time, selection
of old notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the old notes are listed, or, if the old notes are not so listed, on a pro rata
basis, by lot or by such method as the Trustee shall deem fair and appropriate;
provided that no old notes of $1,000 or less shall be redeemed in part. Notices
of redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
old note is to be redeemed in part only, the notice of redemption that relates
to such old note shall state the portion of the principal amount thereof to be
redeemed. A new old note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original old note. Old notes called for redemption become due on the date
fixed for redemption. On and after the redemption date, interest ceases to
accrue on old notes or portions of them called for redemption.
Mandatory redemption
We are not required to make mandatory redemption or sinking fund payments
with respect to the old notes.
Repurchase at the option of the holders upon a change of control
Upon the occurrence of a Change of Control, each Holder of notes will have
the right to require Aviation Sales to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's old notes pursuant to
the offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest and Liquidated Damages thereon, if any, to the date of purchase
(the "Change of Control Payment"). Within ten days following any Change of
Control, we will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
old notes on the date specified in such notice, which date shall be no earlier
than 30 days and no later than 60 days from the date such notice is mailed (the
"Change of Control Payment Date"), pursuant to the procedures required by the
indenture and described in such notice. We will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the old notes as a result of a Change of Control.
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On the Change of Control Payment Date, we will, to the extent lawful, (1)
accept for payment all old notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (2) deposit with the Paying Agent an amount
equal to the Change of Control Payment in respect of all old notes or portions
thereof so tendered and (3) deliver or cause to be delivered to the Trustee the
old notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of old notes or portions thereof being purchased by
us. The Paying Agent will promptly mail to each Holder of notes so tendered the
Change of Control Payment for such old notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new old note equal in principal amount to any unpurchased portion of the old
notes surrendered, if any; provided that each such new old note will be in a
principal amount of $1,000 or an integral multiple thereof. The indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, Aviation Sales will
either repay or cause to be repaid all outstanding Senior Debt or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Debt to permit the repurchase of old notes required by this covenant. Aviation
Sales will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the indenture are applicable. Except as
described above with respect to a Change of Control, the indenture does not
contain provisions that permit the Holders of the old notes to require that
Aviation Sales repurchase or redeem the old notes in the event of a takeover,
recapitalization or similar transaction.
The Credit Facility currently prohibits Aviation Sales from purchasing any
old notes prior to maturity, and also provides that certain change of control
events with respect to Aviation Sales would constitute a default thereunder.
Any future credit agreements or other agreements relating to Senior Debt to
which Aviation Sales becomes a party may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when Aviation
Sales is prohibited from purchasing old notes, Aviation Sales could seek the
consent of its lenders to the purchase of old notes or could attempt to
refinance the borrowings that contain such prohibition. If Aviation Sales does
not obtain such a consent or repay such borrowings, Aviation Sales will remain
prohibited from purchasing old notes. In such case, Aviation Sales' failure to
purchase tendered old notes would constitute an Event of Default under the
indenture which would, in turn, constitute a default under the Credit Facility.
In such circumstances, the subordination provisions in the indenture would
likely restrict payments to the Holders of old notes.
Aviation Sales will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the indenture applicable to a Change of Control Offer made by Aviation
Sales and purchases all old notes validly tendered and not withdrawn under such
Change of Control Offer.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of Aviation Sales and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in Section
13(d)(3) of the Exchange Act), (ii) the adoption of a plan relating to the
liquidation or dissolution of Aviation Sales, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as defined above) becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act, except that a person shall be deemed to have "beneficial ownership" of all
securities that such person has the right to acquire, whether such right is
currently exercisable or is exercisable only upon the occurrence of a
subsequent condition), directly or indirectly, of more than 50% of the Voting
Stock of Aviation Sales (measured by voting power rather than number of
shares), or (iv) the first day on which a majority of the members of the Board
of Directors of Aviation Sales are not Continuing Directors.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of Aviation Sales and its Restricted Subsidiaries
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taken as a whole. Although there is a developing body of case law interpreting
the phrase "substantially all," there is no precise established definition of
the phrase under applicable law. Accordingly, the ability of a Holder of notes
to require Aviation Sales to repurchase such old notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of Aviation Sales and its Restricted Subsidiaries taken as a whole to another
Person or group may be uncertain.
"Continuing Directors" means, as of-any date of determination, any member of
the Board of Directors of Aviation Sales who (i) was a member of such Board of
Directors on the date of the indenture or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
Asset sales
The indenture provides that Aviation Sales will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) Aviation
Sales (or the Restricted Subsidiary, as the case may be) receives consideration
at the time of such Asset Sale at least equal to the fair market value of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii) at
least 80% of the consideration therefor received by Aviation Sales or such
Restricted Subsidiary is in the form of cash; provided that the amount of (x)
any liabilities (as shown on Aviation Sales' or such Restricted Subsidiary's
most recent balance sheet), of Aviation Sales or any Restricted Subsidiary
(other than contingent liabilities and liabilities that are by their terms
subordinated to the old notes or any guarantee thereof) that are assumed by the
transferee of any such assets pursuant to a customary novation agreement that
releases Aviation Sales or such Restricted Subsidiary from further liability
and (y) any securities, notes or other obligations received by Aviation Sales
or any such Restricted Subsidiary from such transferee that are
contemporaneously (subject to ordinary settlement periods) converted by
Aviation Sales or such Restricted Subsidiary into cash (to the extent of the
cash received), shall be deemed to be cash for purposes of this provision.
Within 270 days after the receipt of any Net Proceeds from an Asset Sale,
Aviation Sales may apply such Net Proceeds, at its option, (a) to repay or
cause to be repaid Senior Debt, or (b) to the acquisition of a majority of the
assets of, or a majority of the Voting Stock of, another Permitted Business,
the making of a capital expenditure or the acquisition of other long-term
assets that are used or useful in a Permitted Business. Pending the final
application of any such Net Proceeds, Aviation Sales may temporarily reduce
revolving credit borrowings or otherwise invest such Net Proceeds in any manner
that is not prohibited by the indenture. Any Net Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of this paragraph
will be deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $10.0 million, Aviation Sales will be required to make
an offer to all Holders of old notes and all holders of pari passu Indebtedness
containing provisions similar to those set forth in the indenture with respect
to offers to purchase or redeem with the proceeds of sales of assets (an "Asset
Sale Offer") to purchase the maximum principal amount of old notes and such
other Indebtedness that may be purchased out of the Excess Proceeds, at an
offer price in cash in an amount equal to 100% of the principal amount thereof
plus accrued and unpaid interest and Liquidated Damages thereon, if any, to the
date of purchase, in accordance with the procedures set forth in the indenture
and such other Indebtedness. To the extent that any Excess Proceeds remain
after consummation of an Asset Sale Offer, Aviation Sales may use such Excess
Proceeds for any purpose not otherwise prohibited by the indenture. If the
aggregate principal amount of old notes and such other Indebtedness tendered
into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the old notes and such other
Indebtedness to be purchased on a pro rata basis. Upon completion of such offer
to purchase, the amount of Excess Proceeds shall be reset at zero. In
determining the fair market value of any assets or Equity Interests issued,
sold or otherwise disposed of, such determination shall be evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustee if such fair market value exceeds $15.0 million.
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Covenants
Restricted payments
The indenture provides that Aviation Sales will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of Aviation
Sales' or any of its Restricted Subsidiaries' Equity Interests (including,
without limitation, any payment in connection with any merger or consolidation
involving Aviation Sales or any of its Restricted Subsidiaries) or to the
direct or indirect holders of Aviation Sales' or any of its Restricted
Subsidiaries' Equity Interests in their capacity as such (other than dividends
or distributions payable in Equity Interests (other than Disqualified Stock) of
Aviation Sales or to Aviation Sales or a Restricted Subsidiary of Aviation
Sales); (ii) purchase, redeem or otherwise acquire or retire for value
(including, without limitation, in connection with any merger or consolidation
involving Aviation Sales) any Equity Interests of Aviation Sales or any direct
or indirect parent of Aviation Sales; (iii) make any payment on or with respect
to, or purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is pari passu with or subordinated to the old notes, except a
payment of interest or principal at Stated Maturity; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments")
unless, at the time of and after giving effect to such Restricted Payment:
. no Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof;
. Aviation Sales would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "--Incurrence of
indebtedness and issuance of preferred stock"; and
. such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by Aviation Sales and its Restricted
Subsidiaries after the date of the indenture (excluding Restricted
Payments permitted by clauses (ii), (iii), (iv) and (vi) of the next
succeeding paragraph), is less than the sum, without duplication, of (i)
50% of the Consolidated Net Income of Aviation Sales for the period
(taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the date of the indenture to the end of
Aviation Sales' most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a
deficit, less 100% of such deficit), plus (ii) 100% of the aggregate net
cash proceeds received by Aviation Sales since the date of the indenture
as a contribution to its common equity capital or from the issue or sale
of Equity Interests of Aviation Sales (other than Disqualified Stock) or
from the issue or sale of Disqualified Stock or debt securities of
Aviation Sales that have been converted into such Equity Interests
(other than Equity Interests (or Disqualified Stock or convertible debt
securities) sold to a Subsidiary of Aviation Sales), plus (iii) to the
extent that any Restricted Investment that was made after the date of
the indenture is sold for cash or otherwise liquidated or repaid for
cash, the lesser of (A) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (B) the
initial amount of such Restricted Investment, plus (iv) 50% of any
dividends received by Aviation Sales or a Subsidiary Guarantor after the
date of the indenture from an Unrestricted Subsidiary of Aviation Sales,
to the extent that such dividends were not otherwise included in
Consolidated Net Income of Aviation Sales for such period, plus (v) to
the extent that any Unrestricted Subsidiary is redesignated as a
Restricted Subsidiary after the date of the indenture, the lesser of (A)
the fair market value of Aviation Sales' Investment in such Subsidiary
as of the date of such redesignation or (B) such fair market value as of
the date on which such Subsidiary was originally designated as an
Unrestricted Subsidiary.
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The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment
would have complied with the provisions of the indenture;
(ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or subordinated Indebtedness or Equity
Interests of Aviation Sales in exchange for, or out of the net cash
proceeds of the substantially concurrent sale (other than to a
Subsidiary of Aviation Sales) of, other Equity Interests of Aviation
Sales (other than any Disqualified Stock); provided that the amount
of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (c) (ii) of the preceding paragraph;
(iii) the defeasance, redemption, repurchase or other acquisition of pari
passu or subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness;
(iv) the payment of any dividend by a Subsidiary of Aviation Sales to the
holders of its common Equity Interests on a pro rata basis;
(v) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Aviation Sales or any Subsidiary of
Aviation Sales held by any member of Aviation Sales' (or any of its
Subsidiaries') management pursuant to any management equity
subscription agreement or stock option agreement in effect as of the
date of the indenture; provided that the aggregate price paid for all
such repurchased, redeemed, acquired or retired Equity Interests
shall not exceed $3.0 million in any twelve-month period and no
Default or Event of Default shall have occurred and be continuing
immediately after such transaction;
(vi) the making and consummation of (A) an Asset Sale Offer to holders of
Indebtedness pari passu with or subordinate to the old notes in
accordance with the provisions described above under "Asset Sales",
or (B) a Change of Control Offer to holders of indebtedness pari
passu with or subordinate to the old notes at a price not greater
than 101% of the principal amount of such Indebtedness in accordance
with provisions similar to those described above under "Repurchase at
the option of the holders upon a change of control"; provided, that
prior to consummation of a Change of Control Offer with respect to
subordinated Indebtedness and concurrently with consummation of a
Change of Control Offer with respect to pari passu Indebtedness,
Aviation Sales shall have consummated the Change of Control Offer
with respect to the old notes; or
(vii) the making of additional Restricted Payments in an amount not to
exceed $10.0 million.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by Aviation
Sales and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated will be deemed to be Restricted Payments (to the
extent they otherwise fall within the definition thereof) at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount equal to the fair market value of
such Investments at the time of such designation. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Aviation Sales or such
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any non-cash Restricted Payment in excess of $10.0 million
shall be determined by the Board of Directors whose resolution with respect
thereto shall be delivered to the Trustee, such determination to be based upon
an opinion or appraisal issued by an accounting, appraisal or investment
banking firm of national standing if such fair market
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value exceeds $15.0 million. Not later than the date of making any Restricted
Payment, Aviation Sales shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the calculations required by the covenant "Restricted Payments" were
computed, together with a copy of any fairness opinion or appraisal required by
the indenture.
Incurrence of indebtedness and issuance of preferred stock
The indenture provides that Aviation Sales will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Debt) and that Aviation Sales will not issue any Disqualified Stock
and will nor permit any of its Subsidiaries to issue any shares of preferred
stock, provided, however, that Aviation Sales may incur Indebtedness (including
Acquired Debt) or issue shares of Disqualified Stock and the Subsidiary
Guarantors may incur Indebtedness or issue preferred stock if the Fixed Charge
Coverage Ratio for Aviation Sales' most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock or preferred stock is issued would have been at least 2.0 to
1 if such Indebtedness is incurred or such Disqualified Stock or preferred
stock is issued on or prior to February 15, 2000, or would have been at least
2.25 to 1 if such Indebtedness is incurred or such Disqualified Stock or
preferred stock is issued thereafter, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom) as if the
additional Indebtedness had been incurred, or the Disqualified Stock or
preferred stock had been issued, as the case may be, at the beginning of such
four-quarter period.
The provisions of the first paragraph of this covenant will not apply to the
incurrence of any of the following items of Indebtedness (collectively,
"Permitted Debt"):
. the incurrence by Aviation Sales and the Subsidiary Guarantors of
Indebtedness under the Credit Facility; provided that the aggregate
principal amount of all such Indebtedness (with letters of credit being
deemed to have a principal amount equal to the maximum potential
liability of Aviation Sales and the Subsidiary Guarantors thereunder)
outstanding under the Credit Facility after giving effect to such
incurrence does not exceed an amount equal to $150.0 million less the
aggregate amount of all Net Proceeds of Asset Sales applied to repay
such Indebtedness;
. the incurrence by Aviation Sales and its Restricted Subsidiaries of the
Existing Indebtedness;
. the incurrence by Aviation Sales and the Subsidiary Guarantors of
Indebtedness represented by the old notes and the Subsidiary Guarantees;
. the incurrence by Aviation Sales or any of the Subsidiary Guarantors of
Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the
purpose of financing all or any part of the purchase price or cost of
construction or improvement of property, plant or equipment used in the
business of Aviation Sales or such Subsidiary Guarantor, in an aggregate
principal amount not to exceed $10.0 million at any time outstanding;
. the incurrence by Aviation Sales or any of its Restricted Subsidiaries
of Permitted Refinancing Indebtedness in exchange for, or the net
proceeds of which are used to refund, refinance or replace Indebtedness
(other than intercompany Indebtedness) that was permitted by the
indenture to be incurred under the first paragraph hereof or the second
clause of this paragraph;
. the incurrence by Aviation Sales or any of the Subsidiary Guarantors of
intercompany Indebtedness or preferred stock between or among Aviation
Sales and any of the Subsidiary Guarantors; provided, however, that (A)
any subsequent issuance or transfer of Equity Interests that results in
any such Indebtedness or preferred stock being held by a Person other
than Aviation Sales or a Subsidiary Guarantor and (B) any sale or other
transfer of any such Indebtedness or preferred stock to a Person that is
not either Aviation Sales or a Subsidiary Guarantor shall be deemed, in
each case, to constitute an
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incurrence of such Indebtedness or an issuance of such Preferred Stock by
Aviation Sales or such Subsidiary Guarantor, as the case may be, that was
not permitted by this clause;
. the incurrence by Aviation Sales or any of the Subsidiary Guarantors of
Hedging Obligations;
. the guarantee by Aviation Sales or any of the Subsidiary Guarantors of
Indebtedness of Aviation Sales or a Subsidiary Guarantor that was
permitted to be incurred by another provision of this covenant;
. the incurrence by Aviation Sales' Unrestricted Subsidiaries of Non-
Recourse Debt, provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary, such event shall
be deemed to constitute an incurrence of Indebtedness by a Restricted
Subsidiary of Aviation Sales that was not permitted by this clause; and
. the incurrence by Aviation Sales or any of the Subsidiary Guarantors of
additional Indebtedness in an aggregate principal amount (or accreted
value, as applicable) at any time outstanding, including all Permitted
Refinancing Indebtedness incurred to refund, refinance or replace any
Indebtedness incurred pursuant to this clause, not to exceed $30.0
million.
For purposes of determining compliance with this covenant, in the event that
an item of Indebtedness meets the criteria of more than one of the categories
of Permitted Debt described in clauses above or is entitled to be incurred
pursuant to the first paragraph of this covenant, Aviation Sales shall, in its
sole discretion, classify such item of Indebtedness in any manner that complies
with this covenant. Accrual of interest, accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock will not be deemed to be an incurrence of Indebtedness or an
issuance of Disqualified Stock for purposes of this covenant; provided, in each
such case, that the amount thereof is included in Fixed Charges bf Aviation
Sales as accrued.
Liens
The indenture provides that Aviation Sales will not, and will not permit any
of its Subsidiaries to, directly or indirectly, create, incur, assume or suffer
to exist any Lien securing Indebtedness or trade payables on any asset now
owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom, except Permitted Liens.
Dividend and other payment restrictions affecting subsidiaries
The indenture provides that Aviation Sales will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(a) pay dividends or make any
other distributions to Aviation Sales or any of its Restricted Subsidiaries (1)
on its Capital Stock or (2) with respect to any other interest or participation
in, or measured by, its profits, or (b) pay any indebtedness owed to Aviation
Sales or any of its Restricted Subsidiaries, (ii) make loans or advances to
Aviation Sales or any of its Restricted Subsidiaries or (iii) transfer any of
its properties or assets to Aviation Sales or any of its Restricted
Subsidiaries. However, the foregoing restrictions will not apply to
encumbrances or restrictions existing under or by reason of:
(a) Existing Indebtedness as in effect on the date of the indenture;
(b) the Credit Facility as in effect as of the date of the indenture,
and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, provided
that such amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacement or refinancings are no more
restrictive, taken as a whole, with respect to such dividend and other
payment restrictions than those contained in the Credit Facility as in
effect on the date of the indenture;
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(c) the indenture and the old notes;
(d) applicable law;
(e) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Aviation Sales or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
(f) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices;
(g) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in
clause (c) above on the property so acquired;
(h) any agreement for the sale of a Restricted Subsidiary that restricts
distributions by that Restricted Subsidiary pending its sale;
(i) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being refinanced;
(j) secured Indebtedness otherwise permitted to be incurred pursuant to
the provisions of the covenant described above under the caption "--Liens"
that limits the right of the debtor to dispose of the assets securing such
Indebtedness;
(k) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements and other similar agreements
entered into in the ordinary course of business; and
(1) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Additional subsidiary guaranties
The indenture provides that if Aviation Sales or any of its Restricted
Subsidiaries shall acquire or create another Subsidiary after the date of the
indenture (other than an Unrestricted Subsidiary properly designated as such),
then such newly acquired or created Subsidiary shall become a Subsidiary
Guarantor and execute a supplemental indenture and deliver an Opinion of
Counsel, in accordance with the terms of the indenture.
Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the
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power to direct or cause the direction of the management or policies of such
Person, whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the Voting
Stock of a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets or rights (including, without limitation, by way of a sale and
leaseback) other than sales or leases of inventory in the ordinary course of
business or sales of leases or of assets subject to leases in the ordinary
course of business (provided that the sale, lease, conveyance or other
disposition of all or substantially all of the assets of Aviation Sales and its
Restricted Subsidiaries taken as a whole will be governed by the provisions of
the indenture described above under the caption "--Repurchase at the option of
holders upon a change of control" and/or the provisions described below under
the caption "--Merger, consolidation or sale, lease or conveyance" and not by
the provisions of the Asset Sate covenant), and (ii) the issue or sale by
Aviation Sales or any of its Restricted Subsidiaries of Equity Interests of any
of Aviation Sales' Restricted Subsidiaries, in the case of either clause (i) or
(ii), whether in a single transaction or a series of related transactions (a)
that have a fair market value in excess of $2.0 million or (b) for net proceeds
in excess of $2.0 million. Notwithstanding the foregoing, the following items
shall not be deemed to be Asset Sales: (i) a transfer of assets by Aviation
Sales to a Wholly Owned Restricted Subsidiary or by a Wholly Owned Restricted
Subsidiary to Aviation Sales or to another Wholly Owned Restricted Subsidiary,
(ii) an issuance of Equity Interests by a Wholly Owned Restricted Subsidiary to
Aviation Sales or to another Wholly Owned Restricted Subsidiary, and (iii) a
Restricted Payment that is permitted by the covenant described above under the
caption "--Covenants--Restricted Payments."
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock (ii)
in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case with any domestic commercial
bank having capital and surplus in excess of $500 million and a Thompson Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution
meeting the qualifications specified in clause (iii) above, (v) commercial
paper having the highest rating obtainable from Moody's Investors Service, Inc.
or Standard & Poor's Corporation and in each case maturing within six months
after the date of acquisition and (vi) money market funds at least 95% of the
assets of which constitute Cash Equivalents of the kinds described in clauses
(i)--(v) of this definition.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries for such period, to the
extent that such provision for taxes was included in computing such
Consolidated Net Income, plus (iii) consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or accrued
and whether or not capitalized (including, without
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limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any such
expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash expenses (excluding any such non-cash
expense to the extent that it represents an accrual of or reserve for cash
expenses in any future period or amortization of a prepaid cash expense that
was paid in a prior period) of such Person and its Subsidiaries for such period
to the extent that such depreciation, amortization and other non-cash expenses
were deducted in computing such Consolidated Net Income, plus (v) an amount
equal to 1/3 of the Consolidated Lease Expense of such Person and its
Restricted Subsidiaries for such period, to the extent that any such expense
was deducted in computing such Consolidated Net Income, minus (vi) non-cash
items increasing such Consolidated Net Income for such period, in each case, on
a consolidated basis and determined in accordance with GAAP. Notwithstanding
the foregoing, the provision for taxes based on the income or profits of, and
the depreciation and amortization and other non-cash expenses of, a Restricted
Subsidiary of the referent Person shall be added to Consolidated Net Income to
compute Consolidated Cash Flow only to the extent (and in the same proportion)
that the Net Income of such Restricted Subsidiary was included in calculating
the Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be dividended to Aviation
Sales by such Restricted- Subsidiary without prior governmental approval (that
has not been obtained), and without direct or indirect restriction pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Lease Expense" means, with respect to any Person for any
period, the aggregate rental obligations of such Person and its consolidated
Restricted Subsidiaries determined on a consolidated basis in accordance with
GAAP payable in respect of such period under leases of real and/or personal
property (net of income from subleases thereof, but including taxes, insurance,
maintenance and similar expenses that the lessee is obligated to pay under the
terms of such leases), whether or not such obligations are reflected as
liabilities or commitments on a consolidated balance sheet of such Person and
its Restricted Subsidiaries or in the notes thereto.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded, and (iv) the cumulative effect of a change in accounting
principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that
by its terms is not entitled to the payment of dividends unless such dividends
may be declared and paid only out of net earnings in respect of the year of
such declaration and payment, but only to the extent of any cash received by
such Person upon issuance of
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such preferred stock, less (x) all write-ups (other than write-ups resulting
from foreign currency translations and write-ups of tangible assets of a going
concern business made within 12 months after the acquisition of such business)
subsequent to the date of the indenture in the book value of any asset owned by
such Person or a consolidated Subsidiary of such Person, (y) all investments as
of such date in unconsolidated Subsidiaries and in Persons that are not
Subsidiaries (except, in each case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"Credit Facility" means that certain Fourth Amended and Restated Credit
Agreement dated as of May 31, 2000, by and among Aviation Sales, Aviation Sales
Distribution Services Company, Aviation Sales Leasing Company, Aviation Sales
Finance Company, AVSRE, L.P., AVS/M-3, Inc., AVS/CAI, Inc., AVS/M-2, Inc.,
Aircraft Interior Design, Inc., Triad International Maintenance Corporation,
Timco Engine Center, Inc., Aviation Sales Maintenance, Repair and Overhaul
Company, Timco Engineered Systems, Inc., Aviation Sales, SPS I, Inc., Whitehall
Corporation, AVS/M-I, Inc., Aero Hushkit Corporation, Aviation Sales Property
Management Corp., Aerocell Structures. Inc. and Hydroscience, Inc. the
Institutions from time to time party thereto as Lenders, the Institutions from
time to time party thereto as Issuing Banks, Citicorp USA. Inc. as Agent, and
Citicorp Securities, Inc., as Arranger, and the related term loans, including
any related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith. and in each case as amended, modified,
renewed, refunded, replaced or refinanced from time to time.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default as described below.
"Designated Senior Debt" means (i) any Indebtedness outstanding under the
Credit Facility and (ii) any other Senior Debt permitted under the indenture
the principal amount of which is $25.0 million or more and that has been
designated by Aviation Sales as Designated Senior Debt.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, at the option of the holder thereof), or upon the happening of
any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the date that is 91 days after the date on
which the old notes mature; provided, however, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require Aviation Sales to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that Aviation
Sales may not repurchase or redeem any such Capital Stock pursuant to such
provisions unless such repurchase or redemption complies with the covenant
described above under the caption "--Covenants--Restricted Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means up to $95 million in aggregate principal
amount of Indebtedness of Aviation Sales and its Subsidiaries (other than
Indebtedness under the Credit Facility) in existence on the date of the
indenture, until such amounts are repaid.
"Fixed Charges" means, with respect to any Person and its Restricted
Subsidiaries for any period, the sum, without duplication, of (i) the
consolidated interest expense of such Person and its Restricted Subsidiaries
for such period, whether paid or accrued (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations) and (ii) the consolidated interest of
such Person and its Restricted Subsidiaries that was capitalized during such
period, and (iii) any interest expense on
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Indebtedness of another Person that is Guaranteed by such Person or one of its
Restricted Subsidiaries or secured by a Lien on assets of such Person or one of
its Restricted Subsidiaries (whether or not such Guarantee or Lien is called
upon), (iv) the product of (a) all dividend payments, whether or not in cash,
on any series of preferred stock of such Person or any of its Restricted
Subsidiaries, other than dividend payments on Equity Interests payable solely
in Equity Interests of Aviation Sales (other than Disqualified Stock) or to
Aviation Sales or a Restricted Subsidiary of Aviation Sales, times (b) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current combined federal, state and local statutory tax rate of
such Person expressed as a decimal, in each case, on a consolidated basis and
in accordance with GAAP and (v) an amount equal to 1/3 of the Consolidated
Lease Expense of such Person and its Restricted Subsidiaries for such period,
whether paid or accrued.
"Fixed Charge Coverage Ratio" means with respect to any Person and its
Restricted Subsidiaries for any period, the ratio of the Consolidated Cash Flow
of such Person and its Restricted Subsidiaries for such period to the Fixed
Charges of such Person for such period. In the event that the referent Person
or any of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems
any Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated but prior to date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by Aviation Sales or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be deemed to have occurred on the first day of the four-quarter reference
period and Consolidated Cash Flow for such reference period shall be calculated
without giving effect to clause (iii) of the proviso set forth in the
definition of Consolidated Net Income, and (ii) the Consolidated Cash Flow
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall
be excluded, and (iii) the Fixed Charges attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded, but only to the
extent that the obligations giving rise to such Fixed Charges will not be
obligations of the referent Person or any of its Restricted Subsidiaries
following the Calculation Date.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or
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representing any Hedging Obligations, except any such balance that constitutes
an accrued expense or trade payable, if and to the extent any of the foregoing
(other than letters of credit and Hedging Obligations) would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
as well as all Indebtedness of others secured by a Lien on any asset of such
Person (whether or not such Indebtedness is assumed by such Person) and, to the
extent not otherwise included, the Guarantee by such Person of any indebtedness
of any other Person. The amount of any Indebtedness outstanding as of any date
shall be (i) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount, and (ii) the principal amount thereof, together
with any interest thereon that is more than 30 days past due, in the case of
any other Indebtedness.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities, together with all items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
If Aviation Sales or any Subsidiary of Aviation Sales sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary of
Aviation Sales such that, after giving effect to any such sale or disposition,
such Person is no longer a Subsidiary of Aviation Sales, Aviation Sales shall
be deemed to have made an Investment on the date of any such sale or
disposition equal to the fair market value of the Equity Interests of such
Subsidiary not sold or disposed of in an amount determined as provided in the
final paragraph of the covenant described above under the caption "--
Covenants--Restricted Payments."
"Liens" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain
(but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by Aviation Sales
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax audits or deductions and any tax sharing
arrangements), any business or activities conducted by Aviation Sales on the
date of the indenture and any business or activities reasonably related,
ancillary or complementary to such business or activities amounts required to
be applied to the repayment of Indebtedness secured by a Lien on the asset or
assets that were the subject of such Asset Sale and any reserve for adjustment
in respect of the sale price of such asset or assets established in accordance
with GAAP.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Aviation
Sales nor any of its Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that
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would constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise), or (c) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness
(other than the old notes) of Aviation Sales or any of its Restricted
Subsidiaries to declare a default on such other Indebtedness or cause the
payment thereof to be accelerated or payable prior to its stated maturity; and
(iii) as to which the lenders have been notified in writing that they will not
have any recourse to the stock or assets of Aviation Sales or any of its
Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means any business or activities conducted by Aviation
Sales on the date of the indenture and any business or activities related,
ancillary or complementary to such business or activities.
"Permitted Investments" means (a) any Investment in Aviation Sales or in a
Subsidiary Guarantor; (b) any Investment in Cash Equivalents; (c) any
Investment by Aviation Sales or any Subsidiary of Aviation Sales in a Person,
if as a result of such Investment (i) such Person becomes a Wholly Owned
Restricted Subsidiary of Aviation Sales or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys substantially
all of its assets to, or is liquidated into, Aviation Sales or a Wholly Owned
Restricted Subsidiary of Aviation Sales; (d) any Investment made as a result of
the receipt of non-cash consideration from an Asset Sale that was made pursuant
to and in compliance with the covenant described above under the caption "--
Repurchase at the option of the holders upon a change of control"; (e) any
acquisition of assets solely in exchange for the issuance of Equity Interests
(other than Disqualified Stock) of Aviation Sales; and (f) other Investments in
any Person having an aggregate fair market value (measured on the date each
such Investment was made and without giving effect to subsequent changes in
value), when taken together with all other Investments made pursuant to this
clause (f) that are at the time outstanding, not to exceed $10.0 million.
"Permitted Junior Securities" means Equity Interests in Aviation Sales or
any Subsidiary Guarantor or debt securities that are subordinated to all Senior
Debt (and any debt securities issued in exchange for Senior Debt) to
substantially the same extent as, or to a greater extent than, the old notes
are subordinated to Senior Debt pursuant to Article 10 of the indenture.
"Permitted Liens" means (i) Liens on assets of Aviation Sales or any
Subsidiary Guarantor to secure Senior Debt of Aviation Sales or such Subsidiary
Guarantor that was permitted by the terms of the indenture to be incurred; (ii)
Liens in favor of Aviation Sales or a Subsidiary Guarantor; (iii) Liens on
property of a Person existing at the time such Person is merged into or
consolidated with Aviation Sales or any Subsidiary of Aviation Sales; provided
that such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with Aviation Sales; (iv) Liens on property
existing at the time of acquisition thereof by Aviation Sales or any Subsidiary
of Aviation Sales, provided that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (v)
Liens to secure Indebtedness (including Capital Lease Obligations) permitted by
clause (iv) of the second paragraph of the covenant entitled "Incurrence of
indebtedness and issuance of preferred stock" covering only the assets acquired
with such Indebtedness; (vi) Liens existing on the date of the indenture; (vii)
Liens for taxes, assessments or governmental charges or claims that are not yet
delinquent or that are being contested in good faith by appropriate proceedings
promptly instituted and diligently concluded, provided that any reserve or
other appropriate provision as shall be required in conformity with GAAP shall
have been made therefor; (viii) Liens incurred in the ordinary course of
business of Aviation Sales or any Subsidiary of Aviation Sales with respect to
obligations that do not exceed $10.0 million at any one time outstanding and
that (a) are not incurred in connection with the borrowing of money or the
obtaining of advances or credit (other than trade credit in the
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ordinary course of business) and (b) do not in the aggregate materially detract
from the value of the property or materially impair the use thereof in the
operation of business by Aviation Sales or such Subsidiary; (ix) Liens to
secure the old notes or the Subsidiary Guarantees; and (x) Liens on assets of
Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted
Subsidiaries.
"Permitted Refinancing Indebtedness" means any Indebtedness of Aviation
Sales or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Aviation Sales or any of its Restricted
Subsidiaries (other than intercompany Indebtedness); provided that: (i) the
principal amount (or accreted value, if applicable) of such Permitted
Refinancing Indebtedness does not exceed the principal amount of (or accreted
value, if applicable), plus accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses. incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded: (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the old notes, such Permitted
Refinancing Indebtedness has a final maturity date later than the final
maturity date of, and is subordinated in right of payment to, the old notes on
terms at least as favorable to the Holders of old notes as those contained in
the documentation governing the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred
either by Aviation Sales or by the Restricted Subsidiary who is the obligor on
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Senior Debt" means (i) all Indebtedness outstanding under the Credit
Facility, all Hedging Obligations with respect thereto and, after a default has
occurred and is continuing under the Credit Facility, all other Indebtedness
arising from intercompany loans and advances and owing by Aviation Sales or any
of the Subsidiary Guarantors which constitutes part of the collateral security
for the Credit Facility and such Hedging Obligations, including without
limitation, Indebtedness evidenced by intercompany notes pledged or assigned in
connection with the Credit Facility, (ii) any other Indebtedness permitted to
be incurred by Aviation Sales or a Subsidiary Guarantor under the terms of the
indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the old notes and (iii) all Obligations with respect to the
foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Debt will not include (w) any liability for federal, state, local or other
taxes owed or owing by Aviation Sales or a Subsidiary Guarantor, (x) any
Indebtedness between or among Aviation Sales, any of its Subsidiaries or any of
its other Affiliates except to the extent the same is subject to clause (i)
above, (y) any trade payables or (z) any Indebtedness that is incurred in
violation of the indenture.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time
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owned or controlled, directly or indirectly, by such Person or one or more of
the other Subsidiaries of that Person (or a combination thereof) and (ii) any
partnership (a) the sole general partner or the managing general partner of
which is such Person or a Subsidiary of such Person or (b) the only general
partners of which are such Person or one or more Subsidiaries of such Person
(or any combination thereof).
"Subsidiary Guarantors" means each of (i) Aero Hushkit Corporation, Aerocell
Structures, Inc., Aircraft Interior Design, Inc., Aviation Sales Distribution
Services Company, Aviation Sales Finance Company, Aviation Sales Leasing
Company, Aviation Sales Maintenance Repair & Overhaul Company, Aviation Sales
Property Management Corp., Aviation Sales SPS I, Inc., AVS/CAI, Inc., AVS/M-1,
Inc., AVS/M-2, Inc., AVS/M-3, Inc., AVSRE L.P., Hydroscience, Inc., Timco
Engine Center, Inc., Timco Engineered Systems, Inc., Triad International
Maintenance Corporation and Whitehall Corporation, and (ii) any other
subsidiary that executes a Subsidiary Guarantee in accordance with the
provisions of the indenture, and their respective successors and assigns.
"Unrestricted Subsidiary" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary: (a) has no
indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with Aviation Sales or any Restricted
Subsidiary of Aviation Sales unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to Aviation Sales or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of Aviation Sales; (c) is a Person with respect
to which neither Aviation Sales nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity Interests
or (y) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of Aviation Sales or any of its Restricted Subsidiaries; and (e)
has at least one director on its board of directors that is not a director or
executive officer of Aviation Sales or any of its Restricted Subsidiaries and
has at least one executive officer that is not a director or executive officer
of Aviation Sales or any of its Restricted Subsidiaries. Any such designation
by the Board of Directors shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "--Covenants-Restricted Payments." If, at any
time, any Unrestricted Subsidiary would fail to meet the foregoing requirements
as an Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of
Aviation Sales as of such date (and, if such Indebtedness is not permitted to
be incurred as of such date under the covenant described under the caption "--
Covenants--Incurrence of indebtedness and issuance of preferred stock,"
Aviation Sales shall be in default of such covenant). The Board of Directors of
Aviation Sales may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of Aviation Sales of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant described under the caption "--Covenants-Incurrence of indebtedness
and issuance of preferred stock," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period,
(ii) no Default or Event of Default would be in existence following such
designation, and (iii) such Subsidiary becomes a Subsidiary Guarantor and
executes a Supplemental indenture and delivers an Opinion of Counsel, in
accordance with the terms of the indenture.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will
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elapse between such date and the making of such payment, by (ii) the then
outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
Merger, consolidation, sale, lease or conveyance
The indenture provides that Aviation Sales may not consolidate or merge with
or into (whether or not Aviation Sales is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to another
corporation, Person or entity unless (i) Aviation Sales is the surviving
corporation or the entity or the Person formed by or surviving any such
consolidation or merger (if other than Aviation Sales) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
Aviation Sales) or the entity or Person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made assumes
all the obligations of Aviation Sales under the Registration Rights Agreement,
the old notes and the indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after such
transaction no Default or Event of Default exists; and (iv) except in the case
of a merger of Aviation Sales with or into a Subsidiary Guarantor, Aviation
Sales or the entity or Person formed by or surviving any such consolidation or
merger (if other than Aviation Sales), or to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made (A) will
have Consolidated Net Worth immediately after the transaction equal to or
greater than the Consolidated Net Worth of Aviation Sales immediately preceding
the transaction and (B) will, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"--Covenants--Incurrence of indebtedness and issuance of preferred stock."
Transactions with affiliates
The indenture provides that Aviation Sales will not, and will not permit any
of its Restricted Subsidiaries to, make any payment to, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or
purchase any property or assets from, or enter into or make or amend any
transaction, contract, agreement, understanding, loan, advance or guarantee
with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to Aviation Sales or the relevant Restricted
Subsidiary than those that would have been obtained in a comparable transaction
by Aviation Sales or such Restricted Subsidiary with an unrelated Person and
(ii) Aviation Sales delivers to the Trustee (a) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $5.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction or series of
related Affiliate Transactions involving aggregate consideration in excess of
$10.0 million (or, in the case of a purchase of inventory from JFSS in the
ordinary course of business, $15.0 million) an opinion as to the fairness to
the Holders of such Affiliate Transaction from a financial point of view issued
by an accounting, appraisal or investment banking firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions: (i) any employment agreement entered into by Aviation
Sales or any of its Restricted Subsidiaries in the ordinary course of business
and consistent with the past practice of Aviation Sales or such Restricted
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Subsidiary, (ii) transactions between or among Aviation Sales and/or its
Restricted Subsidiaries, (iii) payment of reasonable directors fees to Persons
who are not otherwise Affiliates of Aviation Sales, (iv) Restricted Payments
that are permitted by the provisions of the indenture described above under the
caption "--Restricted Payments," and (v) any transactions undertaken pursuant
to any contractual obligations in existence on the date of the indenture (as in
effect on such date) as described herein under the caption "Certain
Relationships and Related Transactions."
Events of default
The indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on the old
notes (whether or not prohibited by the subordination provisions of the
indenture); (ii) default in payment when due of the principal of or premium, if
any, on the old notes (whether or not prohibited by the subordination
provisions of the indenture); (iii) failure by Aviation Sales or any of its
Subsidiaries to comply with the provisions described under the captions "--
Change of Control," "--Asset Sales," "--Covenants--Restricted Payments" or "--
Covenants--Incurrence of indebtedness and issuance of preferred stock"; (iv)
failure by Aviation Sales or any of its Subsidiaries for 60 days after notice
to comply with any of its other agreements in the indenture or the old notes;
(v) default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by Aviation Sales or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by Aviation Sales or any of its Subsidiaries)
whether such Indebtedness or guarantee now exists, or is created after the date
of the indenture, which default (a) is caused by a failure to pay principal of,
or premium, if any, or interest on such Indebtedness prior to the expiration of
the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (b) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $10.0 million or more; (vi) failure
by Aviation Sales or any of its Subsidiaries to pay final judgments (including
foreign judgments only to the extent enforcement thereof is sought in the
United States or in any foreign jurisdiction where Aviation Sales owns assets
of $10.0 million or more) aggregating in excess of $10.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days; (vii)
certain events of bankruptcy or insolvency with respect to Aviation Sales or
any of its Significant Subsidiaries; and (viii) except as permitted by the
indenture, any Subsidiary Guarantee shall be held in any judicial proceeding to
be unenforceable or invalid or shall cease for any reason to be in full force
and effect or any Subsidiary Guarantor, or any Person acting on behalf of any
Subsidiary Guarantor, shall deny or disaffirm its obligations under its
Subsidiary Guarantee.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding old notes may
declare all the old notes to be due and payable immediately. Notwithstanding
the foregoing, in the case of an Event of Default arising from certain events
of bankruptcy or insolvency, with respect to Aviation Sales, any Significant
Subsidiary or any group of Subsidiaries that, taken together, would constitute
a Significant Subsidiary, all outstanding old notes will become due and payable
without further action or notice. Holders of the old notes may not enforce the
indenture or the old notes except as provided in the indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding old notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the old notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of Aviation Sales
with the intention of avoiding payment of the premium that Aviation Sales would
have had to pay if Aviation Sales then had elected to redeem the old notes
pursuant to the optional redemption provisions of the indenture, an equivalent
premium shall also become and be immediately due and payable to the extent
permitted by law upon the acceleration of the old notes. If an Event of Default
occurs
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prior to February 15, 2003 by reason of any willful action (or inaction) taken
(or not taken) by or on behalf of Aviation Sales with the intention of avoiding
the prohibition on redemption of the old notes prior to such date, then the
premium specified in the indenture shall also become immediately due and
payable to the extent permitted by law upon the acceleration of the old notes.
The Holders of a majority in aggregate principal amount of the old notes
then outstanding by notice to the Trustee may on behalf of the Holders of all
of the old notes waive any existing Default or Event of Default and its
consequences under the indenture except a continuing Default or Event of
Default in the payment of interest on, or the principal of, the old notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the indenture, and Aviation Sales is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
Discharge, defeasance and covenant defeasance
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding old notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding old notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages on such old notes when such payments are due from the
trust referred to below, (ii) Aviation Sales' obligations with respect to the
old notes concerning issuing temporary old notes, registration of old notes,
mutilated, destroyed, lost or stolen old notes and the maintenance of an office
or agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and Aviation
Sales' obligations in connection therewith and (iv) the Legal Defeasance
provisions of the indenture. In addition, Aviation Sales may, at its option and
at any time, elect to have the obligations of Aviation Sales released with
respect to certain covenants that are described in the indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the old notes. In
the event Covenant Defeasance occurs, certain events (not including non-
payment, bankruptcy, receivership, rehabilitation and insolvency events)
described under "Events of default" will no longer constitute an Event of
default with respect to the old notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Aviation Sales must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders of the old notes, cash U.S. dollars, non-callable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent
public accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages on the outstanding old notes on the stated maturity or on
the applicable redemption date, as the case may be, and Aviation Sales must
specify whether the old notes are being defeased to maturity or to a particular
redemption date; (ii) in the case of Legal Defeasance, Aviation Sales shall
have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) Aviation Sales has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of counsel shall confirm that, the Holders of the
outstanding old notes will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, Aviation Sales shall have delivered
to the Trustee an opinion of counsel in the United States reasonably acceptable
to the Trustee confirming that the Holders of the outstanding old notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such Covenant Defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred; (iv) no Default or Event of
Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the
91st day after the
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date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the indenture) to which Aviation Sales or
any of its Subsidiaries is a party or by which Aviation Sales or any of its
Subsidiaries is bound; (vi) Aviation Sales must have delivered to the Trustee
an opinion of counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (vii) Aviation Sales must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by Aviation Sales with the
intent of preferring the Holders of old notes over the other creditors of
Aviation Sales with the intent of defeating, hindering, delaying or defrauding
creditors of Aviation Sales or others; and (viii) Aviation Sales must deliver
to the Trustee an Officers' Certificate and an opinion of counsel, each stating
that all conditions precedent provided for relating to the Legal Defeasance or
the Covenant Defeasance have been complied with.
Modification of the indenture
Except as provided in the next two succeeding paragraphs, the indenture or
the old notes may be amended or supplemented with the consent of the Holders of
at least a majority in principal amount of the old notes then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, old notes), and any existing default
or compliance with any provision of the indenture or the old notes may be
waived with the consent of the Holders of a majority in principal amount of the
then outstanding old notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, old
notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any old notes held by a non-consenting Holder): (i) reduce the
principal amount of old notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any old note or alter the provisions with respect to the redemption of the
old notes (other than provisions relating to the covenants described above
under the caption "--Repurchase at the option of the holders upon a change of
control"), (iii) reduce the rate of or change the time for payment of interest
on any Note, (iv) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the old notes (except a
rescission of acceleration of the old notes by the Holders of at least a
majority in aggregate principal amount of the old notes and a waiver of the
payment default that resulted from such acceleration), (v) make any old note
payable in money other than that stated in the old notes, (vi) make any change
in the provisions of the indenture relating to waivers of past Defaults or the
rights of Holders of old notes to receive payments of principal of or premium,
if any, or interest on the old notes, (vii) waive a redemption payment with
respect to any old note (other than a payment required by one of the covenants
described above under the caption "--Repurchase at the option of the holders
upon a change of control") (viii) make any change in the foregoing amendment
and waiver provisions or (ix) release any Subsidiary Guarantor from any of its
obligations under its Subsidiary Guarantee or the indenture, except in
accordance with the terms of the indenture. In addition, any amendment to the
provisions of Article 10 or Article 12 of the indenture (which relate to
subordination) will require the consent of the Holders of at least 75% in
aggregate principal amount of the old notes then outstanding if such amendment
would adversely affect the rights of Holders of old notes.
Notwithstanding the foregoing, without the consent of any Holder of old
notes, Aviation Sales, the Subsidiary Guarantors and the Trustee may amend or
supplement the indenture or the old notes to cure any ambiguity, defect or
inconsistency, to provide for uncertificated old notes in addition to or in
place of certificated old notes, to provide for the assumption of Aviation
Sales' obligations to Holders of old notes in the case of a merger or
consolidation or sale of all or substantially all of Aviation Sales' assets, to
make any change that would provide any additional rights or benefits to the
Holders of old notes or that does not adversely affect the legal rights under
the indenture of any such Holder, to comply with requirements of the Commission
in order to effect or maintain the qualification of the indenture under the
Trust Indenture Act to provide for the issuance of additional old notes in
accordance with the limitations set forth in the indenture or to provide for
additional Subsidiary Guarantors in accordance with the terms of the indenture.
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DESCRIPTION OF OTHER INDEBTEDNESS
We and our subsidiaries have entered into a senior credit facility with
certain financial institutions. At present, the senior credit facility consists
of a $57.7 million revolving loan and letter of credit facility, subject to an
availability calculation based on the eligible borrowing base. The eligible
borrowing base includes certain of our receivables and inventories. The letter
of credit portion of the senior credit facility is subject to a $31.0 million
sublimit, with the imposition of certain borrowing criteria based on the
satisfaction of certain debt ratios. The interest rate on the senior credit
facility is, at our option, (a) prime plus 3.0% or (b) LIBOR plus 4.5%.
The senior credit facility contains certain financial covenants regarding
our financial performance and certain other covenants, including limitations on
the amount of annual capital expenditures and the incurrence of additional
debt, and provides for the suspension of the senior credit facility and
repayment of all debt in the event of a material adverse change in our business
or a change in control. A default under the senior credit facility could
potentially result in a default under other agreements to which we are a party,
including our tax retention operation lease. In addition, the senior credit
faculty requires mandatory repayments from the proceeds of a sale of assets or
an issuance of equity or debt securities or as a result of insufficient
collateral to meet the borrowing base requirements thereunder. Substantially
all of our assets are pledged as collateral for amounts borrowed. The senior
credit facility will terminate on July 31, 2002. We were committed to pay a
$1 million financing fee on June 30, 2001, which we paid on July 2, 2001, and
we paid an additional $154,000 in financing fees in August 2001. To the extent
the senior credit facility remains outstanding as of certain dates, we are
committed to pay incremental financing fees as follows: November 14, 2001--2%
of outstanding commitment and February 14, 2002--2% of outstanding commitment.
At September 6, 2001, $4.1 million was outstanding under the senior credit
facility and outstanding letters of credit aggregated $29.6 million. As of
September 6, 2001, $2.7 million was available for borrowing under the senior
credit facility.
The indenture which governs our old notes permits us and our subsidiaries to
incur substantial additional indebtedness, including senior indebtedness. Under
the indenture, we may borrow unlimited additional amounts so long as after
incurring such debt we satisfy a fixed charge coverage ratio for the four most
recent fiscal quarters. Additionally, the indenture allows us to borrow and
have outstanding additional amounts of indebtedness (even if it does not meet
the required fixed coverage ratios) up to enumerated limits. We did not meet
the fixed charge coverage ratio for the one year period ended June 30, 2001.
The old notes are also effectively subordinated in right of payment to all
existing and future liabilities of any of our subsidiaries which do not
guarantee the old notes. Assuming the consummation of the exchange offer and
consent solicitation, the provision restricting our ability to incur additional
indebtedness in this indenture will be removed.
In February 2000, we executed a $15.5 million term loan with the financial
institution that is the agent under our senior credit facility. The proceeds
from this term loan were used to pay debt outstanding under the senior credit
facility. The $15.5 million term loan, as amended, is senior secured debt,
bears interest at 12% per annum, contains financial covenants that are
consistent with the senior credit facility, and matures in July 2002. We repaid
$3.5 million of the term loan from the proceeds of the sale of Caribe.
Remaining principal payments of $500,000 per month are due beginning in January
2002 with a final principal payment of $8.5 million due in July 2002. Under the
$15.5 million term loan agreement, we also granted the lender common stock
purchase warrants to purchase 129,000 shares of our common stock exercisable
for nominal consideration at any time until December 31, 2005. If the term loan
is not repaid in full, the warrants entitle the holder to require us to
repurchase the warrants or common shares issued upon prior exercise of the
warrants at $8.50 per share. The lender has not required us to repurchase any
warrants through September 25, 2001.
In February 2001, we obtained a $10 million term loan from a financial
institution. The term loan is senior secured debt, bears interest at LIBOR plus
2% and matures in August 2002. The proceeds of the $10 million term loan were
used to pay the semi-annual interest payment on the senior subordinated notes
in February 2001 of $6.7 million and for working capital purposes. In
connection with the $10 million term loan, we issued warrants to purchase
250,000 shares of our common stock at an exercise price of $4.00 per share to
each of
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four individuals, two of whom are our officers and/or directors and one of whom
is one of our principal stockholders. Each of these individuals provided credit
support to the financial institution which advanced the $10 million term loan
proceeds. In May 2001, we obtained a short-term increase of up to $3.0 million
in this term loan. We borrowed $2.0 million under the increased term loan in
May 2001 and thereafter repaid the additional borrowing from the proceeds of
the Caribe sale. One of our principal stockholders provided credit support for
the increased amount of the term loan.
As a result of our inability to make the August 2001 interest payment, we
are in default under our senior credit facility, our senior term loans and the
tax retention operating lease and the lenders under our senior credit facility,
our senior term loans and the lessor under our tax retention operating lease
have the right to declare due and require immediate payment of the indebtedness
that ranks senior in right of payment to the old notes, which as of June 30,
2001 aggregated $82.0 million, before any payment could be made on the old
notes. Our lenders under our senior credit facility, our senior term loans and
the lessor under our tax retention operating lease have agreed, under certain
conditions, to not declare due and to not require immediate payment of such
indebtedness until December 31, 2001 (the "forbearance").
Upon the occurrence of an event of default under the senior debt and our tax
retention operating lease and without the forbearance, or upon the expiration
of the forbearance, the respective lenders could elect to increase the interest
rate due and declare all amounts outstanding, together with accrued interest,
to be immediately due and payable. Substantially all of our assets are pledged
as collateral security for the senior credit facility, our senior term loans
and the tax retention operating lease. If we were unable to repay all
outstanding amounts under our senior debt, and tax retention operating lease
the lenders and other parties could proceed against the collateral granted to
them to secure that indebtedness, and any proceeds realized upon the sale of
this collateral would be used first to satisfy all amounts outstanding under
our senior credit facility, our senior term loans and tax retention operating
lease and thereafter, any of our other liabilities. In addition, we may be
prevented from making new borrowings or drawing down further on our senior
credit facility.
The holders of more than a majority of our old notes have agreed to waive
the default arising as a result of the failure to pay the old notes interest
payment due August 15, 2001.
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DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital currently consists of 30,000,000 shares of common
stock, par value $.001 per share, and 1,000,000 shares of preferred stock, par
value $.01 per share. As of the date of this prospectus and consent
solicitation, we had 15,015,317 shares of pre-reverse split common stock
outstanding and no shares of preferred stock were outstanding.
As part of our restructuring, our stockholders will be asked to increase our
authorized shares of common stock to 500 million shares. The number of
authorized preferred shares will remain at 1,000,000. Further, our stockholders
will be asked to approve a ten-for-one reverse split of our outstanding common
stock, reducing the common stock owned by our current holders to 1,501,532
shares.
Common stock
Each holder of common stock is entitled to one vote for each share held of
record on all matters presented to stockholders, including the election of
directors. In the event of a liquidation, dissolution or winding up of Aviation
Sales, the holders of common stock are entitled to share equally and ratably in
the assets of Aviation Sales, if any, remaining after paying all debts and
liabilities of Aviation Sales and the liquidation preferences of any
outstanding preferred stock. The common stock has no preemptive rights or
cumulative voting rights and no redemption, sinking fund or conversion
provisions.
Holders of common stock are entitled to receive dividends if, as and when,
declared by the board of directors out of funds legally available therefore,
subject to the dividend and liquidation rights of any preferred stock that may
be issued and outstanding and subject to any dividend restrictions in our
credit facilities. No dividend or other distribution (including redemptions and
repurchases of shares of capital stock) may be made, if after giving effect to
such distribution, we would not be able to pay our debts as they become due in
the usual course of business, or if our total assets would be less than the sum
of our total liabilities plus the amount that would be needed at the time of a
liquidation to satisfy the preferential rights of any holders of preferred
stock.
Preferred stock
Our board of directors is authorized, without further stockholder action, to
divide any or all shares of the authorized preferred stock into series and fix
and determine the designations, preferences and relative rights and
qualifications, limitations or restrictions thereon of any series so
established, including voting powers, dividend rights, liquidation preferences,
redemption rights and conversion privileges. As of the date of this prospectus
and consent solicitation, our board of directors has not authorized any series
of preferred stock, and there are no plans, agreements or understandings for
the authorization or issuance of any shares of preferred stock. The issuance of
preferred stock with voting rights or conversion rights may adversely affect
the voting power of common stock, including the loss of voting control to
others. The issuance of preferred stock may have the effect of delaying,
deferring or preventing a change in control of Aviation Sales.
Common stock purchase warrants
Each common stock warrant will entitle the holder thereof to purchase one
post-reverse split share of common stock at a price equal to $5.16 post-reverse
split for a period of five years commencing on the date they are issued. The
warrants are redeemable by us, at a redemption price of $0.001 per warrant, at
any time upon thirty days' prior written notice to the holders thereof, if the
average closing bid price of the common stock, as reported on the principal
exchange on which the common stock is traded, equals or exceeds $6.71 per share
for twenty consecutive trading days ending three days prior to the date of the
notice of redemption. The warrants to be issued in the exchange offer will not
trade separately from the new notes until . Pursuant to applicable federal
and state securities laws, in the event a current prospectus is not available,
the common stock purchase warrants may not be exercised by the holders thereof
and we will be precluded from
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redeeming the common stock purchase warrants. There can be no assurances that
we will not be prevented by financial or other considerations from maintaining
a current prospectus. Any warrant holder who does not exercise prior to the
redemption date, as set forth in our notice of redemption, will forfeit the
right to purchase the common stock underlying the warrants, and after the
redemption date or upon conclusion of the exercise period, any outstanding
warrants will become void and be of no further force or effect, unless extended
by our board of directors.
The number of shares of common stock that may be purchased is subject to
adjustment upon the occurrence of certain events including a dividend
distribution to our stockholders, or a subdivision, combination or
reclassification of the outstanding shares of our commons stock.
We may at any time, and from time to time, extend the exercise period of the
warrants, provided that written notice of such extension is given to the
warrant holders prior to the expiration of the date then in effect. Also, we
may reduce the exercise price of the warrants for limited periods or through
the end of the exercise period in accordance with the terms of our warrant
agreement with the warrant agent if deemed appropriate by our board of
directors. Any extension of the term and/or reduction of the exercise price of
the warrants may be subject to compliance with Rule 13e-4 under the Exchange
Act including the filing of a Schedule TO. Notice of any extension of the
exercise period and/or reduction of the exercise price will be given to the
warrant holders. We do not presently contemplate any extension of the exercise
period nor do we contemplate any reduction in the exercise price of the
warrants. Factors which our board of directors may consider in taking such
action include the current market conditions, the price of the common stock and
our need for additional capital.
Presently outstanding options and warrants
As of the date of this prospectus and consent solicitation, there were
issued and outstanding (i) warrants to purchase an aggregate 129,000 pre-
reverse split shares of our common stock held by the lender under our senior
credit facility, (ii) warrants to purchase 1,508,334 pre-reverse split shares
of our common stock, and (iii) options to purchase 2,732,500 pre-reverse split
shares of our common stock. We are contractually obligated to file a
registration statement to register the resale of the shares of common stock
underlying our currently outstanding options and warrants and we intend to file
a registration statement to register these shares in the near future.
Provisions of the certificate and bylaws
A number of provisions of our certificate of incorporation and bylaws
concern matters of corporate governance and the rights of stockholders. Certain
of these provisions, as well as the ability of our board of directors to issue
shares of preferred stock and to set the voting rights, preferences and other
terms thereof, may be deemed to have an anti-takeover effect and may discourage
takeover attempts not first approved by the board of directors (including
takeovers which certain stockholders may deem to be in their best interests).
To the extent takeover attempts are discouraged, temporary fluctuations in the
market price of the common stock, which may result from actual or rumored
takeover attempts, may be inhibited. These provisions, together with the
classified board of directors and the ability of the board to issue preferred
stock without further stockholder action, also could delay or frustrate the
removal of incumbent directors or the assumption of control by stockholders,
even if such removal or assumption would be beneficial to our stockholders.
These provisions also could discourage or make more difficult a merger, tender
offer or proxy contests, even if they could be favorable to the interests of
stockholders, and could potentially depress the market price of the common
stock. The board of directors believes that these provisions are appropriate to
protect the interest of us and all of our stockholders.
Issuance of Rights. The certificate authorized the board of directors to
create and issue rights (the "rights") entitling the holders thereof to
purchase from us shares of capital stock or other securities. The times at
which, and the terms upon which, the rights are to be issued may be determined
by the board of directors and set forth in the contracts or instruments that
evidence the rights. The authority of the board of directors with respect to
the rights includes, but is not limited to, the determination of (1) the
initial purchase price per share of the capital stock or other securities of
Aviation Sales to be purchased upon exercise of the rights,
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(2) provisions relating to the times at which and the circumstances under which
the rights may be exercised or sold or otherwise transferred, either together
with or separately from, any other securities of Aviation Sales,
(3) antidilutive provisions which adjust the number or exercise price of the
rights or amount or nature of the securities or other property receivable upon
exercise of the rights, (4) provisions which deny the holder of a specified
percentage of the outstanding securities of Aviation Sales the right to
exercise the rights and/or cause the rights held by such holder to become void,
(5) provisions which permit Aviation Sales to redeem the rights and (6) the
appointment of a rights agent with respect to the Rights.
Meetings of Stockholders. The bylaws provide that a special meeting of
stockholders may be called only by the board of directors unless otherwise
required by law. The bylaws provide that only those matters set forth in the
notice of the special meeting may be considered or acted upon at that special
meeting, unless otherwise provided by law. In addition, the bylaws set forth
certain advance notice and informational requirements and time limitations on
any director nomination or any new business which a stockholder wishes to
propose for consideration at an annual meeting of stockholders.
No Stockholder Action By Written Consent. The certificate provides that any
action required or permitted to be taken by our stockholders at an annual or
special meeting of stockholders must be effected at a duly called meeting and
may not be taken or effected by a written consent of stockholders in lieu
thereof.
Amendment of the Certificate. The certificate provides that an amendment
thereof must first be approved by a majority of the board of directors and
(with certain exceptions) thereafter approved by the holders of a majority of
the total votes eligible to be cast by holders of voting stock with respect to
such amendment or repeal; provided, however, that the affirmative vote of 80%
of the total votes eligible to be cast by holders of voting stock, voting
together as a single class, is required to amend provisions relating to the
establishment of the board of directors and amendments to the certificate.
Amendments of Bylaws. The certificate provides that the board of directors
or the stockholders may amend or repeal the bylaws. Such action by the board of
directors requires the affirmative vote of a majority of the directors then in
office. Such action by the stockholders requires the affirmative vote of the
holders of at least two-thirds of the total votes eligible to be cast by
holders of voting stock with respect to such amendment or repeal at an annual
meeting of stockholders or a special meeting called for such purposes, unless
the board of directors recommends that the stockholders approve such amendment
or repeal at such meeting, in which case such amendment or repeal shall only
require the affirmative vote of a majority of the total votes eligible to be
cast by holders of voting stock with respect to such amendment or repeal.
New York Stock Exchange
The common stock is traded on the NYSE under the symbol "AVS."
Transfer agent and warrant agent
The transfer agent for the common stock and the warrant agent for our common
stock purchase warrants is Continental Stock Transfer & Trust Company, 2
Broadway, New York, New York 10004.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material United States federal
income tax consequences to us and to United States holders and Non-U.S. holders
of the old notes of the exchange offer and of the acquisition, ownership and
disposition of the new notes. A United States holder is (1) an individual
citizen or resident of the United States; (2) a corporation created or
organized in or under the laws of the United States, a state or the District of
Columbia; (3) a trust where one or more United States persons have the
authority to control all substantial decisions of the trust and a court within
the United States can exercise primary supervision over the administration of
the trust; and (4) an estate subject to federal income taxation on its
worldwide income. A Non-U.S. holder is an individual, corporation, trust or
estate not described in (1), (2), (3) or (4).
A partnership, whether organized in or outside the laws of the United
States, a state or the District of Columbia, is not subject to federal income
taxation and, instead, the United States taxes the income of the partnership to
the partners as if the partners realized the income actually realized by the
partnership. In addition, beneficiaries of a trust or estate are generally
taxed on the income of trusts or estates to the extent that income is currently
distributed to the beneficiaries. The discussion below generally applies to
such partners or beneficiaries depending on their status as a United States
holder or a Non-U.S. holder.
This discussion does not purport to describe all of the tax considerations
that may be relevant to a holder of old notes. The following summary deals only
with old notes that are, and new notes that will be, held as capital assets by
United States holders, and does not deal with persons that are subject to
special tax rules, such as:
. dealers or traders in securities or currencies;
. financial institutions or other United States holders that treat income
in respect of the old notes or new notes as financial services income;
. insurance companies;
. tax-exempt entities;
. persons holding old notes or new notes as a part of a straddles,
conversion transaction or other arrangement involving more than one
position; or
. persons whose "functional currency" is not the U.S. dollar.
The discussion below is based upon the provisions of the United States
Internal Revenue Code of 1986, as amended, and regulations, rulings and
judicial decisions thereunder as of the date of this prospectus and consent
solicitation; any of these authorities may be repealed, revoked or modified,
perhaps with retroactive effect, so as to result in United States federal
income tax consequences different from those discussed below.
Because United States tax consequences may differ from one holder to the
next, the discussion set out below does not purport to describe all of the tax
considerations that may be relevant to you and your particular situation.
Accordingly, you are advised to consult your own tax advisor as to the United
States federal, state, local and other tax consequences of the exchange offer
and of the acquisition, ownership and disposition of new notes. The statements
of United States tax law set out below are based on the laws and
interpretations in force as of the date of this prospectus and consent
solicitation, and are subject to changes, if any, which could occur after that
date.
Classification of the new notes as equity
Although the new notes will be issued in the form of debt securities, the
new notes should be treated as equity securities (capital stock) for federal
income tax purposes. This classification is likely under the applicable legal
authority primarily because we do not have an unconditional obligation to pay
any money to the holders of the new notes and, at our election, we can satisfy
all obligations under the new notes through the
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issuance of our common stock. The PIK notes which are issued in connection with
any interest which is paid in kind will likely be treated as equity securities
also, for the same reasons as the new notes issued pursuant to the exchange
offer. We will classify the new notes as equity securities and this
classification will be binding on a holder of the new notes unless the holder
discloses on his tax returns that it is treating the new notes inconsistently
with the foregoing classification. We anticipate that we will classify the PIK
notes as equity securities. The classification of the new notes by us and the
holders is not necessarily binding on the IRS. The discussion below assumes
that the new notes (and PIK notes) will be treated as equity securities for
federal income tax purposes. You are encouraged to consult your own tax advisor
as to whether the new notes (and PIK notes) will be classified as equity
securities for tax purposes.
Tax consequences to us
If the exchange offer is consummated, we expect to realize cancellation of
indebtedness income for federal income tax purposes. We believe that available
federal tax deductions and exclusions should substantially mitigate the amount
of any federal tax liability we might otherwise incur as a result of such
income. If these deductions and exclusions are not available in the amounts
which we expect, however, we may incur substantial federal income tax
liabilities. To the extent there are any net operating losses available after
offsetting the cancellation of indebtedness income, the utilization of such
remaining net operating losses will be limited under Section 382.To the extent
that we use net operating loss carryforwards to offset cancellation of
indebtedness income, ten percent of the amount of the carryforwards so used are
included in the alternative minimum tax base, which is assessed at the rate of
twenty percent. The net operating loss carryforwards so used may therefore be
subject to a tax of two percent of the total amount. The cancellation of
indebtedness income will also give rise to taxable income for state income tax
purposes. Such cancellation of indebtedness income may result in substantial
state income tax liabilities. Interest payments on the new notes (and PIK
notes) will not be deductible by us for federal income tax purposes. The
redemption or conversion of the new notes in the future and the exercise of
warrants will not result in the company's incurring taxable income for federal
income tax purposes.
Tax consequences to United States holders
Tax consequences of the exchange
Qualification for recapitalization treatment.
The exchange of new notes for old notes pursuant to the exchange offer
should be treated as a non-taxable recapitalization, which is a type of
reorganization within the meaning of Section 368(a)(1)(E) of the Internal
Revenue Code. An exchange of new notes for old notes will be treated as a
recapitalization only if both the old notes are treated as "securities" and the
new notes are treated as "stock" or "securities" for purposes of the
reorganization provisions of the Internal Revenue Code.
The term "securities" is not defined in the Internal Revenue Code or in the
regulations promulgated thereunder. If either the old notes or new notes are
not treated as stock or securities, then the exchange would be treated as a
taxable transaction. We believe that the old notes will be treated as
securities and the new notes will be treated as stock or securities and that
the exchange will be treated as a recapitalization, but you are encouraged to
consult your own tax advisor as to whether an exchange of new notes for old
notes will be treated as a recapitalization. The tax consequences of the
exchange described below assumes that the exchange will be treated as a
recapitalization.
Nonrecognition of gain or loss.
The exchanging United States holders generally will not be required or
permitted to recognize or report any taxable gain or loss on the exchange, but
if "boot" is received by a United States holder in a recapitalization such as
the exchange, the United States holder will be required to recognize and report
taxable gain to the extent of the lower of the gain realized in the exchange,
if any, or the boot received in the exchange.
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For purposes of the exchange, boot includes the receipt of cash or property
other than the new notes, the common stock and warrants. The gain realized is
the amount by which the fair market value of the new notes, the common stock,
boot, and the warrants received in the exchange exceeds the tax basis of the
old notes. Amounts received by the exchanging United States holders which could
be attributable to accrued interest do not constitute boot.
Accrued interest.
For purposes of the information reporting and backup withholding rules, we
intend to allocate the cash, new notes, common stock and warrants issued in
exchange for the old notes entirely to the principal of the old notes for which
they are exchanged to the extent that the fair market value of those items does
not exceed the principal amount of the old notes. To the extent that the fair
market value of those items exceeds the principal amount of the old notes, the
excess will be allocated to interest accrued on the old notes, but we do not
expect that the value of these items will be such that it will result in the
allocation of any amounts to said accrued interest. If this allocation is
respected, accrual-basis holders might be able to recognize a loss to the
extent of any interest income on the old notes previously accrued by the holder
but which is not treated as paid in the exchange. We cannot assure you,
however, that the IRS will respect this allocation for federal income tax
purposes. If the items received in exchange for the old notes are treated as
received in whole or in part in satisfaction of accrued but unpaid interest on
the old notes, then the amount so treated would be taxable to the holder as
interest income if it has not been previously included in the holder's gross
income.
Tax basis, holding period and carryover of market discount.
The aggregate tax basis of the new notes, common stock and warrants received
in the hands of a United States holder will be equal to the adjusted tax basis
of the old notes transferred in the exchange, increased by the amount of gain
recognized, if any, by the United States holder in the exchange, and decreased
by the amount of any cash received by the United States holder in the exchange.
This aggregate basis is then allocated among the new notes, common stock and
warrants received in proportion to the relative fair market values of each of
these items. The holding period of the new notes, common stock and warrants
received will include the holding period of the old notes surrendered in the
exchange. Any accrued market discount on the old notes at the time of the
exchange will carry over to the new notes, common stock and warrants, will be
allocated among these items in proportion to the relative fair market values of
each of these items and will be subject to recognition as ordinary income upon
the disposition of these items unless the holder of the old notes included the
accrued market discount in income in accordance with an election to do so under
the Internal Revenue Code. An old note generally will be considered to have
been acquired with market discount if the issue price of the old note at the
time of acquisition exceeded the initial tax basis of the old note in the hands
of the United States holder by more than a specified de minimis amount. Market
discount accrues in equal amounts during each complete accrual period, unless
the United States holder elects to accrue the market discount using a constant-
yield method.
Tax consequences of the common stock
Rules generally relating to distributions with respect to stock.
When a corporation makes a distribution with respect to its capital stock,
the amount of the distribution received by the stockholder will be treated as a
dividend which will be taxable to the stockholder as ordinary income, to the
extent it is paid from the current or accumulated earnings and profits of the
corporation. The amount of a distribution made in property other than cash is
the fair market value of that property at the time of the distribution. United
States holders that are corporations are entitled to a dividends-received
deduction subject to certain limitations. Earnings and profits for this purpose
consists of an amount based on the taxable income of the corporation as
adjusted by the application of detailed rules set forth in tax regulations. A
distribution will be treated as a dividend even though we have an overall
deficit in our earnings and profits to the extent we have positive earnings and
profits in the year in which we make the distribution (i.e., current earnings
and profits). If the amount of a distribution exceeds the current and
accumulated earnings and profits
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of the corporation, the excess will be treated first as a tax-free return of
investment up to the basis of the stock, and this amount will reduce the
stockholder's tax basis in the stock. If the distribution exceeds the current
and accumulated earnings and profits, and the stockholder's tax basis in the
stock, this excess amount will be treated as capital gain to the stockholder.
If the stockholder is a U.S. corporation, the stockholder would generally be
able to claim a deduction equal to a portion of the amount of the distribution
treated as a dividend under the foregoing rules.
The foregoing rules will apply to any distributions made with respect to the
common stock of the company. These rules will also apply to distributions made
or treated as made with respect to the new notes and PIK notes. See "Tax
consequences of the new notes"--"Interest payments in cash"--"PIK notes"--
"Redemption premium."
Sale of common stock.
United States holders will generally recognize capital gain or loss on a
sale or exchange of common stock. The gain or loss will equal the difference
between the proceeds received and the adjusted tax basis in the stock. The gain
or loss recognized by a United States holder on a sale or exchange of stock
will be long-term capital gain or loss if the holding period for the stock is
more than one year. However, any accrued market discount which carries over to
the common stock as a result of the exchange of the old notes will be
recognized as ordinary income upon sale. See "Tax consequences of the
exchange--Tax basis, holding period and carryover of market discount."
Tax consequences of the warrants
Sale of warrants.
United States holders will generally recognize capital gain or loss on a
sale or exchange of warrants. The gain or loss will equal the difference
between the proceeds received and the adjusted tax basis in the warrants. The
gain or loss recognized by a United States holder on a sale or exchange of
warrants will be long-term capital gain or loss if the holding period for the
warrants is more than one year. However, any accrued market discount which
carries over to the warrants as a result of the exchange of the old notes will
be recognized as ordinary income upon sale. See "Tax consequences of the
exchange--Tax basis, holding period and carryover of market discount."
Exercise of the warrants.
United States holders will not recognize any taxable income upon exercise of
the warrants. Upon exercise of the warrants, the tax basis of the common stock
received upon exercise shall be equal to the sum of the adjusted tax basis of
the warrants plus the price paid for purchase of the common stock upon
exercise. The holding period of the common stock will not begin until the
warrants are exercised.
Tax consequences of the new notes
Interest payments in cash.
Since the new notes will be treated as capital stock for federal income tax
purposes, interest on a new note that is paid in cash will be treated as a
distribution by us with respect to our capital stock. These payments will be
treated as taxable dividends to the extent of our current and accumulated
earnings and profits and, to the extent they exceed said earnings and profits,
the payments will reduce the tax basis of the new notes and after said basis is
reduced to zero, result in capital gain to the holders. The general rules
relating to earnings and profits and distributions are described above under
"Tax consequences of the common stock--Rules generally relating to
distributions with respect to stock." We do not currently expect to pay
interest in cash.
PIK notes.
If the new notes are deemed to be treated as preferred stock for federal
income tax purposes at the time PIK notes are issued with respect to the new
notes, a United States holder could be treated as receiving a
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distribution equal to the fair market value of the PIK notes, and such a
distribution could be taxed as a dividend under the rules discussed above.
Since the PIK notes are likely to be treated as equity securities for
federal income tax purposes, then the above rules would also apply to PIK notes
as if the PIK notes were new notes. Thus, for example, the issuance of PIK
notes to United States holders of PIK notes could be treated as distributions
subject to tax as dividends.
For purposes of these rules, preferred stock is generally stock that enjoys
certain limited rights and privileges as compared to other classes of stock of
a corporation, but which does not participate in corporate growth to any
significant extent. IRS regulations indicate that whether stock is preferred
stock is made without regard to any right to convert such stock into another
class of stock of the corporation. Whether the new notes or PIK notes are
preferred stock or stock other than preferred stock will be determined for this
purpose at the time PIK notes are issued.
If the PIK notes are not treated as a taxable distribution under the
foregoing rules but instead as a non-taxable distribution of stock (i.e., PIK
notes) with respect to stock (i.e., the new notes or PIK notes), a United
States holder's tax basis in the new notes or PIK notes with respect to which
the distribution is made shall be allocated between that property and the non-
taxable distribution (i.e., PIK notes) in proportion to their fair market
values on the date of the distribution.
Redemption premium.
In addition to the foregoing tax consequences, the classification of the new
notes or PIK notes as equity might subject the new notes or PIK notes to
special tax rules relating to the accrual of redemption premiums relating to
preferred stock. If these rules apply, the excess of the total amounts payable
with respect to the new notes or PIK notes over the fair market value of the
new notes or PIK notes on the date of their issuance could be treated as
distributions to the holders over the term of the new notes, with the amount of
such distributions attributable to each tax period during the term of the new
notes or PIK notes being equal to an amount accrued at a constant rate of
interest which causes the present value of the total amounts payable with
respect to the new notes on their maturity date to equal the fair market value
of the new notes on the date of their issuance (this is referred to as a
constant-yield basis). For purposes of calculating these accruals, the
applicable interest rate and term of the notes are determined by assuming that
the Company will redeem the notes at the time and for the amount which will
minimize the overall yield relating to the new notes. If actual events are
inconsistent with these assumptions, then, solely for purposes of recalculating
accruals going forward, the new notes or PIK notes will be deemed to be retired
and exchanged for new notes or PIK notes with a revised set of assumptions that
would similarly minimize the yield of the notes thereafter, with subsequent
inconsistencies being treated in a similar manner. Other special rules might
apply with respect to any amounts payable under the notes which are deemed to
be contingent, such as the value of the common stock which would be issued by
the Company with respect to the new notes. The amounts of any deemed
distributions under the foregoing rules would be subject to the rules described
under "Tax consequences of the common stock--Rules generally relating to
distributions with respect to stock." These rules could result in recognition
of dividend income or capital gains income to the holders.
We have the right to redeem the new notes and PIK notes for cash. Applicable
regulations indicate that these redemption premium rules apply to the new notes
or PIK notes based upon a determination under all of the facts and
circumstances at the time either the new notes or PIK notes are issued whether
the redemption right is more likely than not to occur. The Company will make
this determination at the time the new notes or PIK notes are issued.
Our determination whether the new notes or PIK notes are subject to the
redemption premium rules will be binding on a holder of the new notes or PIK
notes unless the holder discloses on his tax return that it is treating the new
notes or PIK notes inconsistently with the foregoing determination. This
determination of
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whether these rules are applicable with respect to the new notes by us and the
holders is not necessarily binding on the IRS.
The treatment of the issuance of the PIK notes or the amount of any
redemption premium as a taxable or non-taxable distribution is not clear. In
addition, it is not clear whether or how these rules would apply to a United
States holder's increasing interest in our common stock during the holding
period of the new notes or PIK notes by reason of the fact the notes are
mandatorily exchangeable or convertible into common stock at maturity. You are
encouraged to consult your own tax advisor regarding these rules.
Changes in conversion ratio.
The terms of the new notes allow for changes in the conversion price under
certain circumstances and for the retirement of the notes. A change in
conversion price that allows a United States holder to receive more shares of
common stock on conversion may increase the United States holder's
proportionate interests in our earnings and profits or assets. In that case,
the United States holder would be treated as having received a distribution in
the form of our stock in an amount equal to the value of the increase in the
proportionate interest. Such a constructive stock distribution could be taxable
to the United States holder, although cash or other property is not actually
received. A taxable constructive stock distribution would result, for example,
if the conversion price is adjusted to compensate a United States holder for
distributions of cash or property to our stockholders. Not all changes in
conversion price that allow United States holders to receive more stock on
conversion, however, will increase a United States holder's proportionate
interest in the company. For instance, a change in conversion price could
simply prevent the dilution of a United States holder's interest upon a stock
split or other change in capital structure. Changes of this type, if made by a
bona fide, reasonable adjustment formula, are not treated as constructive stock
distributions. Conversely, if an event occurs that dilutes a United States
holder's interests and the conversion price is not adjusted, the resulting
increase in the proportionate interests of our stockholders holding common
stock could be treated as a stock distribution to them. Any constructive stock
distributions resulting from a change to, or failure to change, the conversion
price would be treated in the same manner as distributions paid in cash or
other property, such as those described in the section entitled "Tax
consequences of the common stock--Rules generally relating to distributions
with respect to stock." These rules could result in recognition of dividend
income or capital gains income to the holders.
Sale of the new notes or PIK notes.
A United States holder generally will recognize gain or loss on the sale of
a new note or PIK note in an amount equal to the difference between the amount
realized on the sale and the tax basis of the new note. Any gain or loss will
be capital gain or loss and will be long-term capital gain or loss if the
holding period of the new note or PIK note is more than one year. However, any
accrued market discount which carries over to the new notes as a result of the
exchange of the old notes will be recognized as ordinary income upon sale. See
"Tax consequences of the exchange--Tax basis, holding period and carryover of
market discount."
Redemption and conversion of the new notes or PIK notes.
The redemption of the new notes and PIK notes in exchange for cash and our
common stock should be treated as a recapitalization, which is a type of
reorganization within the meaning of Section 368(a)(1)(E) of the Internal
Revenue Code. The exchanging United States holders generally will recognize
taxable gain on the redemption to the extent of the lower of the gain realized
in the exchange, if any, or any "boot" received in the exchange. No loss can be
recognized on the exchange. For purposes of the exchange, boot includes the
receipt of cash paid in redemption of the new notes. The gain realized is the
amount by which the fair market value of the common stock and cash received in
the exchange exceeds the tax basis of the new notes. However, any accrued
market discount which carries over to the new notes as a result of the exchange
of the old notes will be recognized as ordinary income upon redemption for cash
and common stock. See "Tax consequences of the exchange--Tax basis, holding
period and carryover of market discount."
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The conversion of the new notes and PIK notes into common stock at the
maturity date should also be treated as a recapitalization, and no gain or loss
should be recognized by the holders of the new notes upon conversion. See "Tax
consequences of the new notes--Interest payments."
The tax basis of the common stock received in a redemption or conversion of
the new notes and PIK notes will be equal to the adjusted tax basis of the new
notes and PIK notes transferred in the exchange, and, in the case of a
redemption as opposed to the mandatory conversion at the maturity date, this
amount will be increased by gain recognized in the redemption and decreased by
cash received in the redemption. The holding period of the common stock
received upon a redemption or conversion will include the holding period of the
new notes or PIK notes surrendered in the exchange. Any accrued market discount
on the new notes at the time of the redemption or conversion should carry over
to the common stock and be subject to recognition as ordinary income upon the
disposition of the common stock to the extent not previously recognized.
The tax consequences of holding or selling common stock received in
connection with a conversion or redemption of the new notes and PIK notes will
be the same as in the case of the common stock originally received upon
exchange of the old notes. See "Tax consequences of the common stock" above.
Information reporting and backup withholding.
In general, information reporting requirements will apply:
. to payments of principal and interest made on a new note;
. to payments of the proceeds of a sale or exchange of a new note before
maturity,
. to payments of dividends on common stock; and
. to payments of the proceeds of a sale or exchange of common stock
that are made to a non-corporate United States holder. A "backup withholding"
tax will apply to such payments if the holder fails to provide a correct
taxpayer identification number or otherwise comply with applicable requirements
of the backup withholding rules. The backup withholding tax is not an
additional tax. Any amounts withheld under the backup withholding rules from a
payment to a United States holder will be allowed as a credit against the
holder's U.S. federal income tax liability and may entitle such holder to a
refund of such withheld amounts, provided the required information is furnished
to the Internal Revenue Service. The rate of any backup withholding is 30.5% in
2001, but the rate will be reduced gradually in years thereafter until it is
reduced to 28% in 2006.
Nonparticipation in the exchange offer
A United States holder that does not participate in the exchange offer and
instead retains its old notes will not recognize any gain or loss as a result
of the consummation of the exchange offer.
Tax treatment of the exchange offer to non-U.S. holders
The following discussion is a summary of the principal United States federal
income and estate tax consequences resulting from the exchange of the old notes
and ownership of the new notes and common stock by Non-U.S. holders. All of the
following may be subject to different rules in the case of Non-U.S. holders
that are residents of countries with which the United States has a tax treaty,
depending on the provisions of the particular treaty.
Gain or loss on exchange, disposition of the new notes, common stock or
warrants, or redemption or conversion of the new notes.
A Non-U.S. holder generally will not be subject to United States federal
income tax on gain or income realized on the exchange of the old notes or on
the sale, exchange, redemption or conversion of the new notes
146
or PIK notes, or on the sale or exchange of common stock or warrants, unless
gain or income is effectively connected with the conduct of a trade or business
in the United States by the Non-U.S. holder, or in the case of an individual
Non-U.S. holder such holder is present in the United States for 183 days or
more in the year a sale, exchange or redemption.
Withholding tax on distributions made with respect to the new notes or the
common stock.
Payments on the new notes, PIK notes and common stock which are treated as
dividends in accordance with the discussion above under Tax consequences to
U.S. holders--Tax consequences of the common stock and Tax consequences of the
new notes will be subject to gross withholding at the rate of 30%. This rate
may be reduced if the Non-U.S. holder is a resident of a country with which the
United States has a tax treaty which provides for reduced withholding taxes.
Estate taxes.
An individual Non-U.S. holder who is not considered to be domiciled in the
United States under the rules which apply to estate tax provisions of the
Internal Revenue Code generally will be subject to United States estate tax
upon his or her death with respect to the value of the new notes because they
are treated as equity securities, and also with respect to the common stock. It
is not clear whether United States estate tax would apply with respect to the
value of the warrants.
Information reporting and backup withholding.
In general, backup withholding and information reporting will not apply to
payments made by us or our paying agents, in their capacities as such, to a
non-U.S. holder if the holder has provided the required certification that it
is not a United States person as described above, provided that neither we nor
our paying agent has actual knowledge that the holder is a United States
person. Payments of the proceeds from a disposition by a Non-U.S. holder of a
new note or common stock made to or through a foreign office of a broker will
generally not be subject to information reporting or backup withholding.
However, information reporting will apply to those payments, if the broker is:
. a United States person;
. a controlled foreign corporation for U.S. federal income tax purposes;
. a foreign person 50% or more of whose gross income from all sources is
effectively connected with a U.S. trade or business for a specified
three-year period; or
. a foreign partnership, if at any time during its tax year, one or more
of its partners are U.S. persons, as defined in Treasury regulations,
who in the aggregate hold more than 50% of the income or capital
interest in the partnership or if, at any time during its tax year, the
foreign partnership is engaged in a U.S. trade or business;
unless (1) such broker has documentary evidence in its records that the
beneficial owner is not a United States person and certain other conditions are
met or (2) the beneficial owner otherwise establishes an exemption.
Payments of the proceeds from a disposition by a non-U.S. holder of a new
note or common stock made to or through the U.S. office of a broker is subject
to information reporting and backup withholding unless the statement that the
payee is not a United States person described above has been received (and the
payor does not have actual knowledge that the beneficial owner is a United
States person) or the holder or beneficial owner otherwise establishes an
exemption from information reporting and backup withholding.
147
BOOK-ENTRY SYSTEM--THE DEPOSITORY TRUST COMPANY
The new notes will be evidenced by a global security initially deposited
with DTC and registered in the name of Cede & Co., as DTC's nominee. Except as
set forth below, the global security may be transferred only to another nominee
of DTC or to a successor of DTC or its nominee.
Holders of the new notes may hold their interests in the global security
directly through DTC or indirectly through organizations which are participants
in DTC, called "participants." Transfers between participants will be affected
in accordance with DTC rules and will be settled in clearinghouse funds. The
laws of some states require that some persons take physical delivery of
securities in definitive form. As a result, holders may be unable to transfer
beneficial interests in the global security to those persons.
Holders that are not participants in the DTC system may beneficially own
interests in the global security held by DTC only through participants or
indirect participants, including banks, brokers, dealers, trust companies and
other parties that clear through or maintain a custodial relationship with a
participant. So long as Cede & Co., as the nominee of DTC, is the registered
owner of the global security, Cede & Co. will be considered the sole holder of
the global security for all purposes. Except as provided below, owners of
beneficial interests in the global security will not:
. be entitled to have certificates registered in their names;
. be entitled to receive physical delivery of certificates in definitive
form; and
. be considered registered holders of the new notes.
We will make payments of interest on and principal of and the redemption or
repurchase price of the global security to Cede & Co., the nominee for DTC, as
the registered holder of the global security. We will make these payments by
wire transfer of immediately available funds. Neither we, the trustee nor any
paying agent will have any responsibility or liability for:
. records or payments on beneficial ownership interests in the global
security; or
. maintaining, supervising or reviewing any records relating to those
beneficial ownership interests.
We have been informed that DTC's practice is to credit participants'
accounts on the payment date. These payments will be made in amounts
proportionate to participants' beneficial interests in the new notes. Payments
by participants to owners of beneficial interests in the new notes represented
by the global security held through participants will be the responsibility of
those participants.
We will send any redemption notices with respect to the new notes to Cede &
Co. We understand that if less than all of the new notes are being redeemed,
DTC's practice is to determine by lot the amount of the holdings of each
participant to be redeemed. We also understand that neither DTC nor Cede & Co.
will consent or vote with respect to the new notes. We have been advised that
under its usual procedures, DTC will mail an "omnibus proxy" to us as soon as
possible after the record date. The omnibus proxy assigns Cede & Co.'s
consenting or voting rights to those participants to whose accounts the
exchange notes are credited on the record date identified in a listing attached
to the omnibus proxy.
A person having a beneficial interest in new notes represented by the global
security may be unable to pledge that interest to persons or entities that do
not participate in the DTC system, or to take other actions in respect of that
interest, because that interest is not represented by a physical certificate.
DTC has advised us that it is:
. a limited purpose trust company organized under the laws of the State of
New York;
. a member of the Federal Reserve System;
148
. a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
. a "clearing agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to accounts of its participants. Some of
the participants, together with other entities, own DTC. Indirect access to the
DTC system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with a
participant, either directly or indirectly.
DTC is under no obligation to perform or continue to perform the above
procedures. DTC may discontinue these at any time. If DTC is at any time
unwilling or unable to continue as depository and a successor depository is not
appointed by us within 90 days, we will cause new 8% senior subordinated
convertible notes to be issued in definitive form in exchange for the global
security.
LEGAL MATTERS
The validity of the shares of our common stock, new notes, the subsidiary
guarantees and the amended old notes offered by this prospectus and consent
solicitation has been passed upon for us by Akerman, Senterfitt & Eidson, P.A.
The federal income tax consequences of the exchange offer have also been passed
upon by Akerman, Senterfitt & Eidson, P.A.
EXPERTS
The consolidated balance sheets of Aviation Sales Company as of December 31,
1999 and 2000 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000, have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their report with respect thereto
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing. Reference is made to said report which contains an
explanatory fourth paragraph with respect to our ability to continue as a going
concern.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports and other information with the
Securities and Exchange Commission. You may read and copy any reports,
statements or other information that we file with the SEC at the SEC's public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. You may also read and copy these
reports, statements or other information at the SEC's regional offices located
at 500 West Madison Street, Suite 1400, and Chicago, Illinois 60661-2511.
Copies of such information can also be obtained by mail from the public
reference room of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information
about the public reference rooms.
Our filings with the SEC are also available to the public from commercial
document retrieval services and at the web site maintained by the SEC at
"http://www.sec.gov." Reports, proxy statements and other information about us
may also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
149
We filed a registration statement on Form S-4 to register with the SEC, the
new notes, subsidiary guarantees, the common stock and the warrants to be
issued in the exchange offer and consent solicitation. This prospectus and
consent solicitation is a part of that registration statement. As allowed by
SEC rules, this prospectus and consent solicitation does not contain all of the
information you can find in the registration statement or the exhibits to the
registration statement.
We have not authorized anyone to give any information or make any
representation about the exchange offer and consent solicitation that is
different from, or in addition to, that contained in this prospectus and
consent solicitation or in any of the materials that we have incorporated into
this prospectus and consent solicitation. Therefore, if anyone gives you
information of this sort, you should not rely on it. The information contained
in this document speaks only as of the date of this document unless the
information specifically indicates that another date applies.
150
CONSOLIDATED FINANCIAL STATEMENTS OF AVIATION SALES COMPANY
AVIATION SALES COMPANY AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Years Ended December 31, 1998, 1999 and 2000:
Report of Independent Certified Public Accountants....................... F-2
Consolidated Balance Sheets at December 31, 1999 and 2000................ F-3
Consolidated Statements of Operations for the three years ended December
31, 2000................................................................ F-4
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 2000....................................................... F-5
Consolidated Statements of Cash Flows for the three years ended December
31, 2000 ............................................................... F-6
Notes to Consolidated Financial Statements............................... F-8
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts for the three years ended
December 31, 2000....................................................... F-34
Six Months Ended June 30, 2001 and 2000 (unaudited):
Condensed Consolidated Balance Sheets at June 30, 2001 and December 31,
2000.................................................................... F-35
Condensed Consolidated Statements of Operations for the six months ended
June 30, 2000 and 2001.................................................. F-36
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 2001 ................................................. F-37
Notes to Condensed Consolidated Financial Statements..................... F-38
Unaudited Pro Forma Condensed Consolidated Financial Statements:
Introduction to Unaudited Pro Forma Condensed Consolidated Financial
Statements.............................................................. P-1
Pro Forma Condensed Consolidated Statement of Operations for the year
ended December 31, 2000................................................. P-
Pro Forma Condensed Consolidated Statement of Operations for the six
months ended June 30, 2001.............................................. P-
Pro Forma Condensed Consolidated Balance Sheet at June 30, 2001.......... P-
Notes to Pro Forma Condensed Consolidated Financial Statements........... P-
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Aviation Sales Company:
We have audited the accompanying consolidated balance sheets of Aviation
Sales Company (a Delaware corporation) and subsidiaries as of December 31, 1999
and 2000, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 2000. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aviation Sales Company and
subsidiaries as of December 31, 1999 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Note 1
to the financial statements, the Company incurred net losses for the years
ended December 31, 1999 and 2000 and required cash to fund its operating
activities for each of the three years in the period ended December 31, 2000.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans are also discussed in Note 1. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statements is presented for purposes of complying with the Securities
and Exchange Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Miami, Florida,
March 30, 2001, (except
for the matters
discussed in the fourth
paragraph in Note 1 and
Note 7 as to which the
date is April 17, 2001
and for the matter
discussed in Note 11,
as to which the date is
April 19, 2001).
F-2
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
------------------
1999 2000
-------- ---------
(In thousands,
except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ 21,431 $ --
Accounts receivable, net of allowances of $9,593 and $7,454
in 1999 and 2000, respectively............................ 91,926 67,558
Inventories, net of reserves of $16,348 and $8,614 in 1999
and 2000, respectively ................................... 90,145 53,115
Deferred income taxes...................................... 2,292 --
Other current assets....................................... 37,032 10,784
-------- ---------
Total current assets....................................... 242,826 131,457
-------- ---------
EQUIPMENT ON LEASE, net of accumulated amortization........ 17,393 5,749
FIXED ASSETS, net.......................................... 64,309 65,770
AMOUNTS DUE FROM RELATED PARTIES........................... 2,099 1,792
OTHER ASSETS:
Goodwill, net.............................................. 51,241 41,390
Deferred financing costs, net.............................. 7,953 5,928
Notes receivable from KAV Inventory, LLC................... -- 29,400
Net assets of discontinued operations...................... 314,397 3,479
Other...................................................... 10,657 15,646
-------- ---------
Total other assets......................................... 384,248 95,843
-------- ---------
Total assets............................................... $710,875 $ 300,611
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................... $ 13,948 $ 30,214
Accrued expenses........................................... 27,587 27,725
Current maturities of notes payable........................ 3,887 29
Current maturities of capital lease obligations............ 84 178
Revolving loan............................................. 269,580 35,959
Customer deposits.......................................... 586 7,559
Other...................................................... -- 5,120
-------- ---------
Total current liabilities.................................. 315,672 106,784
-------- ---------
LONG-TERM LIABILITIES:
Senior subordinated notes.................................. 164,254 164,345
Notes payable, net of current portion...................... 1,066 16,498
Capital lease obligations, net of current portion.......... 4,093 3,852
Deferred income............................................ 1,113 36
Other long-term liabilities................................ 6,155 2,204
-------- ---------
Total long-term liabilities................................ 176,681 186,935
-------- ---------
Commitments and Contingencies..............................
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding, 15,000 shares designated
Series A Junior participating............................. -- --
Common stock, $.001 par value, 30,000,000 shares
authorized, 15,015,317 issued and outstanding at December
31, 1999 and 2000, respectively........................... 15 15
Additional paid-in capital................................. 150,288 150,288
Retained earnings (accumulated deficit).................... 68,219 (143,411)
-------- ---------
Total stockholders' equity................................. 218,522 6,892
-------- ---------
Total liabilities and stockholders' equity................. $710,875 $ 300,611
======== =========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
----------------------------------
1998 1999 2000
---------- ---------- ----------
(In thousands, except share
data)
Operating Revenues:
Sales, net............................... $ 177,279 $ 359,956 $ 333,289
Other.................................... 7,169 11,797 4,788
---------- ---------- ----------
Total operating revenues............... 184,448 371,753 338,077
Cost of sales.............................. 141,569 307,944 353,331
---------- ---------- ----------
Gross profit (loss)...................... 42,879 63,809 (15,254)
Operating expenses......................... 17,721 41,774 74,580
---------- ---------- ----------
Income (loss) from operations............ 25,158 22,035 (89,834)
Interest expense........................... 13,895 18,649 20,347
Other (income) expense..................... (196) (1,327) 925
---------- ---------- ----------
Income (loss) before income taxes, equity
income of affiliates and discontinued
operations.............................. 11,459 4,713 (111,106)
Income tax expense......................... 4,281 3,004 4,810
---------- ---------- ----------
Income (loss) before equity income of
affiliates and discontinued operations.. 7,178 1,709 (115,916)
Equity income of affiliates, net of income
tax....................................... 1,356 1,289 43
---------- ---------- ----------
Income (loss) from continuing
operations.............................. 8,534 2,998 (115,873)
Discontinued Operations:
Operations, net of income taxes.......... 16,959 (24,721) (23,432)
Loss on disposal, net of income taxes.... -- -- (72,325)
---------- ---------- ----------
Net income (loss)...................... $ 25,493 $ (21,723) $ (211,630)
========== ========== ==========
Basic Earnings (Loss) Per Share:
Income (loss) from continuing
operations.............................. $ 0.70 $ 0.22 $ (7.72)
Income (loss) from discontinued
operations.............................. 1.38 (1.78) (6.37)
---------- ---------- ----------
Net income (loss)...................... $ 2.08 $ (1.56) $ (14.09)
========== ========== ==========
Diluted Earnings (Loss) Per Share:
Income (loss) from continuing
operations.............................. $ 0.68 $ 0.21 $ (7.72)
Income (loss) from discontinued
operations.............................. 1.34 (1.77) (6.37)
---------- ---------- ----------
Net income (loss)...................... $ 2.02 $ (1.56) $ (14.09)
========== ========== ==========
Weighted average shares outstanding:
Basic.................................... 12,277,020 13,906,000 15,015,317
========== ========== ==========
Diluted.................................. 12,626,394 14,168,442 15,015,317
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained
Common Stock Additional Earnings Treasury Stock Total
------------------ Paid-in (Accumulated -------------------- Stockholders'
Shares Amount Capital Deficit) Shares Amount Equity
---------- ------ ---------- ------------ ---------- -------- -------------
(In thousands, except share data)
Balance as of December
31, 1997............... 13,362,568 $13 $ 72,962 $ 64,449 (1,111,562) $(16,145) $ 121,279
Net income............. -- -- -- 25,493 -- -- 25,493
Stock issued in
acquisition........... 182,143 -- 5,720 -- -- -- 5,720
Rescinded stock
grants................ (18,000) -- -- -- -- -- --
Stock options
exercised............. 100,660 -- 1,806 -- -- -- 1,806
Retirement of treasury
stock................. (1,111,562) (1) (16,144) -- 1,111,562 16,145 --
---------- --- -------- --------- ---------- -------- ---------
Balance as of December
31, 1998............... 12,515,809 12 64,344 89,942 -- -- 154,298
Net loss............... -- -- -- (21,723) -- -- (21,723)
Secondary stock
offering.............. 2,300,000 3 79,859 -- -- -- 79,862
Stock options
exercised............. 199,508 -- 6,085 -- -- -- 6,085
---------- --- -------- --------- ---------- -------- ---------
Balance as of December
31, 1999............... 15,015,317 15 150,288 68,219 -- -- 218,522
Net loss............... -- -- -- (211,630) -- -- (211,630)
---------- --- -------- --------- ---------- -------- ---------
Balance as of December
31, 2000............... 15,015,317 $15 $150,288 $(143,411) -- $ -- $ 6,892
========== === ======== ========= ========== ======== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December
31,
------------------------------
1998 1999 2000
--------- -------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 25,493 $(21,723) $(211,630)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Loss on disposal of discontinued operations.. -- -- 72,325
Depreciation and amortization................ 5,687 10,132 21,941
Write-off of fixed assets.................... -- 297 --
Proceeds from sale of equipment on lease, net
of gain..................................... 1,290 2,960 3,188
Gain on sale of fixed assets................. (72) (1,432) --
Equity (income) loss of affiliate, net of
income taxes................................ (1,356) (1,289) (43)
Provision for inventory obsolescence......... -- 12,814 3,525
Provision for doubtful accounts.............. 670 4,995 20,343
Write down of shareholder note............... -- -- 200
Loss on sale of joint venture................ -- -- 859
Deferred income taxes........................ (1,107) 3,174 1,492
(Increase) decrease in accounts receivable... 1,849 (46,894) 4,025
(Increase) decrease in inventories........... (37,304) (37,962) 35,472
(Increase) decrease in other current assets.. 180 (29,470) 26,248
(Increase) decrease in other non-current
assets...................................... (2,870) 289 (4,078)
Increase (decrease) in accounts payable...... 894 (3,369) 16,266
Increase (decrease) in accrued expenses...... (2,569) 7,289 11,696
Increase (decrease) in deferred income....... 409 (257) (1,077)
Increase (decrease) in other liabilities..... (72) 1,405 (3,457)
--------- -------- ---------
Net cash used in continuing operating
activities.................................. (8,878) (99,041) (2,705)
--------- -------- ---------
Net cash provided by (used in) discontinued
operations.................................. (73,312) (15,598) 50,678
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash used in acquisitions, net of cash
acquired.................................... (75,703) (18,080) --
Purchases of fixed assets.................... (5,381) (17,635) (9,802)
Purchases of equipment on lease.............. (23,411) (9,087) --
Proceeds from sale of fixed assets........... 751 -- --
Purchase of facility......................... -- (3,500) --
Proceeds from sale of land held for
investment.................................. -- 11,556 --
Purchase of land held for investment......... -- (10,124) --
Payments from related parties................ 687 105 106
Investment in joint venture.................. -- (2,500) (3,734)
Proceeds from sale of joint venture.......... -- -- 1,455
Net proceeds from the sale of discontinued
operations.................................. -- -- 175,315
--------- -------- ---------
Net cash provided by (used in) investing
activities.................................. (103,057) (49,265) 163,340
--------- -------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
AVIATION SALES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
For the Years Ended December
31,
------------------------------
1998 1999 2000
-------- --------- ---------
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of amounts under senior debt
facility..................................... 77,880 567,815 460,593
Proceeds from sale of common stock............ -- 79,862 --
Proceeds from issuance of senior subordinated
notes........................................ 164,002 -- --
Repayment of amounts under senior debt
facility..................................... (56,190) (472,242) (694,214)
Proceeds of term loan......................... -- -- 15,500
Proceeds from equipment loans................. 10,488 -- --
Payments on equipment loans................... (921) (627) (201)
Payments on capital leases.................... (41) (184) (147)
Stock options exercised....................... 1,806 5,220 --
Payment of deferred financing costs........... (7,478) (1,573) (10,525)
Payments on notes payable..................... -- (3,472) (3,750)
-------- --------- ---------
Net cash provided by (used in) financing
activities................................... 189,546 174,799 (232,744)
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... 4,299 10,895 (21,431)
-------- --------- ---------
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 6,237 10,536 21,431
-------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period....... $ 10,536 $ 21,431 $ --
======== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Notes received from sale of inventory to joint
venture...................................... $ -- $ -- $ 29,401
======== ========= =========
Value of warrants issued in connection with
origination of $15,500 term loan recorded as
deferred financing costs..................... $ -- $ -- $ 1,079
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid................................. $ 15,684 $ 32,817 $ 39,705
======== ========= =========
Income taxes paid............................. $ 18,669 $ 18,673 $ 1,028
======== ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Financial Amounts in Thousands, Except Per Share Data)
NOTE 1--GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
Aviation Sales Company ("ASC" or the "Company") is a Delaware corporation
which through its subsidiaries provides aircraft maintenance, repair and
overhaul services to commercial passenger airlines, air cargo carriers,
aircraft leasing companies, maintenance and repair facilities and aircraft
parts redistributors throughout the world. During 2000, the Company sold
substantially all of the assets of its parts redistribution operation, its new
parts distribution operation and its manufacturing operations. See Note 4 for
further discussion. The results of operations for these businesses are included
in the accompanying consolidated statements of operations as discontinued
operations.
On July 31, 1998, ASC acquired Whitehall Corporation ("Whitehall") for
consideration of 2,844 shares of ASC common stock. Under the terms of the
acquisition agreement, each share of Whitehall common stock was exchanged for
.5143 shares of ASC common stock. The acquisition of Whitehall has been
accounted for under the pooling of interests method of accounting. The
accompanying consolidated financial statements give retroactive effect to the
acquisition of Whitehall. All share amounts have been restated to include the
conversion of the Whitehall common stock to ASC common stock in the merger and
a two-for-one stock split effected by Whitehall in March 1997. The operations
of ASC and its other subsidiaries and Whitehall retroactively consolidated are
referred to herein as the operations of the Company.
SECONDARY OFFERING
On June 16, 1999, ASC closed a public offering of 2,000 shares of common
stock and on June 24, 1999, the underwriters of the public offering exercised
their option to purchase an additional 300 shares of common stock. The net
proceeds of the offering, $79,862, were used to repay senior indebtedness.
LIQUIDITY
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed in Notes 7
and 11, the Company was not in compliance at December 31, 1999 and March 31,
2000 with certain of the financial covenants contained in the Company's credit
agreement with its senior lenders and certain of the lease agreements to which
the Company is a party. On May 31, 2000, the Company amended and restated its
senior credit facility and amended certain of its lease agreements. These
agreements were further amended on June 25, 2000, September 30, 2000, November
28, 2000, February 14, 2001 and April 17, 2001. As discussed in Note 4, during
2000, the Company sold substantially all of the assets of its parts
redistribution operation, new parts distribution operation and manufacturing
operations. The proceeds from these sales were used to repay senior
indebtedness. In addition, in February 2000, the Company borrowed $15,500 under
a supplemental term loan with the financial institution that is the agent for
the revolving credit facility. In February 2001, the Company borrowed $10,000
under a term loan from a second financial institution. The proceeds from these
loans were used to repay senior indebtedness and for working capital purposes.
The revolving credit facility and the $15,500 term loan mature in July 2002 and
the $10,000 term loan matures in August 2002. As a result of the above
transactions, the outstanding balance on the revolving credit facility was
reduced from $269,580 as of December 31, 1999 to $35,959 as of December 31,
2000.
As of March 31, 2001, the Company has $2,200 of availability for borrowing
under its revolving credit facility. The Company has also recently closed (on a
temporary basis) one of its maintenance, repair and overhaul ("MR&O")
facilities, consolidated the operations of one of its component overhaul
businesses from two facilities to one, and reduced its headcount at certain of
its other MR&O facilities in order to lower its
F-8
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
operating expenses. The Company is also actively considering selling one or
more additional operations, or the sale of additional securities, in order to
repay additional debt and to fund the working capital requirements of its
operations. While the Company expects to be able to meet its working capital
requirements from its available resources, there can be no assurance that the
Company will have sufficient working capital to meet its obligations. The
Company incurred net losses for the years ended December 31, 1999 and 2000 and
required cash to fund its operating activities for the years ended December 31,
1998, 1999 and 2000. As a result of these matters the Company's auditors have
issued their opinion with a going concern qualification. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Principal estimates made by the Company include the estimated losses on
disposal of discontinued operations, the allowance to reduce inventory to the
lower of cost or net realizable value, the estimated profit recognized as
aircraft maintenance, design and construction services are performed, the
allowance for doubtful accounts and notes receivable, medical benefit accruals,
the estimated fair value of the facilities under operating lease discussed in
Note 11, and the allowances for litigation and environmental costs. A principal
assumption made by the Company is that inventory will be utilized and realized
in the normal course of business and may be held for a number of years.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries (collectively the "Company").
Investments in joint ventures are accounted for under the equity method of
accounting. All significant intercompany transactions and balances have been
eliminated.
RECLASSIFICATIONS
Assets, liabilities, revenues and expenses of discontinued operations have
been separately reclassified in the 1999 and 1998 consolidated financial
statements. Certain other prior year amounts included in the accompanying
consolidated financial statements have been reclassified to conform with the
2000 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all deposits with an original maturity of three months
or less to be cash equivalents. Cash and cash equivalents at December 31, 1999
include cash held by the Company in demand deposit accounts.
REVENUE RECOGNITION
Revenues from aircraft maintenance service are generally recognized when
services are performed and unbilled receivables are recorded based upon the
percentage of completion method. Unbilled receivables are billed on the basis
of contract terms (which are generally on completion of an aircraft) and
deliveries. These service fees are recorded in revenue over the course of the
contract as the services are rendered. Gain on sale of equipment on lease is
included in other revenue in the accompanying consolidated statements of
operations.
F-9
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company exchanges rotable parts in need of service or overhaul for new,
overhauled or serviceable parts in its inventory for a fee. Fees on exchanges
are recorded as sales at the time the unit is shipped.
With respect to discontinued business, repairs and sales of aircraft parts
are recognized as revenue when a unit is shipped and title has passed to the
customer or when a repaired unit is returned to the customer. Transfers of
inventory to customers which include a related acquisition of inventory from
the same third party for a similar amount are not recognized as revenue at the
time of transfer. Certain of the Company's discontinued operations also
warehoused and sold inventories on behalf of others under consignment
arrangements. Sales of aircraft parts from consignment inventories were
recorded as revenue upon shipment of the unit. The Company also performs
inventory repair management and warehouse management services for customers on
a contractual basis.
INVENTORIES
Inventories, which consist primarily of new, overhauled, serviceable and
repairable aircraft parts, are stated at the lower of cost or market on
primarily a specific identification basis. In instances where bulk purchases of
inventory items are made, cost is determined based upon an allocation by
management of the bulk purchase price to the individual components.
Expenditures required for the recertification of parts are capitalized as
inventory and are expensed as the parts associated with the recertification are
sold. Cost of inventory includes raw materials, labor and overhead. The Company
maintains raw materials, work in progress and finished goods inventories in
support of its operations. At December 31, 1999 and 2000, inventories consisted
of the following:
1999 2000
------- -------
Finished goods............................................... $35,862 $34,112
A-300 aircraft............................................... 45,709 3,150
Work in progress............................................. 3,848 15,415
Raw materials................................................ 4,726 438
------- -------
$90,145 $53,115
======= =======
The Company provides an allowance to reduce the inventory carrying value to
the lower of cost or net realizable value. In determining net realizable value,
the Company assumes the inventory will be utilized in the normal course of
business and not on a liquidation basis. Such inventory may be held for a
number of years.
EQUIPMENT ON LEASE
The Company leases engines and spare parts inventories to customers in the
airline industry on a worldwide basis through operating leases. Operating lease
income is recognized on a straight-line basis over the term of the underlying
leases and is included in other operating revenue in the accompanying
consolidated statement of operations. The cost of equipment on lease is
amortized, principally on a straight-line basis, to the estimated remaining net
realizable value over the shorter of the lease term or the economic life of the
equipment.
F-10
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FIXED ASSETS, NET
Fixed assets are stated at cost, and at December 31, 1999 and 2000,
consisted of the following:
Depreciable
Life 1999 2000
------------------- -------- --------
Land.................................. $ 71 $ 114
Buildings............................. 29 years 5,553 5,709
Machinery and equipment............... 3 to 7 years 39,981 36,967
Furniture and fixtures................ 3 to 5 years 3,179 11,715
Leasehold improvements................ Shorter of lease
term or useful life 35,918 40,473
-------- --------
84,702 94,978
Accumulated depreciation and
amortization......................... (20,393) (29,208)
-------- --------
$ 64,309 $ 65,770
======== ========
For financial reporting purposes, the Company provides for depreciation and
amortization of fixed assets using the straight-line method at annual rates
sufficient to amortize the cost of the assets less estimated salvage values
over their estimated useful lives. Maintenance and repair expenditures are
charged to expense as incurred, and expenditures for improvements and major
renewals are capitalized. The carrying amounts of assets which are sold or
retired and the related accumulated depreciation are removed from the accounts
in the year of disposal, and any resulting gain or loss is reflected in income.
Depreciation and amortization expense amounted to $2,707, $5,061 and $8,815,
for the years ended December 31, 1998, 1999 and 2000, respectively.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants ("ACSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 establishes criteria for determining
which costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. The Company adopted SOP 98-
1 prospectively on January 1, 1999. The adoption of SOP 98-1 did not have a
material effect on the Company's financial position or results of operations.
Impairment of long-lived assets is recognized when events or changes in
circumstances indicate that the carrying amount of the asset, or related groups
of assets, may not be recoverable and the Company's estimate of undiscounted
cash flows over the assets' remaining estimated useful life are less than the
assets' carrying value. Measurement of the amount of impairment may be based
upon appraisals, market values of similar assets or estimated discounted future
cash flows resulting from the use and ultimate disposition of the asset.
INVESTMENTS
During 1994, Whitehall obtained a 40% ownership interest in a joint venture
involved in the development of aircraft-related technology for an initial
investment of $1. The Company accounts for its investment in the joint venture
under the equity method. In 1994, Whitehall loaned $2,000 to the joint venture,
which is evidenced by a promissory note which accrues interest at a maximum
rate of 5% per annum. Principal and accrued interest became due on January 5,
1999. During February 2000, management elected to convert the then outstanding
note and accrued interest balance into a capital contribution. During May 2000,
the Company liquidated its investment in the joint venture. In connection with
the disposition of the joint venture, the Company recorded a charge of $859,
which is included in other (income) expense in the accompanying consolidated
statement of operations.
F-11
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 1999, the Company obtained a 50% interest in a limited liability
corporation that designs, manufactures and installs an FAA approved conversion
kit that converts certain Boeing 727 aircraft from passenger configuration to
cargo configuration. The initial investment was $2,500. During 2000, the
Company invested an additional $3,734 in the form of cash, advances and
services. The Company accounts for this investment under the equity method.
The total carrying value of the equity investments, including Whitehall
notes receivable and accrued interest, at December 31, 1999 and 2000 was $7,647
and $6,234, respectively, and is included in other assets in the accompanying
consolidated balance sheets. Summarized balance sheet information for the
equity investments as of December 31, 1999 and 2000 is as follows:
1999 2000
------- -------
Current assets.............................................. $14,741 $ --
Noncurrent assets........................................... 3,150 13,234
Current liabilities......................................... 3,622 1,234
Noncurrent liabilities...................................... 2,000 --
Summarized results of operations for the equity investments for the years
ended December 31, 1998, 1999 and 2000 are as follows:
1998 1999 2000
------- ------- ----
Net Sales............................................... $45,483 $38,338 $725
Gross profit............................................ 7,754 7,341 --
Net income.............................................. 5,557 5,298 --
INTANGIBLE ASSETS
The costs associated with obtaining financing are included in the
accompanying consolidated balance sheets as deferred financing costs and are
being amortized over the terms of the loans to which such costs relate.
Amortization of deferred financing costs included in continuing operations for
the years ended December 31, 1998, 1999 and 2000 was $460, $510 and $2,622,
respectively, and is included in interest expense in the accompanying
consolidated statements of operations. Amortization of deferred financing costs
included in discontinued operations for the years ended December 31, 1998, 1999
and 2000 was $489, $1,214 and $11,039, respectively. During 2000, the Company
completed the sales of certain of its operations and assets and the liquidation
of a joint venture, and used the proceeds to repay senior indebtedness
outstanding under the credit facility. See Notes 4 and 7. As a result of these
dispositions, the Company's commitment under its credit facility was reduced
and the Company wrote off the deferred financing costs of $5,407 that related
to that reduction in the quarter ended December 31, 2000, of which $1,074 is
included in amortization of deferred financing costs in continuing operations
and $4,333 is included in amortization of deferred financing costs in
discontinued operations. See Note 7. The cost and accumulated amortization of
deferred financing costs as of December 31, 1999 and 2000 is as follows:
1999 2000
------- -------
Original basis............................................. $10,951 $22,587
Accumulated amortization................................... (2,998) (16,659)
------- -------
$ 7,953 $ 5,928
======= =======
The excess of the purchase price over the fair values of the net assets
acquired from acquisitions of businesses has been recorded as goodwill and is
being amortized on a straight-line basis over 20 years.
F-12
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Effective January 1, 1999, the Company revised the estimated fair market values
allocated to goodwill and inventories relating to an acquisition accounted for
under the purchase method. This revision resulted in a reduction in goodwill
and increase in inventories of $1,410. Amortization expense for the years ended
December 31, 1998, 1999 and 2000 was $784, $2,360 and $9,852, respectively.
Goodwill and accumulated amortization at December 31, 1999 and 2000 are as
follows:
1999 2000
------- -------
Original basis............................................. $54,216 $46,855
Accumulated amortization................................... (2,975) (5,465)
------- -------
$51,241 $41,390
======= =======
The Company continually evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful life of intangible
assets or whether the remaining balance of intangible assets should be
evaluated for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the intangible assets in
measuring whether there is an impairment. Measurement of the amount of
impairment may be based upon appraisals, market values of similar assets or
estimated discounted cash flow resulting from the use and ultimate disposition
of the asset. In April 2000, a customer which represented a significant portion
of the operations at one of the Company's heavy airframe maintenance facilities
filed for protection under the U.S. bankruptcy code. As a result of this event,
the Company has temporarily closed this facility and has determined that the
goodwill relating to this facility and certain capitalized contract costs
associated with the customer are impaired. Accordingly, during the quarter
ended December 31, 2000, the Company recorded a charge of $7,808 to write off
the carrying value of the goodwill and contract costs, which is included in
operating expenses in the accompanying consolidated statement of operations for
the year ended December 31, 2000. The Company has determined that no other
impairments have occurred.
RECENTLY ISSUED ACCOUNTING STANDARDS
Notes receivable is comprised of notes due from KAV Inventory, LLC ("KAV"),
a 50% owned limited liability company which acquired all of the aircraft and
engine spare parts inventory and the engine inventory of the Company's
redistribution operation as discussed in Note 4. These notes bear interest at
14% and are subordinated in all respects to certain institutional financing of
KAV. Management does not expect to receive any payments under the notes during
2001. Because of the contingencies discussed in Note 4, recognition of interest
income under the notes will be deferred and recognized as collected following
collection of all outstanding principal amounts.
DEFERRED INCOME
Advance payments and deposits received on operating leases are initially
deferred and subsequently recognized as the Company's obligations under the
lease agreements are fulfilled.
ENVIRONMENTAL COSTS
Environmental expenditures that relate to current operations are expensed as
incurred. Remediation costs that relate to existing conditions caused by past
operations are accrued when it is probable that these costs will be incurred
and can be reasonably estimated. Environmental costs are included in operating
expenses in the accompanying consolidated statements of operations.
F-13
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
STOCK COMPENSATION PLANS
The Company accounts for the fair value of its grants under its stock option
plans in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"). The Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") on January 1, 1996.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). Under SFAS 109, deferred tax assets or liabilities are computed based
upon the difference between the financial statement and income tax bases of
assets and liabilities using the enacted marginal tax rate applicable when the
related asset or liability is expected to be realized or settled. Deferred
income tax expenses or benefits are based on the changes in the asset or
liability from period to period. If available evidence suggests that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized, a valuation allowance is required to reduce the deferred tax assets
to the amount that is more likely than not to be realized. Future changes in
such valuation allowance would be included in the provision for deferred income
taxes in the period of change.
FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short maturity of the
instruments and the provision for what management believes to be adequate
reserves for potential losses. Management believes the fair value of the
revolving loan approximates the carrying amount of the revolving loan in the
accompanying consolidated balance sheets because management believes the
interest rate to be the fair market interest rate. The fair value of the senior
subordinated notes is $66,000 based on the market value of the notes as of
December 31, 2000. Management believes the fair value of notes receivable
approximates the carrying amount of the notes because the interest rates on the
notes represent fair market interest rates.
START UP ACTIVITIES
In April 1998, the ACSEC issued Statement of Position ("SOP") 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 establishes standards
for the reporting and disclosure of start-up costs, including organization
costs. The Company adopted SOP 98-5 effective on January 1, 1999. The adoption
of SOP 98-5 did not have a material effect on the Company's financial position
or results of operations. The Company expenses start-up costs as incurred.
COMPREHENSIVE INCOME
For all periods presented, comprehensive income is equal to historical net
income or loss.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
the way that public companies report selected information about operating
segments in annual and interim financial reports to shareholders. It also
establishes standards for related disclosures about an enterprise's business
segments, products, services, geographic areas and major customers.
F-14
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SFAS No. 131, which supersedes SFAS No. 14 "Financial Reporting for Segments of
a Business Enterprise", retains the requirement to report information about
major customers and requires that a public company report financial and
descriptive information about its reportable operating segments. Generally,
financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. SFAS No. 131 requires that a public company report a
measure of segment profit or loss, certain specific revenue and expense items
and segment assets. The Company adopted SFAS No. 131 effective December 31,
1998. The Company operates its businesses as a single segment: airline
services.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2000, Securities and Exchange Commission Staff Accounting
Bulletin ("SAB") No. 101 regarding revenue recognition was issued. SAB No. 101
clarifies issues relating to revenue recognition in financial statements
including income statement presentation and disclosure. SAB No. 101 became
effective in 2000 and did not have a material effect on the Company's financial
position or the results of operations.
In May 2000, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue No. 00-14, "Accounting for Certain
Sales Incentives", ("EITF Issue No. 00-14") which addresses the recognition,
measurement and income statement classification for sales incentives offered by
vendors to customers. EITF Issue No. 00-14 became effective for the Company
during the quarter ended September 30, 2000. Sales incentives within the scope
of this issue include offers that can be used by a customer to receive a
reduction in the price of a product or service at the point of sale. The
consensus states that the cost of the sales incentive should be recognized at
the latter of the date at which the related revenue is recorded or the date at
which the sales incentive is offered. The consensus also states that when
recognized, the reduction in or refund of the selling price should be
classified as a reduction of revenue, and that if the sales incentive is a free
product or service delivered at the time of sale, the cost should be classified
as an expense. The adoption of EITF Issue No. 00-14 did not have a material
effect on the Company's financial position or results of operations.
In March 2000, the FASB issued FASB Interpretation ("FIN") 44, "Accounting
for Certain Transactions involving Stock Compensation," which clarifies the
application of APB Opinion No. 25 for certain issues. The interpretation was
effective July 1, 2000, except for the provisions that relate to modifications
that directly or indirectly reduce the exercise price of an award and the
definition of an employee, which were effective after December 15, 1998. The
adoption of FIN 44 did not have a material effect on the Company's financial
position or results of operations.
In July 2000, the Emerging Issues Task Force ("EITF") issued 00-10,
"Accounting for Shipping and Handling Fees and Costs." EITF 00-10 became
effective in the fourth quarter of 2000. EITF 00-10 prohibits the netting of
shipping and handling costs against shipping and handling revenues. EITF 00-10
permits companies to adopt a policy of including shipping and handling costs in
cost of sales or other income statement line items. The adoption of EITF 00-10
did not have a material effect on the Company's financial position or results
of operations.
NOTE 2--BUSINESS COMBINATIONS
ACQUISITIONS ACCOUNTED FOR UNDER THE PURCHASE METHOD OF ACCOUNTING
In March 1998, the Company completed the acquisition of Caribe Aviation,
Inc. ("Caribe") and Caribe's wholly owned subsidiary Aircraft Interior Design,
Inc. ("AIDI") for $23,300, consisting of $5,000 in cash, and
F-15
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$5,000 in promissory notes payable over two years; the issuance of 182 shares
of the Company's common stock; and the repayment of approximately $7,600 of
indebtedness owed by Caribe and AIDI to a financial institution. See Note 8.
In September 1998, the Company completed the acquisition of Triad
International Maintenance Corporation ("TIMCO") for $63,300 in cash.
Additionally, as a part of the transaction, the Company agreed to guarantee
certain industrial revenue bond financing incurred in connection with the
development of TIMCO's Greensboro operating facilities, in the approximate
amount of $11,700 and the Company has posted an irrevocable letter of credit to
secure its obligations thereunder.
In August 1999, the Company completed the acquisition of the assets of Kitty
Hawk, Inc.'s airframe and JT8D engine maintenance operations ("TIMCO Oscoda")
located in Oscoda, Michigan and entered into agreements to provide heavy
airframe and engine maintenance services to Kitty Hawk for a three-year period.
Under the terms of the acquisition agreement, the Company paid $18,080 in cash
and was to deliver $3,500 in purchase credits to Kitty Hawk during future
periods. The pre-acquisition operations of Kitty Hawk, Inc.'s airframe and JT8D
engine maintenance operations were not material to the operations of the
Company for 1998 or 1999. During 2000, Kitty Hawk filed bankruptcy and recently
the Company closed its airframe maintenance facility in Oscoda, Michigan on a
temporary basis. See Note 1.
The Company's acquisitions of Caribe, AIDI, TIMCO and TIMCO Oscoda have been
accounted for under the purchase method of accounting and accordingly, the
purchase price has been allocated to the assets purchased and liabilities
assumed based upon the fair values at the date of acquisition, and their
results of operations have been included in the accompanying consolidated
financial statements from the date of acquisition.
Unaudited pro forma consolidated results of operations assuming Caribe, AIDI
and TIMCO acquisitions had occurred at the beginning of the period presented
are as follows:
December 31,
1998
------------
Revenue......................................................... $298,532
Income from continuing operations............................... 10,142
Net income...................................................... 27,100
Diluted earnings per share...................................... 2.13
The unaudited pro forma results of operations are presented for
informational purposes only and may not necessarily reflect the future results
of operations of the Company or what the results of operations would have been
had the Company owned and operated these businesses as of January 1, 1998.
F-16
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
PURCHASE PRICE ALLOCATIONS
The purchase price allocations for business combinations accounted for under
the purchase method of accounting (including historical accounts of immaterial
acquisitions accounted for under the pooling of interests method of accounting)
were as follows:
Year Ended
December 31,
----------------
1998 1999
------- -------
Accounts receivable........................................ $31,874 $ --
Inventories................................................ 15,057 3,535
Other current assets....................................... 1,127 --
Other non-current assets................................... 483 1,000
Fixed assets............................................... 22,245 2,322
Goodwill................................................... 40,903 14,723
Accounts payable........................................... (8,842) --
Accrued expenses........................................... (16,424) (3,500)
Notes payable.............................................. (5,000) --
Common stock issued........................................ (5,720) --
------- -------
Cash used in acquisitions, net of cash acquired............ $75,703 $18,080
======= =======
ACQUISITIONS ACCOUNTED FOR UNDER THE POOLING OF INTERESTS METHOD OF ACCOUNTING
Shares issued to consummate acquisitions accounted for under the pooling of
interests method of accounting are reflected as outstanding for all periods
presented in the accompanying consolidated financial statements. In July 1998,
the Company acquired Whitehall for consideration of 2,844 shares of AVS's
common stock. The acquisition was accounted for using the pooling of interests
method of accounting and thus, the accompanying consolidated financial
statements have been restated to give retroactive effect for the acquisition
for all periods presented. Operating revenues and net income of Whitehall in
1998 for the period prior to the pooling were $86,498 and $6,115, respectively.
NOTE 3--ADJUSTMENTS TO CARRYING VALUE OF CERTAIN ASSETS AND OTHER CHARGES
During the quarter ended December 31, 1999, the Company recorded adjustments
to the carrying value of certain assets and other charges totaling
approximately $60,858. These charges include a reduction in the carrying value
of the Company's inventory at December 31, 1999 of $23,351 primarily relating
to inventory held for sale by the Company's redistribution operations, a $9,830
write-down in the carrying value of the four A-300 aircraft owned by the
Company and included in inventory, and a $7,700 write-down of previously
capitalized costs expended relating to the development of a new software system
which has not been implemented and will not be completed.
Also included in these charges is a $7,747 addition to the allowance for
doubtful accounts receivable, $4,800 of accrued expenses relating to the runoff
of one of the Company's health insurance plans, $2,000 of Year 2000 remediation
costs, accrued severance and increased professional fees of $1,163, and the
write-off of financing fees relating to a new credit facility which did not
close and miscellaneous deposits and other assets which have been determined
not to be collectible of $4,267. These charges are substantially non-cash
items.
Of the total 1999 charges and adjustments, approximately $16,545 relate to
the Company's continuing operations and $44,313 relate to discontinued
operations. In regard to the charges incurred in relation to
F-17
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
continuing operations, $12,673 and $5,304, respectively, are included in cost
of sales and operating expenses, in the accompanying consolidated statement of
operations for the year ended December 31, 1999. In addition, other expense
(income) included a gain on sale of land of $1,432 for the year ended December
31, 1999.
During the year ended December 31, 2000, the Company recorded charges
totaling $6,638 relating to the disposal of three A-300 aircraft that it owned
and an adjustment of $4,871 to the carrying value of leased assets. These
charges are included in cost of sales in the accompanying consolidated
statement of operations for the year ended December 31, 2000. In addition,
during 2000, the Company recorded charges totaling $30,016 relating to the
temporary closure of one of its heavy airframe maintenance facilities and bad
debt allowances relating primarily to a customer who filed for bankruptcy in
2000 and a customer who recently ceased operations. These charges are included
in operating expenses in the accompanying consolidated statement of operations
for the year ended December 31, 2000.
NOTE 4--DISCONTINUED OPERATIONS
In September 2000, the Company completed the sale of substantially all of
the assets of its manufacturing operations for $41,000, excluding transaction
expenses and possible post-closing adjustments. The cash proceeds of the sale
were used to repay senior indebtedness.
In December 2000, the Company completed the sale to another redistributor
Kellstrom Industries, Inc. (the "Purchaser") of substantially all of the assets
and business of its redistribution operation in a series of transactions
intended to constitute a single transaction (the "Transaction"). The aggregate
purchase price received in the Transaction was $156,400, approximately $127,000
of which was paid in cash ($122,000 after payment of transaction expenses). The
net proceeds of the Transaction were used to repay senior indebtedness. As part
of the Transaction, the Company acquired a 50% interest in a limited liability
company, KAV Inventory, LLC ("KAV") organized by the Purchaser and the Company.
Substantially all of the aircraft and engine spare parts inventory and the
engine inventory of the Company's redistribution operation, as well as certain
rotable parts inventories from two of the Company's MR&O operations, were sold
to KAV for 89% of the closing date book value of such inventory ($148,600,
subject to post-closing adjustments). Compensation for the sale of inventory
was comprised of cash of approximately $105,000 and two subordinated notes,
each in the principal amount of $13,700, and one subordinated note in the
principal amount of $15,701. The notes bear interest at 14% per annum and are
subordinated in all respects to the KAV institutional financing. In addition,
the Company posted an $8,500 letter of credit to secure, in part, KAV's
institutional financing. Further, the Company and the Purchaser each advanced
$2,300 to KAV to allow it to pay fees and costs relating to its institutional
financing. The Company and the Purchaser will receive reimbursement of these
advances after payment of the institutional financing and prior to repayment of
the senior subordinated notes.
KAV's sole business is the liquidation of the inventory it acquired from the
Company. KAV entered into an agreement to consign all of its inventories to the
Purchaser. The Transaction agreement specifies that all of the proceeds from
sales of the inventory, less a consignment commission to the Purchaser of 20%,
will be used to pay interest and principal on KAV's institutional debt. After
the institutional debt is paid in full, proceeds from the sale of inventory
will be used to reimburse the Company and the Purchaser for advances made to
KAV to allow it to pay fees and costs relating to its institutional financing
and thereafter to pay interest and principal on the two $13,700 notes. Interest
and principal on the $15,701 note will be paid from the remaining proceeds from
the sale of inventory, less a 35% consignment commission to the Purchaser.
Under the Transaction agreement, the Company has approval rights relating to
the sale price of certain inventory. After considering a third-party appraisal
of the inventory and projections of cash distributions in accordance with the
Transaction agreement, management believes the total amount of the notes of
$29,401 will be fully realized. Interest income on the notes will be deferred
and recognized as collected following collection of all outstanding principal
amounts. The projections of cash distributions to the Company are highly
dependent upon the timing of the sales and the sale prices obtained by the
Purchaser for KAV's inventory.
F-18
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The second component of the Transaction consisted of a sale of certain non-
inventory assets of the redistribution operation, including one of the $13,700
subordinated notes described above, net of certain payables assumed by the
Purchaser, for approximately $21,500, all of which was paid in cash. Under the
terms of the Transaction, the Purchaser has the right after one year from the
date of the Transaction to require the Company to repurchase receivables sold
in accordance with the Transaction to the extent they remain uncollected. As of
March 31, 2001, $8,515 of receivables sold pursuant to the Transaction had not
been collected by the Purchaser. In addition, the purchase price for the sale
of inventory and non-inventory assets is subject to post-closing adjustments as
set forth in the agreements. The Purchaser has indicated that post-closing
adjustments would result in a reduction in the aggregate consideration received
pursuant to the Transaction of approximately $4,500. The Company has notified
the Purchaser of its intention to dispute their calculation of post-closing
adjustments and the proposed reduction in consideration. While there can be no
assurance, the Company does not believe that the resolution of this dispute or
the amount of receivables which the Company may ultimately be obligated to
repurchase will have a material impact on the Company's financial position or
results of operations. During the year ended December 31, 2000, the Company
recorded a charge of $56,700, including $20,400 in the quarter ended December
31, 2000, to reduce the carrying value of its investment in the redistribution
operation to its estimated net realizable value.
In addition, as part of the sale of the redistribution operations described
above, the Purchaser leased a facility and certain furniture, fixtures and
equipment used in the redistribution operations for a one-year period. The
Purchaser has an option to acquire these assets during the term of the lease
and after one year the Company has an option to require the Purchaser to
acquire the assets, which can be extended by the Purchaser for six months under
certain circumstances. The Company also entered into a sublease agreement
relating to the redistribution operation's warehouse and corporate headquarters
facility for a five-year period with the right to renew for five consecutive
five-year periods at a market rental rate. The Company also entered into a non-
competition agreement whereby the Company is restricted from engaging in the
redistribution business for a period of up to five years. In addition, the
Company entered into a cooperation agreement under which it agreed to provide
repair services for the KAV parts inventory and the Purchaser's parts inventory
and the Purchaser agreed to supply parts to the Company's MR&O operations.
In December 2000, the Company completed the sale of the stock of its
subsidiary, Aviation Sales Bearings Company, which operates the Company's Dixie
Aerospace Bearings new parts distribution operation. In the transaction, the
Company received net aggregate consideration of $17,700 inclusive of debt
assumed by the purchaser. The net cash proceeds from the sale, which
approximated $13,500, were used to reduce outstanding senior indebtedness.
Also, as part of the transaction, the Company retained certain accounts
receivable and inventories. Such retained assets are being sold and collected
pursuant to consignment and collection agreements executed with the purchaser.
The Company anticipates that the liquidation of these assets will provide
additional consideration as these receivables are collected and inventory is
sold.
The net income (loss) of these operations prior to their respective disposal
dates net of income taxes, is included in the accompanying consolidated
statements of operations under "discontinued operations". Previously issued
financial statements have been changed to reflect those operations as
discontinued operations. Revenues from such operations through the disposal
dates were $316,367, $317,326 and $222,299 for the years ended December 31,
1998, 1999 and 2000, respectively. The aggregate results of operations of the
discontinued operations through the disposal dates, net of income tax provision
(benefit) of $11,865, ($16,758) and $624, were $16,959, ($24,721) and ($23,432)
for the years ended December 31, 1998, 1999 and 2000, respectively.
The provision for loss on disposal of discontinued operations reflected in
the accompanying consolidated statement of operations for 2000 of $73,325
includes the write-down of the assets of the operations to estimated net
realizable values, subject to post-closing adjustments. No expected tax benefit
has been recorded relating to
F-19
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the provision for loss on disposition as all loss carrybacks relating to the
discontinued operations have been utilized and the Company has provided a full
valuation allowance on its deferred tax assets (see Note 13).
A summary of the net assets of the discontinued operations as of December
31, 1999 and 2000 is as follows:
1999 2000
-------- --------
Accounts receivable, net................................. $ 71,392 $ 8,492
Inventories.............................................. 260,464 6,565
Other current assets..................................... 3,829 137
Fixed assets, net........................................ 26,771 9,356
Other assets............................................. 19,858 2,081
Accounts payable and accrued expenses.................... (67,917) (19,077)
Notes payable............................................ -- (4,075)
-------- --------
Net assets of discontinued operations.................... $314,397 $ 3,479
======== ========
The above amounts are net of reserves of $28,185 and $28,048 as of December
31, 1999 and 2000, respectively.
NOTE 5--ACCOUNTS RECEIVABLE
The Company distributes products and services to commercial airlines, air
cargo carriers, distributors, maintenance facilities, corporate aircraft
operators and other companies. The Company performs periodic credit evaluations
of its customers' financial conditions and provides allowances for doubtful
accounts as required. Accrued sales not billed for aircraft maintenance
services are billed on the basis of contract terms (which are generally on
completion of an aircraft) and deliveries. Accrued sales not billed amounted to
$45,074 and $28,733 at December 31, 1999 and 2000, respectively, and are
included in accounts receivable in the accompanying consolidated balance
sheets.
The Company's top ten customers combined accounted for approximately 49.6%
and 56.2% of operating revenues, for the years ended December 31, 1999 and
2000, respectively. One customer accounted for 22.6% and 14.0% of operating
revenues for the years ended December 31, 1999 and 2000, respectively. No other
customer accounted for more than 10% of operating revenues in 1999 and 2000. No
customer accounted for more than 10% of accounts receivable as of December 31,
1999 and 2000. There was no concentration of credit risk associated with any
specific customer in 1998.
NOTE 6--EQUIPMENT ON LEASE
In the normal course of business, the Company leases engines and spare parts
to third parties pursuant to noncancelable operating leases ranging from one to
ten years. The cost and accumulated amortization of equipment on lease are as
follows:
December 31,
---------------
1999 2000
------- ------
Equipment on lease, at cost................................. $19,755 $7,156
Accumulated amortization.................................... (2,362) (1,407)
------- ------
$17,393 $5,749
======= ======
F-20
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deposits of $1,113 and $36 as of December 31, 1999 and 2000, respectively,
received on outstanding leases are recorded as deferred income in the
accompanying consolidated balance sheets and will be applied in connection with
the final settlement of these leases. Amortization expense on equipment on
lease amounted to $2,018, $2,151 and $1,035 for the years ended December 31,
1998, 1999 and 2000, respectively. Future minimum lease payments receivable
under outstanding leases are as follows:
Year Ending December 31,
------------------------
2001............................................................. $1,162
2002............................................................. 753
2003............................................................. 226
2004............................................................. 104
------
$2,245
======
NOTE 7--NOTES PAYABLE AND REVOLVING LOAN
Prior to May 31, 2000, the Company had a revolving loan and letter of credit
facility (the "Credit Facility") of $300,000 with a group of financial
institutions. Effective May 31, 2000, the Credit Facility was amended and the
commitment was reduced to $285,000. Following the liquidation of the AvAero
joint venture, and the sales of the A-300 aircraft, manufacturing operations
and redistribution operations described above, the commitment was reduced to
$88,000. As of April 17, 2001, the commitment is effectively $75,000. The
Credit Facility expires in July 2002. The Credit Facility was further amended
on June 25, 2000, September 30, 2000, November 28, 2000, February 14, 2001 and
April 17, 2001. Interest under the Credit Facility is, at the option of the
Company, (a) prime plus 3.0%, or (b) LIBOR plus 4.5%. During the year ended
December 31, 1999 and 2000, the weighted average interest rate on the Credit
Facility was 7.21% and 10.94%, respectively. As of December 31, 1999 and
December 31, 2000, the outstanding balance on the Credit Facility was $269,580
and $35,959, respectively. Borrowings under the Credit Facility are secured by
a lien on substantially all of the Company's assets and the borrowing base
consists primarily of certain of the Company's receivables and inventory.
The Credit Facility contains certain financial covenants regarding the
Company's financial performance and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the suspension of borrowing and repayment of
all debt in the event of a material adverse change in the business of the
Company or a change in control as defined. A default under the Credit Facility
could potentially result in a default under other agreements to which the
Company is a party, including its lease agreements. In addition, the Credit
Facility requires mandatory repayments and a reduction in the total commitment
under the Credit Facility from the proceeds of a sale of assets or an issuance
of equity or debt securities or as a result of insufficient collateral to meet
the borrowing base requirements thereunder. At December 31, 1999 and March 31,
2000, the Company was not in compliance with certain of the financial covenants
contained in the Credit Facility. The financial institutions which are party to
the Credit Facility agreed to forbear in regards to these covenant violations
and other matters until May 31, 2000 at which point in time the Credit Facility
was amended. The Credit Agreement was further modified effective June 25, 2000,
September 30, 2000, November 28, 2000, February 14, 2001 and April 17, 2001.
The Company was required to pay fees of $3,000 in relation to the standstill
agreement associated with the early 2000 forbearance, which were amortized over
the period from February 1, 2000 through May 31, 2000. In connection with the
June 25, 2000 amendment, the Company paid fees of $2,154, which are being
amortized between July 1, 2000 and June 30, 2002. To the extent the Credit
Facility remains outstanding as of certain dates, the Company is committed to
pay incremental financing fees as follows: June 30, 2001--$1,000, August 14,
2001--2% of outstanding commitment less $1,000, November 14, 2001--2% of
outstanding commitment and February 14,
F-21
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2002--2% of outstanding commitment. At December 31, 2000, $2,441 was available
for borrowing under the Credit Facility and outstanding letters of credit
aggregated $30,233.
In February 2000, the Company executed a $15,500 term loan with the
financial institution that is the agent under the Credit Facility. The term
loan is senior secured debt, bears interest at 12% per annum, contains
financial covenants which are consistent with the Credit Facility and matures
in July 2002. Principal payments of $500 per month are due beginning in January
2002 with a final principal payment of $12,000 due in July 2002. Under the term
loan agreement, the Company also granted the lender common stock purchase
warrants to purchase 129 shares of the Company's common stock exercisable for
nominal consideration at any time until December 31, 2005. If the term loan is
not repaid in full, the warrants entitle the holder to require the Company,
subsequent to July 31, 2000 and subject to a vesting schedule, to repurchase
the warrants or common shares issued upon prior exercise of the warrants at
$8.50 per share. The lender has not required the Company to repurchase any
warrants through December 31, 2000. The Company has recorded the value of these
warrants ($1,079) as additional deferred financing costs and is amortizing this
amount to interest expense over the term of the loan.
In February 2001, the Company obtained a $10,000 term loan from a financial
institution. The term loan is senior secured debt, bears interest at LIBOR plus
2% and matures in August 2002. The proceeds of the term loan were used to pay
the semi-annual interest payment on the senior subordinated notes in February
2001 of $6,704 and for working capital purposes. In connection with the term
loan, the Company issued warrants to purchase 250 shares of its unissued common
stock at an exercise price of $4.00 per share to each of four individuals, two
of whom are officers and/or directors of the Company and one of whom is a
principal stockholder of the Company. Each of these individuals provided credit
support to the financial institution which advanced the loan proceeds.
SENIOR SUBORDINATED NOTES
In February 1998, the Company sold $165,000 of senior subordinated notes
with a coupon rate of 8.125% at a price of 99.395%. The proceeds of the sale
were used to repay all amounts then outstanding under the Credit Facility and
to fund the cash requirements related to certain acquisitions. The senior
subordinated notes mature on February 15, 2008. Interest is payable on February
15 and August 15 of each year. The senior subordinated notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior debt, including indebtedness outstanding under the
Credit Facility and under facilities which may replace the Credit Facility in
the future. In addition, the senior subordinated notes are effectively
subordinated to all secured obligations to the extent of the assets securing
such obligations, including the Credit Facility.
The indenture pursuant to which the senior subordinated notes have been
issued permits the Company and its subsidiaries to incur additional
indebtedness, including additional senior debt. Under the indenture, the
Company may borrow unlimited additional amounts so long as after incurring such
debt it meets a fixed charge coverage ratio for the most recent four fiscal
quarters. Additionally, the indenture allows the Company to borrow and have
outstanding additional amounts of indebtedness (even if it does not meet the
required fixed charge coverage ratios), up to enumerated limits. The Company
did not meet the fixed charge coverage ratio for the one-year period ended
December 31, 2000. Accordingly, its ability to incur additional debt is
currently limited under its indenture. The senior subordinated notes are also
effectively subordinated in right of payment to all existing and future
liabilities of any of its subsidiaries which do not guarantee the senior
subordinated notes.
The senior subordinated notes are fully and unconditionally guaranteed, on a
senior subordinated basis, by substantially all of the Company's existing
subsidiaries and each subsidiary that will be organized in the future
F-22
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
by the Company unless such subsidiary is designated as an unrestricted
subsidiary. Subsidiary guarantees are joint and several, full and
unconditional, general unsecured obligations of the subsidiary guarantors.
Subsidiary guarantees are subordinated in right of payment to all existing and
future senior debt of subsidiary guarantors, including the Credit Facility, and
are also effectively subordinated to all secured obligations of subsidiary
guarantors to the extent of the assets securing their obligations, including
the Credit Facility. Furthermore, the indenture permits subsidiary guarantors
to incur additional indebtedness, including senior debt, subject to certain
limitations. The Company has not presented separate financial statements and
other disclosures concerning each of the subsidiary guarantors because
management has determined that such information is not material to investors.
The senior subordinated notes are redeemable, at the Company's option, in
whole or in part, at any time after February 15, 2003, at the following
redemption prices, plus accrued and unpaid interest and liquidated damages, if
any, to the redemption date: (i) 2003--104.063%; (ii) 2004--102.708%; (iii)
2005--101.354%; and (iv) 2006 and thereafter--100%. Upon the occurrence of a
change in control, the Company will be required to make an offer to repurchase
all or any part of each holder's senior subordinated notes at a repurchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, thereon to the repurchase date. There
can be no assurance that the Company will have the financial resources
necessary to purchase the senior subordinated notes upon a change in control or
that such repurchase will then be permitted under the Credit Facility.
Under the indenture, if the Company sells assets (other than inventory in
the ordinary course of business or leases or assets subject to leases in the
ordinary course of business) with a fair market value in excess of $2,000 or
for net proceeds in excess of $2,000, the Company must comply with certain
requirements. Additionally, the Company must use the proceeds from such asset
sales, within 270 days after completion of the sales, to either permanently
repay senior debt or to acquire other businesses or assets (or, if such
proceeds are not used for these purposes, then such proceeds must be used to
repurchase senior subordinated notes). Further, if the value of the assets sold
exceeds $15,000, the Board of Directors must determine that the Company is
receiving fair market value for the assets sold.
The indenture contains certain other covenants that, among other things,
limit the Company's ability and that of its subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, make investments, issue capital stock of subsidiaries, create
certain liens securing indebtedness, enter into certain transactions with
affiliates, sell assets or enter into certain mergers and consolidations or
sell all or substantially all of the Company's assets.
OTHER LOANS
In connection with the Company's acquisition of Kratz-Wilde Machine Company
in October 1997, a subsidiary of the Company delivered a non-interest-bearing
promissory note (guaranteed by the Company) to the sellers in the original
principal amount of $2,500 (discounted to $2,200). A payment of $1,250 was made
during January 1999 and the final payment of $1,250 was made during January
2000. Interest on this note was imputed at 8%.
In connection with the acquisition of Caribe and AIDI, a subsidiary of the
Company delivered to the sellers a promissory note in the original principal
amount of $5,000, which was guaranteed by the Company. The note was payable
over a two year period with an interest rate of 8% per annum. The first payment
of $2,500 was made during March 1999 and the second payment of $2,500 was made
during March 2000. See Note 8.
F-23
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 8--RELATED PARTY TRANSACTIONS
The Company leased its former corporate headquarters and warehouse in Miami,
Florida (the "Miami Property") from an entity controlled by certain
stockholders of the Company. The lease on the Miami Property called for annual
payments in the amount of $893 expiring on December 2, 2014. In connection with
the purchase of the Miami Property by the related party, the Company made an
unsecured $2,466 loan to the related party, which bears interest at 8% per
annum. The loan was being repaid in monthly installments with any remaining
outstanding principal and interest due on December 2, 2004. In January 2001,
the loan was sold to a principal shareholder of the Company for 90% of the then
outstanding principal balance of $2,006. In March 2001, the Miami Property was
sold and the Company was relieved of its remaining obligations under the lease
agreement.
The Company also leases two facilities and periodically utilizes aircraft
owned by an officer/director of the Company. Total expense incurred in relation
to these items was $1,370 and $2,707 in 1999 and 2000, respectively. This same
officer/director sold Caribe and AIDI to the Company in 1998. See Note 2.
Certain shareholders of the Company provided letters of credit in the
aggregate amount of $8.0 million for the benefit of Bank of America, as agent
under the Kellstrom Industries, Inc. senior credit facility, in connection with
the Transaction.
See Note 7 for a description of debt guarantees by certain officers,
directors and principal stockholders in connection with a term loan to the
Company. See Note 11 for a description of credit support provided by certain
stockholders in connection with an amendment to an operating lease of the
Company.
The Company believes that the terms of its agreements with related parties
are no less favorable than could have been obtained from unaffiliated third
parties.
At December 31, 1997, as payment of bonuses, six officers of the Company
were each granted 3 shares of the Company's common stock. On June 18, 1998, the
Compensation Committee of the Company's Board of Directors rescinded this share
grant. No consideration was provided or will be provided in the future in
connection with the rescission.
NOTE 9--PREFERRED SHARE PURCHASE RIGHTS
On November 2, 1999, the Company declared a dividend distribution of one
Preferred Share Purchase Right (a "Right") on each outstanding share of its
common stock. Each Right will entitle shareholders to buy one one-thousandth of
a share of newly created Series A Junior Participating Preferred Stock of the
Company at an initial exercise price of $90.00. In general, the Rights become
exercisable if a person or group hereafter acquires 15% or more of the
outstanding common stock of the Company or announces a tender offer for 15% or
more of the common stock. The Board of Directors will in general be entitled to
redeem the Rights at one percent per Right at any time before any such person
hereafter acquires 15% or more of the outstanding common stock.
In March 2000, the Company amended the rights agreement to allow one of its
stockholders to acquire beneficial ownership of up to 25% of the outstanding
shares of the Company. Simultaneously, the stockholder agreed not to engage in
certain activities without the prior approval of a majority of the Company's
disinterested board members. In December 2000, the rights agreement was further
amended to allow the same stockholder to increase its beneficial ownership to
up to 30% of the outstanding shares of the Company.
F-24
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 10--COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
Several lawsuits have been filed against the Company and certain of its
officers and directors, and its auditors, in the United States District Court
for the Southern District of Florida, which have now been consolidated into a
single lawsuit. The consolidated complaint, as amended in March 2000 and in
September 2000, alleges violations of Sections 11 and 15 of the Securities Act
of 1933 and Sections 10(b) and 20(a) of, and Rule 10b-5 under, the Securities
Exchange Act of 1934. Among other matters, the amended consolidated complaint
alleges that the Company's reported financial results were materially
misleading and violated generally accepted accounting principles. The amended
consolidated complaint seeks damages and certification of two classes, one
consisting of purchasers of the Company's common stock in the June 1999 public
offering and one consisting of purchasers of the Company's common stock during
the period between April 30, 1997 and April 14, 2000. The Company has filed a
motion to dismiss the claims in the amended consolidated complaint. The Company
believes that the allegations contained in the amended consolidated complaint
are without merit and intends to vigorously defend these and any related
actions. Nevertheless, unfavorable resolution of these lawsuits could have a
material adverse effect on the Company in one or more future periods.
The U.S. Securities and Exchange Commission is conducting an inquiry into
the Company's accounting for certain transactions. The Company is cooperating
with the SEC in its inquiry.
On January 8, 1999, Paine Webber Incorporated filed in the Supreme Court of
the State of New York a complaint against the Company and its subsidiary,
Whitehall, alleging breach of contract claims and related claims against the
Company and Whitehall and a tortious interference with a contract claim against
the Company. This suit was settled in November 2000 for a non material amount.
On June 24, 1998, Zantop International Airlines, Inc. filed an action
against Aero Corp.-Macon, Inc., one of the Company's subsidiaries (which is now
part of TIMCO), in the Superior Court of Bibb County, Georgia. The suit was for
an unspecified amount of damages and certain equitable relief arising out of
the July 1997 sale to Aero Corp.-Macon, Inc. (then a subsidiary of Whitehall)
of certain assets used in connection with the operation of Aero Corp.-Macon,
Inc. The nature of the action involved a contractual dispute relative to
certain purchase price adjustments and inventory purchases. The Company settled
the suit for a non material amount during July 2000.
The Company is also involved in various lawsuits and other contingencies
arising out of its operations in the normal course of business. In the opinion
of management, the ultimate resolution of these claims and lawsuits will not
have a material adverse effect upon the financial position or results of
operations of the Company.
ENVIRONMENTAL MATTERS
The Company is taking remedial action pursuant to Environmental Protection
Agency and Florida Department of Environmental Protection ("FDEP") regulations
at TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact and magnitude of the required
remediation efforts on the Company. Based upon the most recent cost estimates
provided by environmental consultants, the Company believes that the total
testing, remediation and compliance costs for this facility will be
approximately $1,400. Testing and evaluation for all known sites on TIMCO-Lake
City's property is substantially complete and the Company has commenced a
remediation program. The Company is currently monitoring the remediation, which
will extend into the future. Subsequently, the Company's accruals were
increased because of this monitoring, which indicated a need for new equipment
and additional
F-25
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
monitoring. Based on current testing, technology, environmental law and clean-
up experience to date, the Company believes that it has established an accrual
for a reasonable estimate of the costs associated with its current remediation
strategies. To comply with the financial assurances required by the FDEP, the
Company has issued a $1,400 standby letter of credit in favor of the FDEP.
Additionally, there are other areas adjacent to TIMCO-Lake City's facility
that could also require remediation. The Company does not believe that it is
responsible for these areas; however, it may be asserted that Whitehall and
other parties are jointly and severally liable and are responsible for the
remediation of those properties. No estimate of any such costs to the Company
is available at this time.
The Company owns a parcel of real estate on which Whitehall previously
operated an electronics business. The Company is currently assessing
environmental issues with respect to this property. When the Company acquired
Whitehall, its environmental consultants estimated that remediation costs
relating to this property could be up to $1,000.
Accrued expenses in the accompanying December 31, 1999 and 2000 consolidated
balance sheets includes $3,148 and $1,702, respectively, related to obligations
to remediate the environmental matters described above. Future information and
developments will require the Company to continually reassess the expected
impact of the environmental matters discussed above. Actual costs to be
incurred in future periods may vary from the estimates, given the inherent
uncertainties in evaluating environmental exposures. These uncertainties
include the extent of required remediation based on testing and evaluation not
yet completed and the varying costs and effectiveness of remediation methods.
OTHER MATTERS
The Company has employment agreements with certain of its officers and key
employees which extend from two to four years. The employment agreements
provide that such officers and key employees may earn bonuses, based upon a
sliding percentage scale of their base salaries, provided the Company achieves
certain financial operating results, as defined. Further, certain of these
employment agreements provide for certain severance benefits in the event of a
change of control.
The Company has a commitment with a vendor to convert one Airbus aircraft
from passenger configuration to cargo configuration. The terms of the agreement
specify that the Company has the right to terminate the agreement; however, the
Company could be subject to a termination fee. The termination fee would be
calculated as the unused costs incurred by the vendor plus a fee equal to 10%
of such unused costs.
NOTE 11--LEASES
On December 17, 1998, the Company entered into an operating lease for its
build-to-suit corporate headquarters and warehouse facility with First Security
Bank, National Association, as trustee of a newly created trust, as lessor. The
lease has an initial term of five years and is a triple net lease with annual
rent as provided in the lease. The lease contains financial covenants regarding
the Company's financial performance and certain other affirmative and negative
covenants which it will be obligated to comply with during the term of the
lease.
Substantially all of the Company's subsidiaries have guaranteed the
Company's obligations under the lease. Additionally, the Company has an option
to acquire the new facility at the end of the lease for an option price as
determined in the lease. Alternatively, if the Company does not purchase the
new facility at the end of the lease, it will be obligated to pay certain
amounts as provided in the lease. Management estimates that the current fair
value of the facilities exceeds the Company's purchase option. Accordingly, no
accrual for the obligation has been recorded by the Company.
F-26
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Lease payments are currently at a rate of LIBOR plus 4.50% and the Company
is responsible for all property taxes, insurance and maintenance of the
property. The Company has subleased a portion of the facility to the purchaser
of the Company's redistribution business (see Note 4). The sublease is for an
initial term of five years with an additional option to renew for five
consecutive five-year terms at market rates. Payments during the initial term
are the lesser of $384 per month or the actual amount paid by the Company
relating to the premises subleased. See Note 4.
The development of the new facility was financed by the trust through a
$43,000 loan facility provided by a financial institution. Pursuant to the
agreements entered into in connection with this financing, the Company was
obligated to develop the new facility on behalf of the trust and was
responsible for the timely completion thereof within an established
construction budget. The Company and substantially all of its subsidiaries have
guaranteed the repayment of $37,840 of the trust's obligations under the
agreements. The trust's obligations under these agreements are secured by a
lien on the real property and improvements comprising the facilities and on the
fixtures therein. Further, the Company has posted an irrevocable letter of
credit in favor of the trust in the amount of $9,000 to secure both its
obligations under the lease and the trust's obligations under these agreements.
The Company was not in compliance at December 31, 1999 and March 31, 2000
with certain of the financial covenants contained in the lease agreement. The
lessor agreed to forbear in regards to these covenant violations and other
matters until May 31, 2000 at which point in time the lease agreement was
amended. The lease agreement was further modified effective June 25, 2000,
September 30, 2000, November 28, 2000, December 31, 2000, February 14, 2001 and
April 19, 2001. Under the terms of the April 19, 2001 amendment, two
shareholders of the Company provided a guarantee in relation to the proceeds to
be received from the sale of one of the leased buildings in an amount up to
$1.0 million. Such guarantee expires January 2, 2002. As part of the amendment,
the lessor has agreed to waive non-compliance with financial covenants, if any,
through the period ended December 31, 2001. The Company will assess the
accounting impact, if any, including the classification of the lease, as a
result of this amendment during 2001.
The Company leases certain buildings and office equipment under operating
lease agreements. Two of the buildings are leased from related parties of the
Company (see Note 8). For the years ended December 31, 1998, 1999 and 2000,
rent expense under all leases amounted to $2,423, $8,112 and $8,090,
respectively. Minimum rental commitments under all leases are as follows:
Operating Leases Capital Leases
----------------------------------- --------------
Years Ending December 31, To related parties To third parties
------------------------- ------------------ ----------------
2001 $181 $ 10,808 $ 432
2002 -- 10,644 432
2003 -- 10,571 432
2004 -- 10,126 432
2005 -- 9,864 432
Thereafter -- 78,293 5,649
To Interest -- -- (3,779)
---- -------- ------
$181 $130,306 $4,030
==== ======== ======
F-27
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 12--EARNINGS PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share" during 1997. SFAS 128 establishes standards
for computing and presenting basic and diluted earnings per share. Basic
earnings per share is computed by dividing net income by the weighted average
common shares outstanding during the year. Diluted earnings per share is based
on the combined weighted average number of common shares and common share
equivalents outstanding which include, where appropriate, the assumed exercise
of options and warrants. In computing diluted earnings per share, the Company
has utilized the treasury stock method. The computation of weighted average
common and common equivalent shares used in the calculation of basic and
diluted earnings per share is as follows:
Year Ended December
31,
--------------------
1998 1999 2000
------ ------ ------
Weighted average shares outstanding used in calculating
basic earnings per share.............................. 12,277 13,906 15,015
Effect of dilutive options and warrants................ 419 262 --
------ ------ ------
Weighted average common and common equivalent shares... 12,696 14,168 15,015
====== ====== ======
Options and warrants outstanding which are not included
in the calculation of diluted earnings per share
because their impact is antidilutive.................. 55 1,680 2,247
====== ====== ======
For business combinations accounted for as pooling of interests, earnings
per share computations are based on the aggregate of the weighted-average
outstanding shares of the constituent businesses, adjusted to equivalent shares
of the surviving business for all periods presented.
NOTE 13--INCOME TAXES
Income tax expense (benefit) relating to continuing operations for the years
ended December 31, 1998, 1999 and 2000 consists of the following:
Year Ended December
31,
------------------------
1998 1999 2000
------ -------- ------
Current..........................................
Federal........................................ $2,483 $(13,430) $2,328
State.......................................... 1,174 (2,182) 1,020
------ -------- ------
3,657 (15,612) 3,348
------ -------- ------
Deferred.........................................
Federal........................................ 703 14,395 1,515
State.......................................... (79) 4,221 (53)
------ -------- ------
624 18,616 1,462
------ -------- ------
Income tax expense related to continuing
operations...................................... $4,281 $ 3,004 $4,810
====== ======== ======
F-28
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31,
-------------------------
1998 1999 2000
------- -------- ------
Current..........................................
Federal........................................ $13,751 $(15,285) $2,370
State.......................................... 2,899 (1,643) 1,260
------- -------- ------
16,650 (16,928) 3,630
------- -------- ------
Deferred.........................................
Federal........................................ (447) 3,964 1,804
State.......................................... (57) (790) --
------- -------- ------
(504) 3,174 1,804
------- -------- ------
Income tax expense (benefit) related to
continuing and discontinued operations.......... $16,146 $(13,754) $5,434
======= ======== ======
The tax effects of temporary differences that give rise to significant
portions of net deferred tax assets as of December 31, 1999 and 2000 are as
follows:
December 31,
-----------------
1999 2000
------- --------
Deferred tax assets, net:
Allowance for doubtful accounts......................... $ 1,570 $ 12,523
Accruals................................................ 1,310 8,951
Writedown of investment................................. 1,800 1,800
Inventories............................................. 12,808 2,354
Property and equipment.................................. (4,804) 552
Spare parts on lease.................................... (1,161) (211)
NOL/Credit carryforwards................................ 1,642 62,070
Other................................................... (9,298) (3,925)
------- --------
3,867 84,114
Less valuation allowance.................................. (2,405) (84,114)
------- --------
Net deferred tax assets................................... $ 1,462 $ --
======= ========
As of December 31, 2000, the Company has net operating loss carry forwards
of approximately $156,000 which begin to expire in 2020. The Company has
established a valuation allowance to offset the net deferred tax assets that
have resulted from items that will only be deductible when such items are
actually incurred. The valuation allowance will be maintained until it is more
likely than not that these net deferred tax assets will be realized.
F-29
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The reconciliation of the federal statutory rate and the Company's effective
tax rate is as follows for the years ended December 31, 1998, 1999 and 2000:
1998 1999 2000
---- ---- -----
Federal income tax (benefit) at the statutory rate.......... 35.0% 35.0% (35.0%)
Increase (reductions) in tax rate resulting from:
Losses not currently utilized............................. 33.5
Change in net deferred tax asset.......................... (5.4) -- 1.3
State income taxes, net of federal tax benefit............ 6.3 28.1 0.6
Other..................................................... 1.5 .7 3.9
---- ---- -----
Effective income tax (benefit) rate......................... 37.4% 63.8% 4.3%
==== ==== =====
NOTE 14--STOCK OPTION PLANS
The Company has two stock option plans (the "Plans"), (i) the 1996 Director
Stock Option Plan (the "Director Plan"), under which options to acquire a
maximum of the greater of 150 shares or 2% of the number of shares of Common
Stock then outstanding may be granted to directors of the Company, and (ii) the
1996 Stock Option Plan, as amended (the "1996 Plan"), under which options to
acquire a maximum of the greater of 2,250 shares of Common Stock or 15% of the
number of shares of Common Stock then outstanding may be granted to executive
officers, employees (including employees who are directors), independent
contractors and consultants of the Company. The price at which the Company's
common stock may be purchased upon the exercise of options granted under the
Plans will be required to be at least equal to the per share fair market value
of the Common Stock on the date the particular options are granted. Options
granted under the Plans may have maximum terms of not more than ten years.
Generally, options granted under the Plans may be exercised at any time up to
three months after the person to whom such options were granted is no longer
employed or retained by the Company or serving on the Company's Board of
Directors.
Pursuant to the Plans, unless otherwise determined by the Compensation
Committee of the Company's Board of Directors, one-third of the options granted
under the Plans are exercisable upon grant, one-third are exercisable on the
first anniversary of such grant and the final one-third are exercisable on the
second anniversary of such grant. However, options granted under the Plans
shall become immediately exercisable if the holder of such options is
terminated by the Company or is no longer a director of the Company, as the
case may be, subsequent to certain events which are deemed to be a "change in
control" of the Company.
In connection with the merger with Whitehall, outstanding stock options to
purchase shares of Whitehall common stock under the Whitehall stock option
plans were converted into the right to receive that number of shares of the
Company's common stock as the holders would have been entitled to receive had
they exercised their options immediately prior to the merger and participated
in the merger.
On January 1, 1999, the Company entered into employment agreements with
certain executive officers. The employment agreements provided for option
grants to purchase 700 shares of common stock (granted outside of any plan) at
$40.625 per share, with one-third of the options granted vesting on January 1,
2000, one-third of the options granted vesting on January 1, 2001, and one-
third of the options granted vesting on January 1, 2002.
On November 11, 2000, the Company granted certain executive officers the
option to purchase 375 shares of common stock (granted outside of any plan) at
$3.3125 per share, with one third of the options vesting upon grant, one third
of the options granted vesting on November 11, 2001 and one third of the
options granted vesting on November 11, 2002.
F-30
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following summarizes outstanding stock options:
Weighted
Average
Total Exercise Price
----- --------------
Outstanding at December 31, 1997......................... 746 $23.10
Granted................................................ 446 27.93
Cancelled.............................................. (6) 22.85
Exercised.............................................. (101) 17.98
----- ------
Outstanding at December 31, 1998......................... 1,085 24.15
Granted................................................ 1,127 35.70
Cancelled.............................................. (70) 24.95
Exercised.............................................. (200) 25.87
----- ------
Outstanding at December 31, 1999......................... 1,942 30.65
Granted................................................ 611 4.20
Cancelled.............................................. (435) 32.58
----- ------
Outstanding at December 31, 2000......................... 2,118 $22.63
===== ======
Options exercisable:
At December 31, 2000..................................... 1,222 $24.11
Available to grant under Plans at December 31, 2000...... 1,335
The following table summarizes information about outstanding and exercisable
stock options at December 31, 2000:
Outstanding Weighted Exercisable
average Weighted average
---------------------------------- ---------------------------
Remaining
Range of contractual Exercise
exercise prices Shares life (in years) Shares price
--------------- ------ --------------- ------ --------
$ 3.00 - $13.00 718 9.4 331 $ 6.73
13.01 - 23.00 265 6.1 109 17.92
23.01 - 33.00 386 7.3 384 26.10
33.01 - 42.00 749 8.5 398 38.37
----- --- ----- ------
$ 3.00 - $42.00 2,118 8.3 1,222 $24.11
===== === ===== ======
F-31
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company accounts for the fair value of its option grants in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" whereby no compensation cost related to stock options is deducted
in determining net income (loss). Had compensation cost for the Company's stock
option plans been determined pursuant to Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company's net income and earnings (loss) per share would have decreased
(increased) accordingly. Using the Black-Scholes option pricing model, the
Company's pro forma net income (loss), pro forma earnings (loss) per share and
pro forma weighted average fair value of options granted, with related
assumptions, are as follows:
Year Ended December 31,
-------------------------------------------
1998 1999 2000
------------- ------------- -------------
Pro forma net income (loss)...... $19,887 $(26,934) $(212,685)
Pro forma basic earnings (loss)
per share....................... 1.62 (1.94) (14.16)
Pro forma diluted earnings (loss)
per share....................... 1.57 (1.94) (14.16)
Risk free interest rates......... 5% 6% 6%
Expected lives................... 7 - 10 years 7 - 10 years 7 - 10 years
Expected volatility.............. 40% 62% 117%
Weighted average grant date fair
value........................... $ 16.43 $ 26.80 $ 4.00
Expected dividend yield.......... 0% 0% 0%
NOTE 15--SAVINGS PLAN
Effective January 1, 1995, the Company established a qualified defined
contribution plan (the "Plan") for eligible employees. The Plan provides that
employees may contribute up to the maximum percent of pretax earnings as
allowed by the U.S. tax code and the Company may elect, at its discretion, to
make contributions to the Plan in any year. The Company contributed
approximately $810, $3,629 and $3,662 to the Plan in 1998, 1999, and 2000,
respectively. The Company does not provide retired employees with health or
life insurance benefits.
NOTE 16--QUARTERLY FINANCIAL DATA (UNAUDITED)
In connection with the preparation of its consolidated financial statements
for the year ended December 31, 1999, the Company identified several
transactions which, after review, should not have been recorded as revenues in
its books and records. Based upon these findings, in early February 2000, the
Company's Board of Directors organized a special committee to review certain
matters relating to the Company's accounting and sales practices. The committee
retained outside professionals to conduct an in-depth review and investigation
of these matters, which was concluded in April 2000.
The Company concluded that seven 1999 transactions arising in its
redistribution operation should have been accounted for as exchange
transactions rather than as sales. The Company has also concluded that seven
additional 1999 transactions arising in its redistribution operation should not
have been recorded as sales due to certain contingencies associated with the
transactions that had not been resolved at the date of the sales. In the
aggregate, these 1999 transactions represented $32,719 of revenues of
discontinued operations and $7,269 of gross margin of discontinued operations,
representing approximately 4.8% and 6.5% of the revenues and gross margin for
the 1999 fiscal year, respectively (including that of discontinued operations).
During 2000, the Company recognized revenue related to the design and
construction of specialized parts when services were performed. Effective
December 31, 2000, such revenues are recognized when the manufactured units are
delivered. Including the effects of this change, revenues of $22,000 previously
F-32
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recognized in the first three quarters of 2000 were reversed in the fourth
quarter of 2000. Income (loss) from operations for each of the quarterly
periods in the year ended December 31, 2000 was not affected by this change as
no gross margin had been recognized in relation to these revenues.
Results for the quarterly periods in the years ended December 31, 1999 (as
reported and as reported, with adjustments) and 2000 are as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except earnings per
share)
1999, as reported:
Operating revenues.................... $ 85,388 $ 92,493 $ 79,980 $113,892
Income (loss) from operations......... 5,077 7,294 4,759 (14,132)
Income (loss) from discontinued
operations........................... 2,840 2,209 2,586 (32,356)
Net Income (loss)..................... 7,917 9,503 7,345 (46,488)
Diluted income (loss) per share from
continuing operations................ 0.39 0.55 0.31 (1.04)
Diluted income (loss) per share from
discontinued operations.............. 0.22 0.16 0.17 (2.32)
Diluted net income (loss) per share... 0.61 0.71 0.48 (3.36)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except earnings per
share)
1999, as reported with adjustments:
Operating revenues.................... $ 85,388 $ 92,493 $ 79,980 $113,892
Income (loss) from operations......... 5,077 7,294 4,759 (14,132)
Income (loss) from discontinued
operations........................... 1,820 886 1,940 (29,367)
Net Income (loss)..................... 6,897 8,180 6,699 (43,499)
Diluted income (loss) per share from
continuing operations................ 0.39 0.55 0.31 (1.04)
Diluted income (loss) per share from
discontinued operations.............. 0.14 0.06 0.13 (2.10)
Diluted net income (loss) per share... 0.53 0.61 0.44 (3.14)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(In thousands, except earnings per
share)
2000:
Operating revenues.................... $101,876 $ 95,159 $ 81,252 $ 59,790
Income (loss) from operations......... 1,141 (17,883) (27,720) (71,411)
Income (loss) from discontinued
operations........................... (2,847) (13,392) (54,548) (24,970)
Net Income (loss)..................... (1,606) (31,275) (82,268) (96,481)
Diluted income (loss) per share from
continuing operations................ 0.08 (1.19) (1.85) (4.76)
Diluted income (loss) per share from
discontinued operations.............. (0.18) (0.89) (3.63) (1.67)
Diluted net income (loss) per share... (0.10) (2.08) (5.48) (6.43)
See Note 3 for a discussion of the charges recorded in the fourth quarter of
1999 and 2000.
F-33
SCHEDULE II
AVIATION SALES COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 2000
(In thousands)
Additions
Balance at charged to Balance at
Beginning cost and end of
Description of Year expenses Other Deductions year
----------- ---------- ---------- ------ ---------- ----------
Allowances for doubtful
accounts receivable:
Year ended December 31,
1998.................. $ 3,847 $ 670 $5,304(A) $ 2,011(B) $ 7,810
1999.................. 7,810 4,995 -- 3,212(B) 9,593
2000.................. 9,593 20,343 -- 22,482(B) 7,454
Reserve relating to
discontinued
operations:
1998.................. $ 4,742 $ 2,283 $ -- $ -- $ 7,025
1999.................. 7,025 24,833 -- 3,673 28,185
2000.................. 28,185 18,868 -- 19,005(C) 28,048
--------
(A) Represents allowance for doubtful accounts acquired in purchase
accounting.
(B) Represents accounts receivable written-off.
(C) Utilization of reserve upon disposition of business.
F-34
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, June 30,
2000 2001
------------ -----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents............................ $ -- $ --
Accounts receivable, net............................. 67,558 38,942
Inventories.......................................... 53,115 46,904
Other current assets................................. 10,784 6,044
--------- ---------
Total current assets................................. 131,457 91,890
--------- ---------
Equipment on lease, net............................... 5,749 407
Fixed assets, net..................................... 65,770 56,973
Amounts due from related parties...................... 1,792 --
Other Assets:
Goodwill, net........................................ 41,390 26,904
Deferred financing costs, net........................ 5,928 8,516
Notes receivable from KAV Inventory, LLC............. 29,400 --
Net assets of discontinued operations................ 3,479 --
Other................................................ 15,646 14,957
--------- ---------
Total other assets................................... 95,843 50,377
--------- ---------
Total assets......................................... $ 300,611 $ 199,647
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable..................................... $ 30,214 $ 21,377
Accrued expenses..................................... 27,725 24,006
Current maturities of notes payable.................. 29 12,029
Current maturities of capital lease obligations...... 178 178
Senior subordinated notes (see Note 7)............... -- 164,391
Revolving loan....................................... 35,959 4,911
Customer deposits.................................... 7,559 14,948
Other................................................ 5,120 2,782
--------- ---------
Total current liabilities............................ 106,784 244,622
--------- ---------
Senior subordinated notes (see Note 7)............... 164,345 --
Notes payable, net of current portion................ 16,498 10,000
Capital lease obligations, net of current portion.... 3,852 3,786
Deferred income...................................... 36 36
Net liabilities of discontinued operations........... -- 658
Other long-term liabilities.......................... 2,204 --
--------- ---------
Total long-term liabilities.......................... 186,935 14,480
--------- ---------
Commitments and Contingencies (See Notes)
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding, 15,000 shares
designated Series A Junior Participating............ -- --
Common stock, $.001 par value, 30,000,000 shares
authorized, 15,015,317 shares issued and outstanding
at December 31, 2000 and June 30, 2001,
respectively........................................ 15 15
Additional paid-in capital........................... 150,288 153,226
Accumulated deficit.................................. (143,411) (212,696)
--------- ---------
Total stockholders' equity (deficit)................. 6,892 (59,455)
--------- ---------
Total liabilities and stockholders' equity
(deficit)........................................... $ 300,611 $ 199,647
========= =========
The accompanying notes are an integral part of these condensed consolidated
balance sheets.
F-35
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
For the Six
Months Ended June
30,
------------------
2000 2001
-------- --------
Operating revenues:
Sales.................................................... $206,232 $146,847
Other.................................................... 3,109 5,615
-------- --------
209,341 152,462
Cost of sales.............................................. 188,972 152,542
-------- --------
Gross profit (loss)........................................ 20,369 (80)
Operating expenses......................................... 22,777 29,217
-------- --------
Loss from operations..................................... (2,408) (29,297)
Interest expense........................................... 10,765 13,116
Charge to reserve notes receivable from KAV Inventory,
LLC....................................................... -- 29,400
Other expense (income)..................................... 1,036 (6,918)
-------- --------
Loss before income taxes, equity income of affiliate and
discontinued operations................................. (14,209) (64,895)
Income tax expense......................................... 2,627 48
-------- --------
Loss before equity income of affiliate and discontinued
operations.............................................. (16,836) (64,943)
Equity income of affiliate................................. 93 --
-------- --------
Loss from continuing operations.......................... (16,743) (64,943)
Discontinued operations:
Operations, net of income taxes.......................... (6,920) --
Loss on disposal, net of income taxes.................... (9,218) (4,342)
-------- --------
Net loss................................................... ($32,881) ($69,285)
======== ========
Basic loss per share:
Loss from continuing operations.......................... ($1.12) ($4.33)
Loss from discontinued operations........................ (1.07) (0.28)
-------- --------
Net loss................................................... ($2.19) ($4.61)
======== ========
Diluted loss per share:
Loss from continuing operations.......................... ($1.12) ($4.33)
Loss from discontinued operations........................ (1.07) (0.28)
-------- --------
Net loss................................................... ($2.19) ($4.61)
======== ========
Weighted average shares of common stock and common stock
equivalents used to calculate earnings per share, basic
and diluted............................................... 15,015 15,015
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-36
AVIATION SALES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the Six Months Ended
June 30,
--------------------------
2000 2001
------------ ------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.......................................... $ (32,881) $ (69,285)
Adjustments to reconcile net loss to cash provided
by operating activities:
Depreciation and amortization..................... 5,787 8,341
Loss from discontinued operations................. 16,138 4,342
Charge to reserve notes receivable from KAV
Inventory, LLC................................... -- 29,400
Write down of long lived assets................... -- 9,886
Proceeds from sale of equipment on lease, net of
gain............................................. 1,704 3,282
Provision for doubtful accounts................... 1,011 3,684
Loss on sale of affiliate......................... 859 --
Equity in earnings of affiliate, net of taxes..... (43) --
Gain on sale of subsidiary........................ -- (5,664)
Income on non-refundable lease deposit............ -- (2,204)
Expense from warrants issued to third parties..... -- 402
Deferred income taxes............................. 2,292 --
(Increase) decrease in accounts receivable........ (21,786) 22,492
Decrease in inventories........................... 3,274 1,042
Decrease in other current assets.................. 12,504 5,472
Decrease (increase) in other assets............... 24,706 (928)
Increase (decrease) in accounts payable........... 2,792 (6,639)
(Decrease) increase in accrued expenses........... (3,423) 1,423
Decrease in deferred income....................... (175) --
Decrease in other liabilities..................... (3,659) --
------------ ------------
Net cash provided by operating activities......... 9,100 5,046
------------ ------------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchases of fixed assets......................... (5,547) (1,350)
Payments from related parties..................... 47 1,792
Investment in limited liability company........... (2,000) --
Proceeds from sale of affiliate................... 1,455 --
Proceeds from sale of subsidiary.................. -- 21,290
------------ ------------
Net cash (used in) provided by investing
activities....................................... (6,045) 21,732
------------ ------------
CASH FLOW FROM FINANCING ACTIVITIES:
Borrowing under senior debt facilities............ 183,156 184,383
Payments under senior debt facilities............. (212,425) (215,430)
Proceeds of term loans............................ 15,500 12,000
Payments on equipment loans....................... (95) (998)
Payments on notes payable......................... (3,578) (5,500)
Payments on capital leases........................ (255) (66)
Payments of deferred financing costs.............. (5,303) (1,540)
------------ ------------
Net cash used in financing activities............. (23,000) (27,151)
------------ ------------
Net cash (used in) provided by discontinued
operations....................................... (183) 373
------------ ------------
Net decrease in cash and cash equivalents......... (20,128) --
Cash and cash equivalents, beginning of period..... 21,431 --
------------ ------------
Cash and cash equivalents, end of period........... $ 1,303 $ --
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid..................................... $ 20,505 $ 10,181
============ ============
Income taxes paid................................. $ 954 $ --
============ ============
F-37
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2001
(In thousands, except share data)
(Unaudited)
1. BASIS OF PRESENTATION
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Aviation Sales Company ("ASC" or the "Company") is a Delaware corporation,
which through its subsidiaries provides aircraft maintenance, repair and
overhaul services to commercial passenger airlines, air cargo carriers,
aircraft leasing companies, maintenance and repair facilities and aircraft
parts redistributors throughout the world. During 2000, the Company sold
substantially all of the assets of its parts redistribution operation, its new
parts distribution operation and its manufacturing operations. The results of
operations for these businesses are included in the accompanying condensed
consolidated statements of operations as discontinued operations. See Note 2
for further discussion.
The accompanying unaudited interim condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission for reporting on Form 10-Q. Pursuant to such
rules and regulations, certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted. The accompanying unaudited interim condensed consolidated financial
statements should be read in conjunction with the Company's December 31, 2000
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the 2000 fiscal year (File No. 001-
11775).
In the opinion of management, the accompanying unaudited interim condensed
consolidated financial statements of the Company contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of the Company as of June 30, 2001 and the results of
its operations for the six month periods ended June 30, 2000 and 2001 and cash
flows for the six month periods ended June 30, 2000 and 2001. The results of
operations and cash flows for the six month period ended June 30, 2001 are not
necessarily indicative of the results of operations or cash flows which may be
reported for the year ending December 31, 2001.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
Principal estimates made by the Company include the estimated losses on
disposal of discontinued operations, the allowance to reduce inventory to the
lower of cost or net realizable value, the estimated profit recognized as
aircraft maintenance, design and construction services are performed, the
allowance for doubtful accounts and notes receivable, the realizability of its
investment in affiliates, future cash flows in support of its long lived
assets, medical benefit accruals, the estimated fair value of the facilities
under operating lease, and the allowances for litigation and environmental
costs. A principal assumption made by the Company is that inventory will be
utilized and realized in the normal course of business and may be held for a
number of years.
F-38
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS
No. 141 eliminates the pooling-of-interests method of accounting for business
combinations and modifies the application of the purchase accounting method.
The elimination of the pooling-of-interest method is effective for transactions
initiated after June 30, 2001. The remaining provision of SFAS No. 141 will be
effective for transactions accounted for using the purchase method that are
completed after June 30, 2001. The Company does not believe that the adoption
of SFAS No. 141 will have a significant impact on its financial statements.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Intangible
Assets." SFAS No. 142 eliminates the current requirement to amortize goodwill
and indefinite-lived intangible assets, addresses the amortization of
intangible assets with defined lives and addresses the impairment testing and
recognition for goodwill and intangible assets. SFAS No. 142 will apply to
goodwill and intangible assets arising from transactions completed before and
after the Statement's effective date of January 1, 2002. At June 30, 2001, the
Company has net goodwill of $26,904 and a 50% interest in a limited liability
corporation that has a net intangible asset of $13,234 (See Note 3). These
assets will be subject to the new impairment tests prescribed under the
statement. These new requirements will impact future period net income equal to
the amount of discontinued goodwill amortization offset by goodwill impairment
charges, if any, and adjusted for any differences between the old and new rules
for defining goodwill and intangible assets on future business combinations. An
initial impairment test must be performed in 2002 as of January 1, 2002. Any
resulting impairment charge from this initial test will be reported as a change
in accounting principle, net of tax. The Company is currently reviewing the
provisions of these Standards to determine any impact that might result from
adoption, and has not yet made a determination of the impact that adoption of
SFAS No. 142 will have on the consolidated financial statements.
COMPREHENSIVE INCOME
For all periods presented comprehensive loss is equal to net loss.
REVENUE RECOGNITION
During the three months ended June 30, 2001, the Company changed its method
of accounting for revenue recognition at its engine overhaul facility. Revenues
related to engine overhaul services are recognized upon shipment of the
overhauled engine. Prior to this change, revenue was recognized as services
were performed. The change in the method of accounting for revenue recognition
at the Company's engine overhaul facility did not have a material impact on the
Company's financial position or current or prior periods consolidated results
of operations.
LIQUIDITY
The accompanying condensed consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company was
not in compliance at March 31, 2000 with certain of the financial covenants
contained in the Company's credit agreement with its senior lenders and
F-39
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
certain of the lease agreements to which the Company is a party. On May 31,
2000, the Company amended and restated its senior credit facility and amended
certain of its lease agreements. These agreements were further amended on June
25, 2000, September 30, 2000, November 28, 2000, February 14, 2001, April 17,
2001 and May 21, 2001. The Company was not in compliance at June 30, 2001 with
certain covenants contained in the credit agreement and the Company's senior
lenders have waived the covenant violations.
As discussed in Note 2, during 2000 and 2001 the Company sold substantially
all of the assets of its parts redistribution operation, new parts distribution
operation, manufacturing operations and one of its component overhaul
operations. The proceeds from these sales were used to repay senior
indebtedness and, with respect to the sale of the component overhaul
operations, to repay senior indebtedness and for working capital. In addition:
(i) in February 2000 the Company borrowed $15,500 under a supplemental term
loan with the financial institution that is the agent for the revolving credit
facility, and (ii) in February 2001, the Company borrowed $10,000 under a term
loan from a second financial institution. The proceeds from these loans were
used to repay senior indebtedness and for working capital. The revolving credit
facility and the remaining balance on the $15,500 term loan mature in July 2002
and the $10,000 term loan matures in August 2002. As a result of the above
transactions, the outstanding balance on the revolving credit facility was
reduced from $268,013 as of March 31, 2000 to $4,911 as of June 30, 2001.
As of September 6, 2001 the Company has $2,698 of availability for borrowing
under its revolving credit facility. The Company has also recently closed (on a
temporary basis) two of its maintenance, repair and overhaul ("MR&O")
facilities, consolidated the operations of one of its component overhaul
businesses from two facilities to one, reduced its headcount at certain of its
other MR&O facilities and implemented salary and benefit reductions that
affected virtually all employees in order to lower its operating expenses. The
Company is also seeking to obtain additional working capital to allow it to
bring its trade accounts payable back into a more normalized status. Further,
the Company was obligated to make $6,704 in interest payments on its 8 1/8%
senior subordinated notes on August 15, 2001, however, the Company did not make
the payments due to the agreement which it has reached with the holders of
73.02% of its outstanding senior notes. See Note 7. Although the Company
expects to be able to meet its working capital requirements from its available
resources and from other sources, including sales of assets and further equity
and/or debt infusions, there can be no assurance that the Company will have
sufficient working capital to meet its obligations. The Company incurred net
losses for the years ended December 31, 1999 and 2000 and for the six months
ended June 30, 2001 and required cash to fund its operating activities for the
years ended December 31, 1998, 1999 and 2000. As a result of these matters, the
Company's auditors have issued their opinion on the December 31, 2000
consolidated financial statements with a going concern modification. The
accompanying condensed consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
RECLASSIFICATIONS
Certain prior year account balances within the statement of cash flows have
been reclassified as a result of discontinued operations to conform with
current year presentation.
2. DISCONTINUED OPERATIONS
In September 2000, the Company completed the sale of substantially all of
the assets of its manufacturing operations for $40,299, after post-closing
adjustments and excluding transaction expenses. The cash proceeds of the sale
were used to repay senior indebtedness.
In December 2000, the Company completed the sale to Kellstrom Industries,
Inc. (the "Purchaser") of substantially all of the assets and business of its
redistribution operation in a series of transactions intended to
F-40
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
constitute a single transaction (the "Transaction"). The aggregate purchase
price received in the Transaction was $156,400, approximately $127,000 of which
was paid in cash ($122,000 after payment of transaction expenses). The net
proceeds of the Transaction were used to repay senior indebtedness. As part of
the Transaction, the Company acquired a 50% interest in a limited liability
company, KAV Inventory, LLC ("KAV") organized by the Purchaser and the Company.
Substantially all of the aircraft and engine spare parts inventory and the
engine inventory of the Company's redistribution operation, as well as certain
rotable parts inventories from two of the Company's MR&O operations, were sold
to KAV for 89% of the closing date book value of such inventory ($148,600,
subject to post-closing adjustments). Consideration for the sale of inventory
was comprised of cash of approximately $105,500, two senior subordinated notes,
each in the principal amount of $13,700 (one of which was sold to Kellstrom in
the second component of the transaction for $13,700 in cash), and one junior
subordinated note in the principal amount of $15,700.
The notes bear interest at 14% per annum and are subordinated in all
respects to KAV's institutional financing. In addition, the Company issued an
$8,500 letter of credit to secure, in part, KAV's institutional financing.
Further, the Company and the Purchaser each advanced $2,300 to KAV to allow it
to pay fees and costs relating to its institutional financing. The Company and
the Purchaser are entitled to receive reimbursement of these advances after
payment of the institutional financing and prior to repayment of the senior
subordinated notes.
KAV's sole business is the liquidation of the inventory it acquired from the
Company. KAV entered into an agreement to consign all of its inventories to the
Purchaser. The Transaction agreement specifies that all of the proceeds from
sales of the inventory, less a consignment commission to the Purchaser of 20%,
will be used to pay interest and principal on KAV's institutional debt. After
the institutional debt is paid in full, proceeds from the sale of inventory
would be used to reimburse the Company and the Purchaser for advances made to
KAV to allow it to pay fees and costs relating to its institutional financing,
to pay adjustment notes, if any, resulting from post closing adjustments to the
closing date book value of the inventory and thereafter to pay interest and
principal on the two $13,700 senior notes. Interest and principal on the
$15,700 junior note would be paid from the remaining proceeds from the sale of
inventory, less a 35% consignment commission to the Purchaser. Under the
Transaction agreement, the Company has approval rights relating to the sale
price of certain inventory. Because of the uncertainty regarding the collection
of the notes, interest income on the notes is not being recognized. The
projections of cash distributions to the Company are highly dependent upon the
timing of the sales and the sale prices obtained by the Purchaser for KAV's
inventory.
The second component of the Transaction consisted of a sale of certain non-
inventory assets of the redistribution operation, including one of the $13,700
senior subordinated notes described above, net of certain payables assumed by
the Purchaser, for approximately $21,500, all of which was paid in cash. Under
the terms of the Transaction, the Purchaser has the right after one year from
the date of the Transaction to require the Company to repurchase receivables
sold in accordance with the Transaction to the extent they remain uncollected.
As of July 31, 2001, $6,621 of receivables sold pursuant to the Transaction had
not been collected by the Purchaser. In addition, the purchase price for the
sale of inventory and non-inventory assets is subject to post-closing
adjustments as set forth in the agreements. The Purchaser has indicated that
post-closing adjustments would result in a reduction in the aggregate
consideration received pursuant to the Transaction of approximately $4,500. The
Company has disputed the Purchaser's calculation of post-closing adjustments
and the proposed reduction in consideration. There can be no assurance as to
the outcome of these matters.
In addition, as part of the sale of the redistribution operation as
described above, the Purchaser leased from the Company a facility and certain
furniture, fixtures and equipment used in the redistribution operations for a
one-year period. The Purchaser has an option to acquire these assets during the
term of the lease and after one year the Company has an option to require the
Purchaser to acquire the assets, which can be extended by the
F-41
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Purchaser for six months under certain circumstances. The Company has also
entered into a sublease agreement relating to the redistribution operation's
warehouse and corporate headquarters facility for a five-year period, with the
right to renew for five consecutive five-year periods at a market rental rate.
The Company also entered into a non-competition agreement whereby the Company
is restricted from engaging in the redistribution business for a period of up
to five years. In addition, the Company entered into a cooperation agreement
under which it agreed to provide repair services for the KAV parts inventory
and the Purchaser's parts inventory and the Purchaser agreed to supply parts to
the Company's MR&O operations.
In July 2001, KAV's institutional lender advised KAV that it is in default
under its loan agreement and that the lender therefore reserves all of its
rights and remedies under the loan agreement including among other remedies the
right to draw among other things on the Company's $8,500 letter of credit, call
the outstanding institutional financing and increase the interest rate on the
loan. No action has been taken by the lender to date. Further, during the last
few months, the Purchaser has reported in its filings with the SEC that it is
having financial difficulties. As a result of these matters, and due to current
economic conditions in the redistribution industry and the aviation industry as
a whole and lower than projected sales levels by KAV, during the quarter ended
June 30, 2001 the Company recorded a full reserve against both the $13,700
senior note and the $15,700 junior note due from KAV which it holds. For the
same reasons, during the 2001 second quarter the Company recorded reserves
totaling $5,081 relating to net assets of discontinued operations whose
realizability is impacted by the operations of the Purchaser and KAV. In total,
aggregate charges relating to these matters were $34,481 for the three and six
months ended June 30, 2001. Further, in the event that the Purchaser's
financial difficulties as discussed above adversely impact its ability to make
payments under its lease obligations to the Company and/or its obligations to
purchase certain property and equipment, additional write-downs and accruals
may be necessary. Finally, the Purchaser's financial condition may adversely
impact its ability to satisfy its obligations under the above-described
ancillary agreements.
In December 2000, the Company completed the sale of the stock of its
subsidiary, Aviation Sales Bearings Company, which operates the Company's Dixie
Aerospace Bearings new parts distribution operation. In the transaction, the
Company received net aggregate consideration of $17,700 inclusive of debt
assumed by the purchaser. The net cash proceeds from the sale, which
approximated $13,500, were used to reduce outstanding senior indebtedness.
Also, as part of the transaction, the Company retained certain accounts
receivable and inventories. Such retained assets are being sold and collected
pursuant to consignment and collection agreements executed with the purchaser.
The Company anticipates that the liquidation of these assets will provide
additional consideration as these receivables are collected and inventory is
sold.
The net income (loss) of these operations prior to their respective disposal
dates net of income taxes is included in the accompanying condensed
consolidated statements of operations under "discontinued operations".
Previously issued financial statements have been changed to reflect those
operations as discontinued operations. Revenues from such operations were
$165,084 for the six months ended June 30, 2000.
3. INVESTMENTS IN AFFILIATES
During 1994, Whitehall obtained a 40% ownership in a joint venture involved
in the development of aircraft-related technology for an initial investment of
$1. The Company accounts for its investment in the joint venture under the
equity method. In 1994, Whitehall loaned $2,000 to the joint venture, which was
evidenced by a promissory note, which accrued interest at a maximum rate of 5%
per annum. Principal and accrued interest became due on January 5, 1999. During
February 2000, management elected to convert the then outstanding note and
accrued interest payable balance into a capital contribution. During May 2000,
the Company liquidated its investment in the joint venture and recorded a
charge of $859 to other expense.
F-42
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 1999, the Company obtained a 50% interest in a limited liability
corporation that designs, manufactures and installs an FAA approved conversion
kit that converts certain Boeing 727 aircraft from passenger configuration to
cargo configuration. The initial investment was $2,500. During 2000 and through
June 30, 2001, the Company invested an additional $3,734 and $339,
respectively, in the form of cash advances and services. The Company accounts
for this investment under the equity method. The limited liability corporation
is in the early development of the conversion kit and sales to date have been
minimal, and the Company has incurred losses to date in fulfilling these sales.
Realizability of this investment will be dependent on the ability of the
limited liability corporation to attract new business during future periods at
rates sufficient to cover its costs.
4. NOTES PAYABLE AND REVOLVING LOAN
Prior to May 31, 2000, the Company had a revolving loan and letter of credit
facility of $300,000 with a group of financial institutions. Effective May 31,
2000, the Credit Facility was amended and restated and the commitment was
reduced to $285,000. Following the sales of businesses described in Note 2, the
commitment was reduced to $57,737. The credit facility has been amended on
several occasions since May 31, 2000. The Credit Facility as amended to date
(the "Credit Facility") expires in July 2002. Interest under the Credit
Facility is, at the option of the Company, (a) prime plus 3.0%, or (b) LIBOR
plus 4.5%. Borrowings under the Credit Facility are secured by a lien on
substantially all of the Company's assets and the borrowing base consists
primarily of certain of the Company's receivables and inventory.
The Credit Facility contains certain financial covenants regarding the
Company's financial performance and certain other covenants, including
limitations on the amount of annual capital expenditures and the incurrence of
additional debt, and provides for the suspension of borrowing and repayment of
all debt in the event of a material adverse change in the business of the
Company or a change in control as defined. A default under the Credit Facility
could potentially result in a default under other agreements to which the
Company is a party, including its lease agreements. In addition, the Credit
Facility requires mandatory repayments and a reduction in the total commitment
under the Credit Facility from the proceeds of a sale of assets or an issuance
of equity or debt securities or as a result of insufficient collateral to meet
the borrowing base requirements thereunder. The Company was committed to pay a
$1,000 financing fee on June 30, 2001 which was accrued as of that date and
subsequently paid on July 2, 2001 and paid additional financing fees of $154 in
August, 2001. To the extent the Credit Facility remains outstanding as of
certain dates, the Company is committed to pay incremental financing fees as
follows: November 14, 2001--2% of outstanding commitment and February 14,
2002--2% of outstanding commitment. As of September 6, 2001, $2,698 was
available for borrowing under the Credit Facility and outstanding letters of
credit aggregated $29,612.
In February 2000, the Company executed a $15,500 term loan with the
financial institution that is the agent under the Credit Facility. The term
loan is senior secured debt; bears interest at 12% per annum, contains
financial covenants that are consistent with the Credit Facility, and matures
in July 2002. As discussed in Note 8, the Company repaid $3,500 of the term
loan from the proceeds of the sale of Caribe. Remaining principal payments of
$500 per month are due beginning in January 2002 with a final principal payment
of $8,500 due in July 2002. Under the term loan agreement, the Company also
granted the lender common stock purchase warrants to purchase 129,000 shares of
the Company's common stock exercisable for nominal consideration at any time
until December 31, 2005. If the term loan is not repaid in full, the warrants
entitle the holder to require the Company to repurchase the warrants or common
shares issued upon prior exercise of the warrants at $8.50 per share. The
lender has not required the Company to repurchase any warrants through August
29, 2001. The Company has recorded the value of these warrants ($1,079) as
additional deferred financing costs and accrued expenses and is amortizing this
amount to interest expense over the term of the loan.
F-43
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As discussed in Note 7, the Company's senior lenders have agreed to forbear
until December 31, 2001 in regard to the default which existed in the senior
credit facilities resulting from the failure to make the August 15, 2001
subordinated note interest payment. This forbearance effectively cures the
cross-default under the term loan through the end of the forbearance period.
Subsequent to the end of the forbearance period (if the restructuring is not
completed by that date or if the forbearance period is not otherwise extended),
the holder of the term loan will have the ability to accelerate payment of the
outstanding term loan balance. As a result, the entire $12,000 balance of the
term loan as of June 30, 2001 has been classified as a current liability in the
accompanying condensed consolidated balance sheet.
In February 2001, the Company obtained a $10,000 term loan from a financial
institution. The term loan is senior secured debt, bears interest at LIBOR plus
2% and matures in August 2002. The proceeds of the term loan were used to pay
the semi-annual interest payment on the senior subordinated notes in February
2001 of $6,704 and for working capital purposes. In connection with the term
loan, the Company issued warrants to purchase 250,000 shares of its unissued
common stock at an exercise price of $4.00 per share to each of four
individuals, one of whom is an officer and director of the Company and one of
whom is a principal stockholder of the Company. Each of these individuals
provided credit support to the financial institution which advanced the loan
proceeds. The Company has recorded the value of these warrants ($2,536) as
additional deferred financing costs and is amortizing this amount to expense
over the term of the loan. In May 2001, the Company obtained a short-term
increase of up to $3,000 in the term loan. The Company borrowed $2,000 under
the increased term loan in May 2001, and thereafter repaid the additional
borrowing from the proceeds of the Caribe sale. One of the Company's principal
stockholders provided credit support for the increased amount of the term loan.
In return for providing credit support, the stockholder received a cash fee of
$67 and warrants to purchase 333,334 shares of the Company's common stock at an
exercise price of $1.40 per share. The value of these warrants ($356) and the
cash fee of $67 were charged to results of operations during the quarter ended
June 30, 2001.
SENIOR SUBORDINATED NOTES
In February 1998, the Company sold $165,000 of senior subordinated notes
with a coupon rate of 8.125% at a price of 99.395%. The senior subordinated
notes mature on February 15, 2008. Interest is payable on February 15 and
August 15 of each year. The senior subordinated notes are general unsecured
obligations of the Company, subordinated in right of payment to all existing
and future senior debt, including indebtedness outstanding under the Credit
Facility and under facilities, which may replace the Credit Facility in the
future. In addition, the senior subordinated notes are effectively subordinated
to all secured obligations to the extent of the assets securing such
obligations, including the Credit Facility.
The indenture pursuant to which the senior subordinated notes have been
issued permits the Company and its subsidiaries to incur additional
indebtedness, including additional senior debt. Under the indenture, the
Company may borrow unlimited additional amounts so long as after incurring such
debt it meets a fixed charge coverage ratio for the most recent four fiscal
quarters. Additionally, the indenture allows the Company to borrow and have
outstanding additional amounts of indebtedness (even if it does not meet the
required fixed charge coverage ratios), up to enumerated limits. The Company
did not meet the fixed charge coverage ratio for the one-year period ended June
30, 2001. Accordingly, its ability to incur additional debt is currently
limited under its indenture. The senior subordinated notes are also effectively
subordinated in right of payment to all existing and future liabilities of any
of its subsidiaries that do not guarantee the senior subordinated notes.
The senior subordinated notes are fully and unconditionally guaranteed, on a
senior subordinated basis, by substantially all of the Company's existing
subsidiaries and each subsidiary that will be organized in the future by the
Company unless such subsidiary is designated as an unrestricted subsidiary.
Subsidiary guarantees are
F-44
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
joint and several, full and unconditional, general unsecured obligations of the
subsidiary guarantors. Subsidiary guarantees are subordinated in right of
payment to all existing and future senior debt of subsidiary guarantors,
including the Credit Facility, and are also effectively subordinated to all
secured obligations of subsidiary guarantors to the extent of the assets
securing their obligations, including the Credit Facility. Furthermore, the
indenture permits subsidiary guarantors to incur additional indebtedness,
including senior debt, subject to certain limitations. The Company has not
presented separate financial statements and other disclosures concerning each
of the subsidiary guarantors because management has determined that such
information is not material to investors.
The senior subordinated notes are redeemable, at the Company's option, in
whole or in part, at any time after February 15, 2003, at the following
redemption prices, plus accrued and unpaid interest and liquidated damages, if
any, to the redemption date: (i) 2003--104.063%; (ii) 2004--102.708%; (iii)
2005--101.354%; and (iv) 2006 and thereafter--100%. Upon the occurrence of a
change in control, the Company will be required to make an offer to repurchase
all or any part of each holder's senior subordinated notes at a repurchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest and liquidated damages, if any, thereon to the repurchase date. There
can be no assurance that the Company will have the financial resources
necessary to purchase the senior subordinated notes upon a change in control or
that such repurchase will then be permitted under the Credit Facility.
Under the indenture, if the Company sells assets (other than inventory in
the ordinary course of business or leases or assets subject to leases in the
ordinary course of business) with a fair market value in excess of $2,000 or
for net proceeds in excess of $2,000, the Company must comply with certain
requirements. Additionally, the Company must use the proceeds from such asset
sales, within 270 days after completion of the sales, to either permanently
repay senior debt or to acquire other businesses or assets (or, if such
proceeds are not used for these purposes, then such proceeds must be used to
repurchase senior subordinated notes). Further, if the value of the assets sold
exceeds $15,000, the Board of Directors must determine that the Company is
receiving fair market value for the assets sold.
The indenture contains certain other covenants that, among other things,
limit the Company's ability and that of its subsidiaries to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, make investments, issue capital stock of subsidiaries, create
certain liens securing indebtedness, enter into certain transactions with
affiliates, sell assets or enter into certain mergers and consolidations or
sell all or substantially all of the Company's assets.
On August 14, 2001, the Company entered into an agreement with the holders
of 73.02% of its outstanding 8 1/8% senior subordinated notes to restructure
those notes. See Note 7.
OTHER LOANS
In connection with the Company's acquisition of Kratz-Wilde Machine Company
in October 1997, a subsidiary of the Company delivered a non-interest-bearing
promissory note (guaranteed by the Company) to the sellers in the original
principal amount of $2,500 (discounted to $2,200). A payment of $1,250 was made
during January 1999 and the final payment of $1,250 was made during January
2000. Interest on this note was imputed at 8%.
In connection with the acquisition of Caribe and AIDI, a subsidiary of the
Company delivered to the sellers a promissory note in the original principal
amount of $5,000, which was guaranteed by the Company. The note was payable
over a two year period with an interest rate of 8% per annum. The first payment
of $2,500 was made during March 1999 and the second payment of $2,500 was made
during March 2000.
F-45
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. COMMITMENTS AND CONTINGENCIES
LITIGATION AND CLAIMS
Several lawsuits have been filed against the Company and certain of its
officers and directors, and its auditors, in the United States District Court
for the Southern District of Florida, which have now been consolidated into a
single lawsuit. The consolidated complaint, as amended in March 2000 and in
September 2000, alleges violations of Sections 11 and 15 of the Securities Act
of 1933 ("Securities Act") and Sections 10(b) and 20(a) of, and Rule 10b-5
under, the Securities Exchange Act of 1934 ("Exchange Act"). Among other
matters, the amended consolidated complaint alleges that the Company's reported
financial results were materially misleading and violated generally accepted
accounting principles. The amended consolidated complaint seeks damages and
certification of two classes, one consisting of purchasers of the Company's
common stock in the June 1999 public offering and one consisting of purchasers
of the Company's common stock during the period between April 30, 1997 and
April 14, 2000. On August 22, 2001, the District Court granted the Company's
motion to dismiss the pending claims under the Exchange Act, with leave to
amend, but denied the Company's motion to dismiss the pending claims under the
Securities Act. The Company believes that the allegations contained in the
amended consolidated complaint are without merit and intends to vigorously
defend these and any related actions. Nevertheless, unfavorable resolution of
these lawsuits could have a material adverse effect on the Company's financial
position and results of operations.
The U.S. Securities and Exchange Commission is conducting an inquiry into
the Company's accounting for certain prior year transactions. The Company is
cooperating with the SEC in its inquiry.
The Company is also involved in various lawsuits and other contingencies
arising out of its operations in the normal course of business. In the opinion
of management, the ultimate resolution of these claims and lawsuits will not
have a material adverse effect upon the financial position or results of
operations of the Company.
ENVIRONMENTAL MATTERS
The Company is taking remedial action pursuant to Environmental Protection
Agency and Florida Department of Environmental Protection ("FDEP") regulations
at TIMCO-Lake City. Ongoing testing is being performed and new information is
being gathered to continually assess the impact and magnitude of the required
remediation efforts on the Company. Based upon the most recent cost estimates
provided by environmental consultants, the Company believes that the total
testing, remediation and compliance costs for this facility will be
approximately $1,400. Testing and evaluation for all known sites on TIMCO-Lake
City's property is substantially complete and the Company has commenced a
remediation program. The Company is currently monitoring the remediation, which
will extend into the future. Subsequently, the Company's accruals were
increased because of this monitoring, which indicated a need for new equipment
and additional monitoring. Based on current testing, technology, environmental
law and clean-up experience to date, the Company believes that it has
established an accrual for a reasonable estimate of the costs associated with
its current remediation strategies. To comply with the financial assurances
required by the FDEP, the Company has issued a $1,400 standby letter of credit
in favor of the FDEP.
Additionally, there are other areas adjacent to TIMCO-Lake City's facility
that could also require remediation. The Company does not believe that it is
responsible for these areas; however, it may be asserted that the Company and
other parties are jointly and severally liable and are responsible for the
remediation of those properties. No estimate of any such costs to the Company
is available at this time.
F-46
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company owns a parcel of real estate on which the Company previously
operated an electronics business. The Company is currently assessing
environmental issues with respect to this property. When the Company acquired
Whitehall, its environmental consultants estimated that remediation costs
relating to this property could be up to $1,000.
Accrued expenses in the accompanying December 31, 2000 and June 30, 2001
condensed consolidated balance sheets includes $1,702 and $1,386, respectively,
related to obligations to remediate the environmental matters described above.
Future information and developments will require the Company to continually
reassess the expected impact of the environmental matters discussed above.
Actual costs to be incurred in future periods may vary from the estimates,
given the inherent uncertainties in evaluating environmental exposures. These
uncertainties include the extent of required remediation based on testing and
evaluation not yet completed and the varying costs and effectiveness of
remediation methods.
OTHER MATTERS
The Company has employment agreements with certain of its officers and key
employees. The employment agreements provide that such officers and key
employees may earn bonuses, based upon a sliding percentage scale of their base
salaries, provided the Company achieves certain financial operating results, as
defined. Further, certain of these employment agreements provide for certain
severance benefits in the event of a change of control.
In January 2001, the Company sold a loan related to its former corporate
headquarters to a principal stockholder of the Company for 90% of the then
outstanding principal balance of $2,006. In conjunction with the transaction,
the Company granted to the stockholder warrants to purchase 25,000 shares of
common stock at an exercise price of $3.63 per share. The value of the warrants
of $46 was charged to operating results and credited to additional paid-in
capital.
The Company has a commitment with a vendor to convert one Airbus aircraft
from passenger configuration to cargo configuration. The terms of the agreement
specify that the Company has the right to terminate the agreement; however, the
Company could be subject to a termination fee. The termination fee would be
calculated as the unused costs incurred by the vendor plus a fee equal to 10%
of such unused costs.
On December 17, 1998, the Company entered into an operating lease for its
build-to-suit corporate headquarters and warehouse facility with Wells Fargo,
as successor to First Security Bank, National Association, as trustee of a
newly created trust, as lessor. The lease has an initial term of five years and
is a triple net lease with annual rent as provided in the lease. The lease
contains financial covenants regarding the Company's financial performance and
certain other affirmative and negative covenants, which it will be obligated to
comply with during the term of the lease.
Substantially all of the Company's subsidiaries have guaranteed the
Company's obligations under the lease. Additionally, the Company has an option
to acquire the new facility at the end of the lease for an option price as
determined in the lease. Alternatively, if the Company does not purchase the
new facility at the end of the lease, it will be obligated to pay certain
amounts as provided in the lease. Management estimates that the current fair
value of the facility exceeds the Company's purchase option. Accordingly, no
accrual for the obligation has been recorded by the Company.
Lease payments are currently at a rate of LIBOR plus 4.50% and the Company
is responsible for all property taxes, insurance and maintenance of the
property. The Company has subleased a portion of the facility to the purchaser
of the Company's redistribution operation (see Note 2). The sublease is for an
initial term of five years with an additional option to renew for five
consecutive five-year terms at market rates. Payments
F-47
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
during the initial term are the lesser of $384 per month or the actual amount
paid by the Company relating to the premises subleased, less $26 per month
relating to certain space which the Company occupies in the building.
The development of the new facility was financed by the trust through a
$43,000 loan facility provided by a financial institution. Pursuant to the
agreements entered into in connection with this financing, the Company was
obligated to develop the new facility on behalf of the trust and was
responsible for the timely completion thereof within an established
construction budget. As discussed in Note 8, in conjunction with the sale of
Caribe, the purchaser of this business also acquired the real estate and
facility used by the Caribe business for $8,500. These proceeds were used to
repay a portion of the financing utilized to develop this facility. The Company
and substantially all of its subsidiaries have guaranteed the repayment of
$29,340 of the trust's obligations under these agreements. The trust's
obligations under these agreements are secured by a lien on the real property
and improvements comprising the facilities and on the fixtures therein.
Further, the Company has issued an irrevocable letter of credit in the amount
of $9,000 to secure both its obligations under the lease and certain of the
trust's obligations under the loan agreement.
The lease agreement has been amended on several occasions. Under the terms
of the April 19, 2001 amendment, two shareholders of the Company provided a
guarantee in an amount up to $1.0 million. In exchange for providing their
guarantee, the shareholders each received warrants to purchase 50,000 shares of
the Company's common stock at an exercise price of $1.75 per share the value of
which was charged to results of operations during the period. Such guarantee
has been released in conjunction with the sale of Caribe and repayment of
proceeds relating to the sale of the real estate and facility as discussed
above. As part of the April 19, 2001 amendment, the lessor has also agreed to
waive non-compliance with financial covenants, if any, through the period ended
December 31, 2001.
Further, under a September 10, 2001 agreement with the lender, the Company
has agreed that the lender may draw down in full, at any time, the $9,000
letter of credit which the Company has posted as security for this loan and to
apply the proceeds from such letter of credit draw against balances outstanding
under this loan agreement.
6. EARNINGS PER SHARE
The computation of weighted average common and common equivalent shares used
in the calculation of basic and diluted earnings per share is as follows:
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
------------- -------------
2000 2001 2000 2001
------ ------ ------ ------
Weighted average common and common equivalent
shares outstanding used in calculating basic
and diluted earnings per share............... 15,015 15,015 15,015 15,015
====== ====== ====== ======
Options and warrants outstanding which are not
included in the calculation of diluted
earnings per share because their impact is
antidilutive................................. 1,773 4,285 1,773 4,285
====== ====== ====== ======
7. CONTEMPLATED SENIOR SUBORDINATED NOTE RESTRUCTURING AND RIGHTS OFFERING
In August 2001, the Company entered into an agreement with the holders of
73.02% of its outstanding senior subordinated notes to restructure those notes.
Under the agreement, the note holders will exchange their
F-48
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
existing notes for up to $10,000 in cash, $100,000 of new five-year notes with
"paid-in-kind" interest of 8% per annum and 15% of the equity of the
reorganized company. The new notes will be redeemable at the Company's option
at the following percentages of par plus accrued interest through the date of
redemption: 2002--70.0%, 2003--72.5%, 2004--73.0%, 2005--75.625% and 2006--
77.5%. If the new notes are not redeemed prior to their maturity, they will
convert into common stock representing 90% ownership of the reorganized
company. The new notes will also provide that the holders will receive
additional shares of common stock representing 15% of the reorganized company
if the notes are redeemed in 2002 or 2003 and 10% of the reorganized company if
the notes are redeemed in 2004, 2005 or 2006. As a result of the contemplated
note restructuring and agreement entered into with holders of the existing
notes, the Company has classified the existing senior subordinated notes as a
current liability in the accompanying condensed consolidated balance sheet as
of June 30, 2001.
In connection with the restructuring, the Company intends to conduct a
rights offering of shares of its common stock to all existing stockholders to
raise $20,000. A principal stockholder of the Company has agreed to provide the
Company with a standby commitment to purchase any unsold allotments. Investors
who purchase the $20,000 of shares in the restructured company will receive 80%
of the outstanding common stock of the reorganized company. Under the terms of
the agreement, the Company's existing stockholders will own 5% of the
reorganized company. Additionally, the Company's new note holders and existing
stockholders will each as a group be granted warrants at a fixed price to
purchase an additional 10% of the reorganized company.
Approval of the note restructuring and the sale of common stock in the
rights offering will require approval of a majority of the Company's
stockholders. Completion of the note restructuring will also be subject to the
requirement that 80% of the holders of the Company's existing notes tender
their notes in the exchange and consent to the removal of all covenants
contained in the indenture relating to the existing notes (other than the
obligation to pay principal and interest), approval by the Company's senior
lenders and other customary conditions. Although there can be no assurances,
the restructuring is expected to be completed by the end of 2001.
Under the agreement, the holders of more than a majority of the Company's
outstanding notes have agreed to waive the default arising as a result of the
failure to pay the interest payment on its notes due on due August 15, 2001.
Also, the Company's senior lenders have agreed to forbear on the default in the
senior loan agreements resulting from the failure to make the August 15, 2001
note interest payment until December 31, 2001. The Company intends to file
registration statements relating to the note exchange offer and rights offering
in the near future.
In the event that the note exchange offer and rights offering fails to
close, such failure is likely to have a material adverse effect on the Company.
If the Company is unable to close the note exchange offer and rights offering,
it will seek alternative financing to meet its working capital obligations.
However, there can be no assurance such funding will be available.
8. OTHER EVENTS
Due to the current economic environment and the depressed status of the
aviation industry including market for overhaul services relating to JT8D
engines and the results of operations relating to the Company's engine overhaul
operation, during the quarter ended June 30, 2001 the Company recognized non-
cash charges totaling $10,886 relating to an impairment of goodwill, leasehold
improvements and fixed assets and inventory reserves relating to this
operation. Of this amount, $9,886 and $1,000 are recorded in operating expenses
and cost of sales, respectively, in the accompanying condensed consolidated
statements of income.
F-49
AVIATION SALES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 2001, the Company completed the sale of the assets of its Caribe
Aviation component repair operation. The purchase price was $22,500, of which
$21,750 was received in cash at the closing and the balance will be received
within one year, subject to post closing adjustments. The Company used $10,000
of the proceeds from the sale to repay its revolving credit facility and $5,500
to repay borrowings under its term loans (see Note 4). The balance, net of
expenses, was used for working capital. In addition, the purchaser acquired the
real estate and facility on which the Caribe operation was located for an
aggregate purchase price of $8,500. The proceeds from the sale of the real
estate and facility were used to reduce the Company's outstanding tax retention
operating lease financing (see Note 5).
During the quarter ended June 30, 2001, the Company recognized a gain on the
sale of Caribe Aviation and income on a non-refundable lease deposit that had
previously been recorded as a long-term liability totaling $7,868. In the
aggregate, these amounts are recorded in other (income) expense in the
accompanying condensed consolidated statements of income. In addition, during
the quarter ended June 30, 2001 the Company received settlements on accounts
receivable of the former redistribution operation that had been previously
fully reserved. These collections, totaling $2,645, are recorded as part of
loss from discontinued operations in the accompanying condensed consolidated
statements of income.
F-50
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements are based on the historical financial statements of the Company
adjusted to give effect to the proposed restructuring of the old notes. The
restructuring includes:
. The offering of rights to purchase 24,024,507 post-reverse split shares
of our common stock to our existing shareholders for proceeds of $20
million.
. The exchange offer of a combination of:
. up to $10 million in cash in exchange for $33 million of principal
of old notes, and
. up to $100 million of principal amounts of new notes, up to
4,504,595 post-reverse split shares of our common stock and up to
3,003,063 warrants to purchase post-reverse split shares of our
common stock in exchange for $132 million in principal amount of our
old notes.
. Reverse-split of our issued and outstanding common stock on a ten share
for one share basis.
The following unaudited pro forma condensed combined financial statements
present: (i) the pro forma financial position of the Company at June 30, 2001
as if the proposed restructuring had been consummated on that date, and (ii)
the pro forma results of operations of the Company for the six months ended
June 30, 2001 and the year ended December 31, 2000 as if the restructuring had
been consummated as of the beginning of the periods. The information presented
is derived from, should be read in conjunction with, and is qualified in its
entirety by reference to, the separate historical financial statements and the
notes thereto appearing elsewhere in this Prospectus or incorporated elsewhere
in this Prospectus by reference. The unaudited pro forma condensed combined
financial data have been included for comparative purposes only and do not
purport to be indicative of the results of operations or financial position
which actually would have been obtained if the restructuring had been effected
at the beginning of the periods or as of the date indicated or of the financial
position or results of operations which may be obtained in the future.
P-1
AVIATION SALES COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(in thousands, except per share data)
Pro forma Pro forma
Historical Adjustments 2000
---------- ----------- ---------
Operating revenues:
Sales....................................... $ 333,289
Other....................................... 4,788
---------
Total operative revenues.................. 338,077
Cost of sales................................. 353,331
---------
Gross profit (loss)........................... (15,254)
Operating expenses............................ 74,580
---------
Loss from operations.......................... (89,834)
Interest expense.............................. 20,347
Other expense................................. 925
---------
Income (loss) before income taxes, equity
income of affiliates, discounted operations
and extraordinary item....................... (111,106)
Income tax expense............................ 4,810
---------
Loss before equity income of affiliates,
discontinued operations and extraordinary
item......................................... (115,916)
Equity income of affiliates, net of income
tax.......................................... 43
---------
Loss from continuing operations............... $(115,873)
=========
Basic Loss Per Share from continuing
operations................................... $ (7.72)
=========
Diluted Loss Per Share from continuing
operations................................... $ (7.72)
=========
Weighted average shares outstanding:
Basic....................................... 15,015
=========
Diluted..................................... 15,015
=========
P-2
AVIATION SALES COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(in thousands, except per share data)
Pro Forma Pro Forma
Historical Adjustments 2001
---------- ----------- ---------
Operating revenues:
Sales...................................... $146,847
Other...................................... 5,615
-------- --- ---
152,462
Cost of sales.............................. 152,542
-------- --- ---
Gross profit (loss).......................... (80)
Operating expenses........................... 29,217
-------- --- ---
Loss from operations......................... (29,297)
Interest expense............................. 13,116
Charge to reserve notes receivable from KAV
Inventory, LLC.............................. 29,400
Other expense (income)....................... (6,918)
-------- --- ---
Loss before income taxes, equity income of
affiliate, discontinued operations and
extraordinary item.......................... $(64,895)
Income tax expense........................... 48
-------- --- ---
Loss before equity income of affiliate,
discontinued operations and extraordinary
item........................................ (64,943)
Equity income of affiliate................... --
-------- --- ---
Loss from continuing operations.............. $(64,943)
======== === ===
Basic loss per share from continuing
operations.................................. $ (4.33)
========
Diluted loss per share from continuing
operations.................................. $ (4.33)
========
Weighted average shares of common stock and
common stock equivalents used to calculate
earnings per share, basic and diluted....... 15,015
======== === ===
P-3
AVIATION SALES COMPANY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AT JUNE 30, 2001
Pro Forma
June 30, Pro Forma June 30,
2001 Adjustments 2001
--------- ----------- ---------
in thousands
ASSETS
Current Assets:
Cash and cash equivalents................... $ --
Accounts receivable, net.................... 38,942
Inventories................................. 46,904
Other current assets........................ 6,044
---------
Total current assets...................... 91,890
---------
Equipment on lease, net....................... 407
Fixed assets, net............................. 56,973
Amounts due from related parties.............. --
Other Assets:
Goodwill, net............................... 26,904
Deferred financing costs, net............... 8,516
Notes receivable from KAV Inventory, LLC.... --
Net assets of discontinued operations....... --
Other....................................... 14,957
---------
Total other assets........................ 50,377
---------
Total assets.............................. $ 199,647
=========
LIABILITIES & STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable............................ $ 21,377
Accrued expenses............................ 24,006
Current maturities of notes payable......... 12,029
Current maturities of capital lease
obligations................................ 178
Senior subordinated notes (see Note 7)...... 164,391
Revolving loan.............................. 4,911
Customer deposits........................... 14,948
Other....................................... 2,782
---------
Total current liabilities................. 244,622
---------
Senior subordinated notes (see Note 7)........ --
Notes payable, net of current portion......... 10,000
Capital lease obligations, net of current
portion...................................... 3,786
Deferred income............................... 36
Net liabilities of discontinued operations.... 658
Other long-term liabilities................... --
---------
Total long-term liabilities............... 14,480
---------
Commitments and Contingencies (See Notes)
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value, 1,000,000
shares authorized, none outstanding, 15,000
shares designated Series A Junior
Participating.............................. --
Common stock, $.001 par value, 30,000,000
shares authorized, 15,015,317 shares issued
and outstanding at December 31, 2000 and
June 30, 2001, respectively................ 15
Additional paid-in capital.................. 153,226
Accumulated deficit......................... (212,696)
---------
Total stockholders' equity (deficit)...... (59,455)
---------
Total liabilities and stockholders' equity
(deficit)................................ $ 199,647
=========
P-4
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
[TO BE FILED BY AMENDMENT]
P-5
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVIATION SALES COMPANY
Exchange Offer and Consent Solicitation
Outstanding 8 1/8% Senior Subordinated Notes due 2008
----------------
Prospectus
and
Consent Solicitation
----------------
, 2001
In order to tender, a holder must send or deliver a properly completed and
signed Consent and Letter of Transmittal, certificates for old notes and any
other required documents to the exchange agent at its address set forth below
or tender pursuant to DTC's Automated Tender Offer Program.
The exchange agent for the exchange offer is:
----------------
By facsimile (for For information or
eligible institutions only): confirmation by:
( ) - ( ) -
----------------
Any questions or requests for assistance or for additional copies of this
prospectus and consent solicitation, the Consent and Letter of Transmittal or
related documents may be directed to the exchange agent at its telephone number
set forth above. A holder may also contact the dealer manager at its telephone
number set forth below or such holder's broker, dealer, commercial bank, trust
company or other nominee for assistance concerning this exchange offer and
consent solicitation.
The exclusive dealer manager for the exchange offer is:
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of directors and officers
Subsection (a) of section 145 of the General Corporation Law of the State of
Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above, against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been made to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
Section 145 in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification
provided for by Section 145 shall not be deemed exclusive of any other rights
to which the indemnified party may be entitled; that indemnification provided
for by Section 145 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of such person's heirs,
executors and administrators; and empowers the corporation to purchase and
maintain insurance on behalf of a director or officer of the corporation
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such whether or not the corporation
would have the power to indemnify him against such liabilities under
Section 145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision
eliminating or limiting the personal liability of a director to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal benefit.
Article VII of Aviation Sales Company's Second Amended and Restated
Certificate of Incorporation states that:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the
II-1
Director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware (the DGCL), or (iv) for any transaction from which
the Director derived an improper personal benefit. If the DGCL is amended after
the effective date of this Second Amended and Restated Certificate of
Incorporation to authorize corporate action further eliminating or limiting the
personal liability of Directors, then the liability of a Director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
Any repeal or modification of this Article VII by (i) the stockholders of
the Corporation or (ii) an amendment to the DGCL, shall not adversely affect
any right or protection existing at the time of such repeal or modification
with respect to any acts or omissions occurring before such repeal or
modification of a person serving as Director at the time of such repeal or
modification.
In addition, Article V of Aviation Sales Company's Bylaws further provides
that the Corporation shall indemnify its present and former officers, directors
and employees to the fullest extent permitted by law.
Aviation Sales Company has entered into indemnification agreements with
certain executive officers and directors.
These limitations on liability would apply to violations of the federal
securities laws. However, the registrant has been advised that in the opinion
of the SEC, indemnification for liabilities under the Securities Act of 1933 is
against public policy and therefore unenforceable.
ITEM 21. Exhibits and financial statement schedules
(a) Exhibits
Exhibit
Number Description
------- -----------
1.1 Form of Dealer Manager Agreement, dated [ ], 2001 by and between
Aviation Sales and Houlihan Lokey Howard & Zukin Capital(2)
3.1 Certificate of Incorporation of Aviation Sales and amendment
thereto(3)
3.2 Second Amendment to Certificate of Incorporation(5)
3.3 Bylaws of Aviation Sales(3)
4.1 Indenture, dated as of February 17, 1998, among Aviation Sales, the
Subsidiary Guarantors named therein and SunTrust Bank, Central
Florida, National Association, Trustee(2)
4.2 Form of Supplemental Indenture among Aviation Sales, the Subsidiary
Guarantors named therein and SunTrust Bank, Central Florida, National
Association(2)
4.3 Common Stock Purchase Warrant Certificate issued on February 18, 2000
to Citicorp USA, Inc.(11)
4.4 Form of Common Stock Purchase Warrants issued in February, 2001 to
four individuals(17)
4.5 Form of Indenture among Aviation Sales Company, the Subsidiary
Guarantors named therein and Trustee with respect to the 8% Senior
Subordinated Convertible Notes due 2006(2)
4.6 Form of Warrant Agreement(2)
5.1 Opinion of Akerman, Senterfitt & Eidson, P.A.(2)
8.1 Opinion of Akerman, Senterfitt & Eidson, P.A.(2)
II-2
Exhibit
Number Description
------- -----------
10.1 Fourth Amended and Restated Credit Agreement dated May 31, 2000 by and
among Aviation Sales, certain of our Subsidiaries and Citicorp USA,
Inc., as Agent(12)
10.2 Reserved
10.3 Lease dated July 22, 1998 by and between Ben Quevedo, Ltd. and
Caribe(8)
10.4 Reserved
10.5 Amended Employment Agreement, effective as of December 2, 1994, by and
between Harold Woody and Aviation Sales(5)
10.6 Form of Employment Agreement, dated January 1, 1999, by and between
Benito Quevedo and Aviation Sales(8)
10.7 1996 Director Stock Option Plan(5)
10.8 1996 Stock Option Plan(5)
10.9 1997 EBITDA Incentive Compensation Plan(6)
10.10 Form of Aviation Sales Company 1999 EBITDA Plan(8)
10.11 Form of Stock Option Agreement (Non-Plan) by and between Aviation
Sales and each of Dale S. Baker and Benito Quevedo(8)
10.12 Special Incentive Compensation Plan(9)
10.13 Credit Agreement dated as of December 17, 1998 among First Security
Bank, National Association, as Owner Trustee for the Aviation Sales
Trust 1998-1, as Lessor, NationsBank, National Association, as
Administrative Agent, and the several Lenders thereto(7)
10.14 Lease Agreement dated as of December 17, 1998 between First Security
Bank, National Association, as Owner Trustee under Aviation Sales
Trust 1998-1, as Lessor, and Aviation Sales, as Lessee(7)
10.15 Guaranty Agreement (Series A Obligations) between Aviation Sales,
substantially all of our subsidiaries and NationsBank, National
Association, as Agent for the Series A Lenders, dated as of December
17, 1998(7)
10.16 Guaranty Agreement (Lease Obligations) between substantially all of
the subsidiaries of Aviation Sales and First Security Bank, National
Association, as Owner Trustee for the Aviation Sales Trust 1998-1,
dated as of December 17, 1998(7)
10.17 Participation Agreement between Aviation Sales as Construction Agent
and Leases, First Security Bank, National Association, as Owner
Trustee, the Various Banks and other lending institutions as the
Holders and Lenders, and NationsBank, National Association, as
Administrative Agent, dated as of December 17, 1998(7)
10.18 Stockholders' Rights Plan(10)
10.19 Term Loan Note, dated February 18, 2000(11)
10.20 Amendment No. 1 to Participation Agreement between Aviation Sales as
Construction Agent and Leases, First Security Bank, National
Association, as Owner Trustee, the Various Banks and other lending
institutions as the Holders and Lenders, and NationsBank, National
Association, as Administrative Agent, dated as of February 18,
2000(11)
10.21 Standstill Agreement between Aviation Sales, LJH Corporation and Lacy
J. Harber(11)
10.22 Amendment No. 1 to Stockholders' Rights Plan(11)
II-3
Exhibit
Number Description
------- -----------
10.23 Amended and Restated Term Loan Note, dated May 31, 2000(12)
10.24 Amendment Agreement No. 2 for Lease Agreement and Certain Other
Operative Agreements, dated May 31, 2000(12)
10.25 Amendment No. 1, dated as of August 14, 2000, to the Fourth Amended
and Restated Credit Agreement(13)
10.26 Amendment Agreement No. 3 for Lease Agreement and Certain Other
Operative Agreements(13)
10.27 Asset Purchase Agreement by and among Barnes Group Inc., Aviation
Sales, Aviation Sales Manufacturing Company, AVS/Kratz-Wilde Machine
Company and Apex Manufacturing, Inc. dated as of August 3, 2000(14)
10.28 Amendment No. 1 dated September 7, 2000 to the Asset Purchase
Agreement by and among Barnes Group Inc., Aviation Sales, Aviation
Sales Manufacturing Company, AVS/Kratz-Wilde Machine Company and Apex
Manufacturing, Inc. dated as of August 3, 2000(14)
10.29 Amendment No. 2 dated as of November 14, 2000 to Fourth Amended and
Restated Credit Agreement(15)
10.30 Amendment Agreement No. 4 for Lease Agreement and Certain Other
Operative Agreements(15)
10.31 Asset Purchase Agreement among Aviation Sales, Aviation Sales
Distribution Services Company ("ASDC") and Kellstrom, dated September
20, 2000(16)
10.32 Letter Agreement to Asset Purchase Agreement, dated November 28,
2000(16)
10.33 Inventory Purchase Agreement among KAV, Aviation Sales and ASDC, dated
September 30, 2000(16)
10.34 Letter Amendment to Inventory Purchase Agreement, dated November 28,
2000(16)
10.35 Form of KAV Senior Subordinated Note(16)
10.36 Form of KAV Junior Subordinated Note(16)
10.37 Operating Agreement of KAV, dated September 20, 2000, between Aviation
Sales and Kellstrom(16)
10.38 Letter Agreement between Kellstrom, KAV and Aviation Sales, dated
December 1, 2000, with respect to the payment of KAV Operating
Expenses(16)
10.39 Consignment Agreement between KAV and Kellstrom, dated December 1,
2000(16)
10.40 Equipment Lease Agreement, dated December 1, 2000, among Aviation
Sales, ASDC and Kellstrom(16)
10.41 Lease Agreement, dated December 1, 2000, among ASDC and Kellstrom
(Pearland)(16)
10.42 Lease Agreement, dated December 1, 2000, between Kellstrom and
Aviation Sales (Miramar)(16)
10.43 Non-Competition Agreement, dated December 1, 2000, among ASDC,
Aviation Sales and Kellstrom(16)
10.44 License Agreement, dated December 1, 2000, among Aviation Sales, ASDC
and Kellstrom(16)
10.45 Cooperation Agreement, dated December 1, 2000, between Kellstrom and
Aviation Sales(16)
10.46 Letter Agreement, dated December 1, 2000, between Kellstrom and
Aviation Sales (Equipment)(16)
10.47 Letter Agreement, dated December 1, 2000, between Kellstrom and
Aviation Sales (Pearland)(16)
10.48 Consent and Amendment No. 3, dated November 28, 2000, to the Fourth
Amended and Restated Credit Agreement dated as of May 31, 2000, as
amended(16)
II-4
Exhibit
Number Description
------- -----------
10.49 Amendment and Consent Agreement No. 5 for Participation Agreement and
Certain Other Operative Agreements, dated as of December 1, 2000(16)
10.50 Amendment No. 1 to Agreement, dated December 4, 2000(16)
10.51 Amendment No. 2 to Rights Agreement, dated December 4, 2000(16)
10.52 Agreement, dated February 14, 2001, between various subsidiaries of
Aviation Sales and Bank of America, N.A.(17)
10.53 $10.0 million Term Loan Note, dated February 14, 2001(17)
10.54 Form of Limited Guaranty in favor of Bank of America, N.A.(17)
10.55 Amendment No. 4, Consent and Waiver, dated February 14, 2001, to the
Fourth Amended and Restated Credit Agreement dated as of May 31, 2000,
as amended(17)
10.56 Amendment and Consent Agreement No. 7 for Lease Agreement and Certain
Other Operative Agreements, dated as of February 14, 2001(17)
10.57 Note Modification Agreement, dated as of February 14, 2001(17)
10.58 Stock Purchase Agreement, dated December 15, 2000, among Wencor West,
Inc. Aviation Sales and ASDC(16)
10.59 Amendment No. 5 and Waiver, dated as of April 17, 2001 to Fourth
Amended and Restated Credit Agreement dated as of May 31, 2000,
amended(18)
10.60 Letter Agreement dated April 17, 2001, regarding $15.5 million Term
Loan(18)
10.61 Amendment and Consent Agreement No. 8 for Lease Agreement and Certain
Other Operative Agreements(18)
10.62 Asset Purchase Agreement dated May 25, 2001 among Aviation Sales,
Caribe Aviation, Inc. and Hamilton Sundstrand Service Corporation(19)
10.63 $13 million Replacement Term Loan Note, dated May 24, 2001(19)
10.64 Amendment No. 6 and Consent, dated May 21, 2001, to the Fourth Amended
and Restated Credit Agreement dated as of May 31, 2000, as amended(19)
10.65 Amendment No. 7, Consent and Waiver, dated May 23, 2001, to the Fourth
Amended and Restated Credit Agreement dated as of May 31, 2000, as
amended(19)
10.66 Amendment and Consent Agreement No. 9 for Lease Agreement and Certain
Other Operative Agreements, dated as of May 21, 2001(19)
10.67 Amendment and Consent Agreement No. 10 for Lease Agreement and Certain
Other Operative Agreements, dated as of May 24, 2001(19)
10.68 Amendment No. 2 to Agreement between Aviation Sales, LJH Corporation
and Lacy J. Harber(19)
10.69 Amendment No. 3 to Stockholders' Rights Plan(19)
10.70 Lockup Agreement dated as of August 14, 2001 by and among Aviation
Sales, Consenting Stockholders and Consenting Noteholders(20)
10.71 Forbearance Letter dated August 16, 2001 of lenders under Credit
Agreement(20)
10.72 Forbearance Letter dated August 16, 2001 of parties to the Tax
Retention Operating Lease(20)
10.73 Consent Letter dated August 13, 2001 regarding the Fourth Amended and
Restated Credit Agreement dated as of May 31, as amended(20)
II-5
Exhibit
Number Description
------- -----------
10.74 Amendment No. 8, Consent and Waiver, dated August 30, 2001 to Fourth
Amended and Restated Credit Agreement(20)
10.75 Consent, Waiver and Forbearance Agreement No. 11 for Lease Agreement
and Certain Operative Agreements, dated as of September 11, 2001(20)
12.1 Computation of Ratio of Earnings to Fixed Charges(2)
21.1 Subsidiaries of Aviation Sales(18)
23.1 Consent of Arthur Andersen LLP(1)
23.2 Consent of Akerman, Senterfitt & Eidson, P.A.(Included in Exhibit 5.1)
25.1 Statement of Eligibility of Trustee on Form T-1(2)
99.1 Form of Consent and Letter of Transmittal(21)
99.2 Form of Letter to Clients(21)
99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees(21)
99.4 Form of Notice of Guaranteed Delivery(21)
99.5 Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9(21)
99.6 Certificate of Foreign Status on Substitute Form W-8(21)
99.7 Power of attorney (Included in signature page)(21)
Notes to Exhibits
(1) Filed herewith
(2) To be filed by amendment
(3) Incorporated by reference to Aviation Sales' Registration Statement on
Form S-1 dated April 15, 1996 (File No. 333-3650)
(4) Incorporated by referenced to Aviation Sales' Registration Statement on
Form S-4 dated March 26, 1998 (File No. 333-48669)
(5) Incorporated by reference to Amendment No. 1 to Aviation Sales'
Registration Statement on Form S-1 dated June 6, 1996 (File No. 333-3650)
(6) Incorporated by reference to Aviation Sales' Annual Report on Form 10-K
for the year ended December 31, 1996
(7) Incorporated by reference to Aviation Sales' Current Report on Form 8-K
dated December 17, 1998
(8) Incorporated by reference to Aviation Sales' Annual Report on Form 10-K
for the year ended December 31, 1998
(9) Incorporated by reference to Aviation Sales' Quarterly Report on Form 10-Q
for the quarter and six months ended June 30, 1999
(10) Incorporated by reference to Aviation Sales' Current Report on Form 8-A
filed November 15, 1999
(11) Incorporated by reference to Aviation Sales' Current Report on Form 8-K
filed on March 27, 2000
(12) Incorporated by reference to Aviation Sales' Current Report on Form 8-K
filed on June 13, 2000
(13) Incorporated by reference to Aviation Sales' Quarterly Report on Form 10-Q
for the quarter and six months ended June 30, 2000
(14) Incorporated by reference to Aviation Sales' Current Report on Form 8-K
filed on September 22, 2000
(15) Incorporated by reference to Aviation Sales' Quarterly Report on Form 10-Q
for the quarter and nine months dated September 30, 2000
(16) Incorporated by reference to Aviation Sales' Current Report on Form 8-K
filed on December 18, 2000
(17) Incorporated by reference to Aviation Sales' Current Report on Form 8-K
filed on March 1, 2001
II-6
(18) Incorporated by reference to Aviation Sales' Annual Report on Form 10-K
for the year ended December 31, 2000
(19) Incorporated by reference to Aviation Sales' Current Report on Form 8-K
filed May 25, 2001
(20) Incorporated by reference to Aviation Sales' Quarterly Report on Form 10-Q
for the quarter and six months ended June 30, 2001.
(21) Previously filed with Aviation Sales's Registration Statement on Form S-4
filed September 14, 2001.
ITEM 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(d) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-7
(e) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(f) That every prospectus (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(g) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(h) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment No. 1 to the Registrant's
Registration Statement on Form S-4 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Miami, Florida, on
October 2, 2001.
Aviation Sales Company
By: /s/ Roy T. Rimmer, Jr.
---------------------------------
Roy T. Rimmer, Jr.
Chairman and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Pre-
Effective Amendment No. 1 to the Registrant's Registration Statement has been
signed by the following persons in the capacities indicated on October 2, 2001.
Signature Title
--------- -----
/s/ Roy T. Rimmer, Jr. Chairman and Chief Executive Officer
______________________________________ (Principal Executive Officer)
Roy T. Rimmer, Jr.
/s/ Michael C. Brant* Vice President and Chief Financial
______________________________________ Officer (Principal Financial and
Michael C. Brant Accounting Officer)
/s/ Ben Quevedo* President and Director
______________________________________
Ben Quevedo
/s/ Sam Humphreys* Director
______________________________________
Sam Humphreys
/s/ Philip B. Schwartz Director and Corporate Secretary
______________________________________
Philip B. Schwartz
/s/ Steven L. Gerard* Director
______________________________________
Steven L. Gerard
* /s/ Philip B. Schwartz
---------------------------------
as Power of Attorney
II-9
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
23.1 Consent of Arthur Andersen LLP
II-10