1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended Commission File No.
JUNE 30, 1999 0-24275
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED
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(Exact name of registrant as specified in its charter)
DELAWARE 52-2081515
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
587 GREENWAY INDUSTRIAL DRIVE
FORT MILL, SOUTH CAROLINA 29715
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(Address of principal executive offices) (Zip code)
(803) 548-2160
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Registrant's telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Shares Outstanding at August 5, 1999
7,190,104
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS --JUNE 30, 1999 AND DECEMBER 31, 1998
(in thousands)
JUNE 30, DECEMBER 31,
1999 1998
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ASSETS
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 224 $ 2,150
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Receivables - Trade and other, net of allowances of
$255,592 at June 30, 1999, and December 31, 1998, respectively 9,154 4,017
Unbilled accounts receivable 819 610
Inventories 37,863 22,220
Prepaid expenses 574 181
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Total current assets 48,634 29,178
PROPERTY AND EQUIPMENT, net 7,013 2,263
ASSETS HELD FOR LEASE 6,860 1,725
GOODWILL AND ACQUISITION COSTS, net of amortization 10,318 10,446
DEFERRED FINANCING FEES 1,767 --
OTHER ASSETS 1,574 566
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$76,166 $44,178
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $39,209 $ 3,250
Current maturities of long-term debt -- 1,733
Accounts payable and accrued expenses 8,105 3,270
Accounts payable to related parties -- 54
Income taxes payable 374 1,128
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Total current liabilities 47,688 9,435
LONG-TERM DEBT, NET OF CURRENT MATURITIES 2,179 11,267
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 2,000,000 shares authorized;
no shares issued or outstanding -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
7,190,104 shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively 7 7
Additional paid-in capital 20,450 20,450
Retained earnings 5,842 3,019
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Total stockholders' equity 26,299 23,476
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$76,166 $44,178
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998
(in thousands, except per share amounts)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(Unaudited) (Unaudited)
NET REVENUES $15,748 $ 4,418 $29,317 $ 8,095
COST OF SALES AND SERVICE 9,900 2,242 18,860 4,351
------- ------- ------- -------
Gross profit 5,848 2,176 10,457 3,744
------- ------- ------- -------
OPERATING EXPENSES:
Selling and marketing 1,223 313 2,034 544
General and administrative 1,302 309 2,637 473
------- ------- ------- -------
Total operating expenses 2,525 622 4,671 1,017
------- ------- ------- -------
Income from operations 3,323 1,554 5,786 2,727
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OTHER EXPENSE
Interest expense, net 682 72 1,055 131
Deferred financing fees 99 -- 99 --
------- ------- ------- -------
Income before income taxes 2,542 1,482 4,632 2,596
PROVISION FOR INCOME TAXES 1,009 266 1,809 265
------- ------- ------- -------
Net income $ 1,533 $ 1,216 $ 2,823 $ 2,331
======= ======= ======= =======
PRO FORMA DATA:
Income before incomes taxes as reported $ -- $ 1,482 $ -- $ 2,596
Pro forma income tax expense -- 593 -- 1,038
------- ------- ------- -------
Pro forma net income $ -- $ 889 $ -- $ 1,558
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EARNINGS PER SHARE AND PRO FORMA BASIC
EARNINGS PER SHARE $ 0.21 $ 0.18 $ 0.39 $ 0.35
======= ======= ======= =======
EARNINGS PER SHARE AND PRO FORMA DILUTED
EARNINGS PER SHARE $ 0.21 $ 0.18 $ 0.38 $ 0.35
======= ======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING AND PRO
FORMA WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,190 4,825 7,190 4,464
======= ======= ======= =======
Diluted 7,316 4,828 7,447 4,467
======= ======= ======= =======
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(in thousands)
FOR THE SIX MONTHS ENDED
JUNE 30,
1999 1998
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(Unaudited)
OPERATING ACTIVITIES:
Net income $ 2,823 $ 2,331
Adjustments to reconcile net income to cash used
in operating activities:
Depreciation and amortization 668 48
(Increase) decrease in trade and other receivables (5,136) 439
Decrease in receivables from affiliate -- 1
Increase in unbilled accounts receivable (209) --
Increase in inventories (15,643) (5,847)
Increase in prepaid expenses (394) (65)
Increase in other assets (1,037) --
Increase in accounts payable and accrued expenses 4,834 610
Increase in customer deposits -- 83
Decrease in payables to affiliates (54) --
(Decrease) increase in income taxes payable (753) 265
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Net cash used in operating activities (14,901) (2,135)
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INVESTING ACTIVITIES:
Investments -- (75)
Assets held for lease (5,160) --
Acquisition costs (5,089) (176)
(48) --
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Net cash used in investing activities (10,297) (251)
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FINANCING ACTIVITIES:
Net borrowings on revolving line of credit 35,959 1,450
Repayment of long-term debt (10,821) (121)
Issuance/(Principal repayments) on notes payable
to related parties, net -- (1,502)
Increase in deferred financing fees (1,866) --
Net proceeds from initial public offering -- 10,269
Distribution to stockholders -- (3,101)
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Net cash provided by financing activities 23,272 6,995
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Net (decrease) increase in cash and cash equivalents (1,926) 4,609
CASH AND CASH EQUIVALENTS, beginning of year 2,150 751
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 224 $ 5,360
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated interim financial statements include the accounts
of American Aircarriers Support, Incorporated, a Delaware corporation, and its
wholly-owned subsidiaries AAS Engine Services, Inc., AAS Landing Gear Services,
Inc., AAS Amjet, Inc., and AAS Complete Controls, Inc. (collectively "AAS" or
"the Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation. These statements have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments that, in management's opinion,
are necessary for fair presentation. All such adjustments are of a normal,
recurring nature. The balance sheet as of December 31, 1998, has been derived
from the audited consolidated financial statements of the Company as of that
date. Certain pro forma information has been provided in connection with the
initial public offering of securities (Note 3). Operating results for the three
and six-month periods ended June 30, 1999, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
here have been condensed or omitted pursuant to such rules and regulations,
although the Company believes the disclosures are adequate to make the
information presented not misleading. It is suggested that these consolidated
interim financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's Form 10-KSB
for the year ended December 31, 1998.
2. LINE OF CREDIT:
Effective May 25, 1999, the Company entered into a five-year revolving credit
agreement and capital expenditure loan facility ("Credit Agreement") with Bank
of America (the "agent") and other financial institutions (the "lenders"). The
Credit Agreement provides a line of credit up to $100 million, of which $10
million is designated as the Capital Expenditure Loan Facility. The Credit
Agreement replaced an existing $35 million line of credit, which was repaid in
full from the proceeds of the new facility. The Company also wrote off deferred
financing fees of $98,874 associated with the previous line of credit. Principal
amounts outstanding under the Credit Agreement bear interest on a variable rate
basis at various interest rates tied to either the London Interbank Offered Rate
("LIBOR") or the prime rate, depending on certain indebtedness ratios. The
Credit Agreement, of which $39.2 million and $2.2 million were outstanding under
the revolver and capital expenditure loan facility, respectively, at June 30,
1999, contains customary events of default and restrictive covenants that, among
other matters, require the Company to maintain certain financial ratios. The
amount of credit available to the Company under the agreement at any given time
is determined by an availability calculation, based on the eligible borrowing
base, as defined in the credit agreement which includes the Company's
outstanding receivables and inventories, with certain exclusions, The Credit
Agreement is secured by substantially all of the assets of the Company.
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
3. PRO FORMA FINANCIAL INFORMATION:
PRO FORMA STATEMENT OF OPERATIONS INFORMATION
In conjunction with the initial public offering on May 28, 1998, the Company
terminated its status as an S corporation. The pro forma data in the statement
of operations provides information as if the Company had been treated as a C
Corporation for income tax purposes for the periods presented. Pro forma net
income includes a provision for income taxes as if the Company was subject to
federal and state income taxes as described above at an effective tax rate of
approximately 40% for the three and six months ended June 30, 1998.
PRO FORMA EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," which was required to be adopted for the fiscal years ending after
December 15, 1997. SFAS No. 128 supercedes APB Opinion No. 15, "Earnings Per
Share" and specifies the computation, presentation and disclosure requirements
for earnings per share ("EPS") for entities with publicly held common stock or
potential common stock. Essentially, this Statement replaces the primary EPS and
fully diluted EPS presentations under APB Opinion No. 15 with a basic EPS and a
diluted EPS.
The provisions of SFAS No. 128 have been adopted in determining pro forma basic
and diluted EPS for all periods presented. The weighted average number of shares
outstanding has been retroactively restated to give effect to the shares issued
in the re-incorporation in Delaware.
The computation of pro forma basic earnings per common share is as follows - in
thousands, except for per share amounts:
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
1998 1998
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Pro forma net income $ 889 $ 1,558
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Pro forma weighted average shares outstanding 4,825 4,464
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Pro forma basic earning per share $ 0.18 $ 0 .35
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
3. PRO FORMA FINANCIAL INFORMATION - CONTINUED:
PRO FORMA EARNINGS PER SHARE - CONTINUED
Computation of pro forma diluted earnings per common share - in thousands,
except per share amounts:
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
1998 1998
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Pro forma net income $ 889 $2,596
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Pro forma weighted average
shares outstanding: 4,825 4,465
Pro forma dilutive common stock option at average market price 3 2
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Pro forma weighted average dilutive shares outstanding 4,828 4,467
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Pro forma earnings per share $ 0.18 $ 0.35
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4. EARNINGS PER SHARE:
The computation of basic earnings per share in accordance with SFAS No. 128 is
as follows - in thousands, except per share amounts:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
1999 1999
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Net income as reported $1,533 $2,823
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Weighted average shares outstanding 7,316 7,447
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Basic earnings per share $ 0.21 $ 0.39
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS - CONTINUED
4. EARNINGS PER SHARE - CONTINUED:
The computation of diluted earnings per share in accordance with SFAS No. 128 is
as follows - in thousands except per share amounts:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1999
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Net income as reported $1,533 $2,823
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Weighted average shares outstanding 7,190 7,190
Effect of dilutive securities 126 257
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Diluted weighted average shares outstanding 7,316 7,447
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Diluted earnings per share $ 0.21 $ 0.38
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5. BUSINESS COMBINATION:
Effective April 1, 1999, the Company completed the acquisition of Complete
Controls, Inc. ("CCI") for a purchase price of $600,000, reduced by an
agreed-upon working capital adjustment, and the assumption of certain
liabilities. The purchase price consisted of $150,000 in cash and promissory
notes for the balance of the purchase price, payable over two years, issued to
the prior owners. CCI is a FAA-certified maintenance, repair and overhaul
facility specializing in flight control surfaces. Flight control surfaces
include the flaps, slats and rudders of an aircraft.
The CCI acquisition has been accounted for by the purchase method of accounting
and, accordingly, the results of operations of CCI for the period from April 1,
1999 are included in the accompanying consolidated financial statements. Assets
acquired and liabilities assumed have been recorded at their estimated fair
values, and are subject to adjustment when additional information concerning
asset and liability valuations are finalized.
The following unaudited pro forma information presents the results of operations
of the Company as if the acquisition had taken place on January 1, 1999:
Three Months Ended Six Months Ended
March 31, 1999 June 30, 1999
------------------ -----------------
Pro forma revenues $ 14,183 $ 29,932
Pro forma net income 1,223 2,757
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Pro forma basic earnings per share 0.17 0.38
Pro forma diluted earnings per share $ 0.17 $ 0.37
============ ============
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion may contain "forward-looking" statements, as that term
is defined by (i) the Private Securities Litigation Reform Act of 1995 (the
"Reform Act") and (ii) in releases made by the Securities and Exchange
Commission from time to time. Forward-looking statements are subject to risks
and uncertainties that may cause future results to differ materially from those
set forth in such forward-looking statements. The Company undertakes no
obligation to update forward-looking statements to reflect events or
circumstances after the date hereof. The Company's future operating results may
be affected by various trends and factors beyond the Company's control.
Accordingly, past results and trends should not be used by investors to
anticipate future results or trends.
OVERVIEW
The Company is an international supplier of aviation services, which include
sales of aircraft components and spare parts in the redistribution market,
maintenance, repair and overhaul of those components and parts, and engine
management services, primarily to other maintenance and repair facilities, major
commercial passenger and cargo airlines and other redistributors located
throughout the world. Historically, revenues have been principally derived from
the redistribution of engine components and spare parts for the Pratt & Whitney
JT8D series of engines and, to a lesser extent, the General Electric CFM56, as
well as avionics, rotable, repairable and expendable airframe components and
spare parts for Boeing, Douglas and Airbus aircraft. The Company fulfills
customers' requirements for engine and airframe components and spare parts
through purchases of surplus aircraft for disassembly, bulk purchases of
aircraft components and spare parts from aircraft operators, purchases of
individual components and spare parts from other redistributors, consignments
from aircraft operators and others, and exchanges of inventoried aircraft
components and spare parts for components and spare parts that require service
or overhaul. In the last quarter of 1998, AAS began to implement an acquisition
strategy aimed primarily at integrating its aviation capabilities with related
products, such as engine management services, maintenance, repair and overhaul
services and manufacturing capabilities, thereby becoming a full service "one
stop" supplier of both aviation products and services for customers.
RESULTS OF OPERATIONS
Recent Developments
On June 1, 1999, the Company entered into a service contract to provide all
engine repairs and restorations of JT8 engines for Amerijet International,
Inc.'s ("Amerijet") fleet of 10 B727 aircraft. Amerijet is an international
cargo airline servicing North America, the Caribbean, Mexico and Latin America.
The contract includes maintenance, repairs, overhauls and the additional
services of troubleshooting, boroscope inspections and management of insurance
claims. The agreement is effective for a term of five (5) years with annual
revenues of approximately $4.0 million.
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - CONTINUED
Comparison of Three Months Ended June 30, 1999 and 1998
Net revenues increased approximately $11.3 million, or 257%, to $15.7 million in
the three months ended June 30, 1999 from $4.4 million in the corresponding
period in 1998. Approximately $6.8 million of the increase in net revenues for
the second quarter of 1999 was derived from the companies acquired during the
fourth quarter of 1998 and the second quarter of 1999, and $4.5 million of the
increase in net revenues was generated through internal growth.
Cost of sales and service totaled approximately $9.9 million, or 63% of net
revenues, in the second quarter of 1999, compared with $2.2 million, or 51% net
of revenues, in the second quarter of 1998. Gross profit increased 169% to $5.8
million for the three months ended June 30, 1999, compared with $2.2 million for
the same period last year. As a percentage of revenues, gross profit was
approximately 37% of revenues in the three months ended June 30, 1999, compared
with approximately 49% in the three months ended June 30, 1998. The decline in
the gross profit margin percentage in 1999 was due to the change in product mix
resulting from the inclusion of the Maintenance, Repair and Overhaul ("MRO")
operations that were acquired during the fourth quarter of 1998.
Selling and marketing expenses increased $0.9 million, or 288%, to $1.2 million
in the three months ended June 30, 1999 from $0.3 million in the three months
ended June 30, 1998. This increase primarily reflects compensation expenses
related to additional staffing, fees paid to outside agents, sales related
travel necessary to facilitate the increased revenues and the increase in
expenses related to the recently acquired operations. As a percentage of net
revenues, selling and marketing expenses increased to 7.8% in the three months
ended June 30, 1999, compared to 7.1% of net revenues in the three months ended
June 30, 1998.
General and administrative expenses increased $1.0 million, or 324%, to $1.3
million in the three months ended June 30, 1999 from $0.3 million in the
comparable 1998 period. The majority of the increase in expenses is attributable
to the approximately $0.9 million of general and administrative expenses
associated with the recently acquired operations. As a percentage of net
revenues for the three months ended June 30, 1999, general and administrative
expenses were 8.3%, compared with 6.9% of net revenues in the three months ended
June 30, 1998.
Net interest expense for the three months ended June 30, 1999 increased by $0.6
million to approximately $0.7 million, compared to $0.1 million in the three
months ended June 30, 1998. This increase is due to the higher levels of
indebtedness outstanding used to finance the recent acquisitions, inventory
acquisitions and equipment held for lease.
During the three months ended June 30, 1999, the Company wrote off approximately
$0.1 of deferred financing fees. The one-time charge was a result of the
restructuring of the Company's credit facility (see note 2).
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - CONTINUED
Comparison of Three Months Ended June 30, 1999 and 1998 - continued
As a result of the above, net income before taxes increased $1.0 million, or
72%, to $2.5 million in the second quarter of 1999 from $1.5 million in the same
period in 1998. Net income after the provision for income tax expense of $1.0
million was $1.5 million ($0.21 per diluted share) for the three months ended
June 30, 1999. AAS became subject to income taxes on May 28, 1998 when it
terminated its election to be taxed as an S corporation in connection with its
initial public offering. However, to allow comparisons with future periods, pro
forma federal and state income taxes have been assumed. Based on this
assumption, pro forma net income after the pro forma income tax provision of
$0.6 million was $0.9 million ($0.18 per pro forma diluted share) for the three
months ended June 30, 1998. Weighted average diluted shares outstanding
increased 2.5 million shares, or 52%, to 7.3 million shares outstanding during
the three month period ended June 30, 1999 compared with pro forma weighted
average shares outstanding of 4.8 million during the three month period ended
June 30, 1998.
Comparison of Six Months Ended June 30, 1999 and 1998
Net revenues increased $21.2 million or 262%, to $29.3 million in the six months
ended June 30, 1999 from $8.1 million in the six months ended June 30, 1998.
Approximately $10.6 million of the increase in net revenues for the six months
ended June 30, 1999 was derived from companies acquired during the fourth
quarter of 1998 and the second quarter of 1999, and $10.6 million of the
increase in net revenues was generated through internal growth.
Cost of sales and service totaled $18.9 million for the six months ended June
30, 1999, a $14.5 million or 333% increase from $4.4 million in the six months
ended June 30, 1998. Gross profit increased $6.7 million or 179%, to $10.5
million in the six months ended June 30, 1999 from $3.7 million in the six
months ended June 30, 1998. As a percentage of net revenues, gross profit
decreased to 36% in the six months ended June 30, 1999, from 46% in the
comparable 1998 period. The decline in gross profit margin percentage in 1999 is
due to the change in product mix resulting from the inclusion of MRO operations
that were acquired in the fourth quarter of 1998.
Selling and marketing expenses increased $1.5 million, or 274%, to $2.0 million
in the six months ended June 30, 1999 from $0.5 million in the six months ended
June 30, 1998. This increase primarily consists of fees paid to sales agents,
higher compensation expense related to additional sales personnel, sales related
travel, advertising costs, and the increase in expenses related to the recently
acquired operations. As a percentage of net revenues, selling and marketing
expenses increased to 6.9% in the six months ended June 30, 1999 from 6.7% in
the comparable 1998 period.
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - CONTINUED
Comparison of Six Months Ended June 30, 1999 and 1998 - continued
General and administrative expenses increased $2.2 million, or 459%, to $2.6
million in the six months ended June 30, 1999 from $0.5 million in the
comparable 1998 period. The majority of the increase in expenses is attributable
to the approximately $1.5 million of general and administrative expenses
associated with the recently acquired operations. Expenses such as rent and
depreciation associated with the relocation of the corporate offices and
warehouse, insurance, along with increased professional fees associated with
operating as a public entity, also increased during the comparative periods. As
a percentage of net revenues, general and administrative expenses increased to
9.0% in the six months ended June 30, 1999 from 5.8% in the six months ended
June 30, 1998.
Net interest expense increased to $1.1 million in the six months ended June 30,
1999, from net interest expense of $131,000 in the six months ended June 30,
1998. The increase in net other expense reflects interest charges associated
with higher levels of indebtedness outstanding under the Credit Agreement.
During the six months ended June 30, 1999, the Company wrote off approximately
$0.1 of deferred financing fees. The one-time charge was a result of the change
in the Company's credit facility (see note 2).
As a result of the above, net income before taxes increased $2.0 million, or
78%, to $4.6 million in the six months ended June 30, 1999 from $2.6 million in
the same period in 1998. Net income after the provision for income tax expense
of $1.8 million was $2.8 million ($0.38 per diluted share) for the six months
ended June 30, 1999. AAS became subject to income taxes on May 28, 1998 when it
terminated its election to be taxed as an S corporation in connection with its
initial public offering. However, to allow comparisons with future periods, pro
forma federal and state income taxes have been assumed. Based on this
assumption, pro forma net income after the pro forma income tax provision of
$1.0 million was $1.6 million ($0.35 per pro forma diluted share) for the six
months ended June 30, 1998. Weighted average diluted shares outstanding
increased 2.9 million shares, or 67% to 7.4 million shares outstanding during
the six month period ended June 30, 1999 compared with pro forma weighted
average shares outstanding of 4.5 million during the six month period ended June
30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of liquidity for AAS prior to completion of the May 1998
initial public offering were cash flows from operating activities, borrowings
under the prior credit facility and advances from its two founders. AAS requires
capital to purchase inventory, to fund product servicing and overhaul
facilities, for normal operating expenses and for general working capital
purposes.
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AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RESULTS OF OPERATIONS - CONTINUED
LIQUIDITY AND CAPITAL RESOURCES - CONTINUED
In May 1999 the Company entered into a five-year revolving credit agreement and
capital expenditure loan facility ("Credit Agreement") which provides a line of
credit up to $100 million, of which $10 million is designated as the Capital
Expenditure Loan Facility. The Credit Agreement replaced an existing $35 million
revolving line of credit, amounts of which were repaid prior to the effective
date. Principal amounts outstanding under the Credit Agreement bear interest on
a variable rate basis at various interest rates tied to either the London
Interbank Offered Rate ("LIBOR") or the prime rate, depending on the number of
loans outstanding and on certain indebtedness ratios.
As of June 30, 1999, the Company's principal sources of liquidity included cash
and cash equivalents of $224,000, net accounts receivable of $9.2 million and up
to $50.8 million (determined by an availability calculation based on the
eligible borrowing base), and $7.8 million of borrowings available under the
revolver and capital expenditure line, respectively, of the Credit Agreement.
The Company had working capital of $0.9 million and long-term debt of $2.2
million at June 30, 1999.
For the six months ended June 30, 1999, operating activities used cash of $14.9
million, primarily for increases in inventory and accounts receivable, which
were partially offset by increases in accounts payable and accrued expenses. Net
cash used in investing activities during the six months ended June 30, 1999 was
$10.3 million, reflecting the purchase of fixed assets and assets held for lease
as well as increased acquisition costs that were incurred in connection with the
Company's purchase of Complete Controls, Inc., which closed on April 1, 1999.
Net cash provided by financing activities during the six months ended June 30,
1999, was $23.3 million, which consisted of net borrowings under the Credit
Agreement.
Capital expenditures were approximately $5.1 million for the six months ended
June 30, 1999. The expenditures were primarily for equipment purchases and
leasehold improvements necessary for the expansion of the Company's maintenance,
repair and overhaul facilities. The increase in assets held for lease of $5.2
million primarily relates to a Pratt & Whitney engine purchased in March 1999.
At June 30, 1999, the Company had outstanding commitments to acquire machinery
and equipment of approximately $3.5 million.
Existing cash balances, accounts receivable and amounts available under the
Credit Facility are anticipated to be sufficient to meet future short-term
capital requirements. If the Company's capital requirements increase, the
Company could be required to secure additional sources of capital. There can be
no assurance the Company will be capable of securing additional capital or that
the terms upon which such capital will be available to the Company will be
acceptable.
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14
AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
YEAR 2000 COMPLIANCE
The Company is cognizant of the issues associated with the programming code in
existing computer systems and devices that utilize microchip processors as the
year 2000 approaches. The "Year 2000" problem is pervasive and complex, as
virtually every computer operation will be affected in some way by the rollover
of the two-digit year value to "00". Computer systems that do not properly
recognize date-sensitive information when the year changes to 2000 could
generate erroneous data or fail.
In the ordinary course of business, AAS has replaced or is in the process of
replacing non-compliant hardware and software in all of its facilities as well
as those of the acquired companies with systems that are Year 2000 ready. The
Company has confirmed with the licensors of financial and operational
applications that have been licensed from outside vendors that those products
are Year 2000 compatible.
The information system used by the Company in tracking and processing inventory
currently is non-compliant. The Company has contracted for the development of a
proprietary system to replace the existing system. Testing and implementation of
the system is expected to be completed in the third quarter of 1999. Should
management assess that the new system will not be implemented prior to the end
of 1999, the Company can purchase and install upgrades of the existing system
that are or will be Year 2000 compatible at a cost approximating $50,000.
Year 2000 issues may also affect the computer systems of the customers, vendors
and financial institutions with which AAS and the acquired companies do
business. The Company has made inquiries of its significant customers, vendors
and financial institutions and has been advised that these customers expect to
be Year 2000 compatible in sufficient time to allow for testing and system
implementation before December 31, 1999.
Management of AAS believes all of its systems and those of the acquired
companies will be fully Year 2000 compatible by September 30, 1999, and that
amounts currently budgeted for hardware and software upgrades will be sufficient
to address expenses associated with any Year 2000 issues. Approximately $255,000
was expended during 1998, approximately $256,000 and $568,000 was expended in
the three and six months ended June 30, 1999, respectively, and approximately
$500,000 is expected to be spent expenditure during the remainder of 1999 for
information systems acquisition and development. As many of these expenditures
are for the replacement of information and operational systems, a significant
portion of these expenditures will be capitalized. Management does not
anticipate that any other material expenditures will be necessary to achieve
Year 2000 compliance. Failure to achieve full Year 2000 compliance prior to
December 31, 1999, could have a material adverse impact on results of operations
of AAS.
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15
AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
RECENT ACCOUNTING PRONOUNCEMENTS
Please refer to Note 3 - Pro Forma Financial Information in the accompanying
interim financial statements regarding Statement of Financial Accounting
Standard No. 128.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). This statement establishes
standards for reporting information of public companies about operating segments
in annual financial statements and requires reporting of selected information
about operating segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company is in one business segment, as
a supplier of aviation services including the sale, maintenance, repair and
overhaul of spare parts and engines.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). This statement addresses the accounting
for derivative instruments, including certain derivative instruments imbedded in
other contracts, and hedging activities. The Statement is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999. In June 1999,
the FASB issued SFAS No. 137 which delayed the effective date of SFAS No. 133
until fiscal quarters of all fiscal years beginning after June 15, 2000.
Management does not anticipate the adoption of the provisions of SFAS No. 133
will significantly impact the Company's financial reporting.
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16
AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) Not applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 11, 1999, the
following proposals were adopted by the vote specified below:
Proposal #1 Election Of Directors For Withhold
Karl F. Brown 5,194,134 3,600
Joseph E. Civiletto 5,196,134 1,600
Anton K. Khoury 5,196,134 1,600
Michael F. Evans 5,195,134 1,600
David M. Furr 5,195,134 2,600
Pamela K. Clement 5,195,134 2,600
James T. Comer, III 5,196,134 1,600
Proposal #2 To consider and act upon an amendment to increase the number
of shares of common stock authorized for issuance under the
Company's 1998 omnibus stock option plan by an additional
450,000 shares.
For Against Abstain
5,178,935 14,899 3,900
Proposal #3 To ratify the appointment of Arthur Andersen LLP as auditors
of the Company.
For Against Abstain
5,194,344 3,400
ITEM 5 - OTHER INFORMATION
None
ITEM 6 -EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
Exhibit 10.4 - Loan and Security Agreement Dated May 25, 1999 Among American
Aircarriers Support, Incorporated and The Financial Institutions Party and
Nationsbank, N.A.
(b) Reports on Form 8-K
None
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17
AMERICAN AIRCARRIERS SUPPORT, INCORPORATED AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
American Aircarriers Support, Incorporated
(Registrant)
Date: August 12, 1999
By: /s/Elaine T. Rudisill
---------------------
Elaine T. Rudisill
(Principal Financial and Accounting Officer)
F-17