-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BU3i2nl6GpAFz/agm3QoRB82qoMxht9ZgvATQbvo4wbOuQtThvhL6CoZSqxJYFoj 2oXWm9xcVHkuhLZR5n3zWQ== 0000950144-01-502426.txt : 20010516 0000950144-01-502426.hdr.sgml : 20010516 ACCESSION NUMBER: 0000950144-01-502426 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KELLSTROM INDUSTRIES INC CENTRAL INDEX KEY: 0000918275 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT ENGINES & ENGINE PARTS [3724] IRS NUMBER: 133753725 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23764 FILM NUMBER: 1637815 BUSINESS ADDRESS: STREET 1: 1100 INTERNATIONAL PARKWAY CITY: SUNRISE STATE: FL ZIP: 33323 BUSINESS PHONE: 9548450427 MAIL ADDRESS: STREET 1: 1100 INTERNATIONAL PARKWAY CITY: SUNRISE STATE: FL ZIP: 33323 FORMER COMPANY: FORMER CONFORMED NAME: ISRAEL TECH ACQUISITION CORP DATE OF NAME CHANGE: 19940301 10-Q 1 g69066qe10-q.txt KELLSTROM INDUSTRIES, INC. FORM 10-Q 03/31/01 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 0-23764 KELLSTROM INDUSTRIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 13-3753725 - -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1100 INTERNATIONAL PARKWAY, SUNRISE, FLORIDA 33323 - -------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (954) 845-0427 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: 11,910,981 shares of common stock, $.001 par value per share, were outstanding as of April 30, 2001. 2 KELLSTROM INDUSTRIES, INC. INDEX
Page Number ------------ PART I Item 1. Financial Statements: Condensed Consolidated Balance Sheets ...................................................... 3 Condensed Consolidated Statements of Operations ............................................ 4 Condensed Consolidated Statements of Cash Flows ............................................ 5 Notes to Condensed Consolidated Financial Statements ....................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................. 19 PART II Item 1. Legal Proceedings............................................................................ 20 Item 2. Changes in Securities and Use of Proceeds.................................................... 20 Item 3. Defaults Upon Senior Securities.............................................................. 20 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 20 Item 5. Other Information............................................................................ 20 Item 6. Exhibits and Reports on Form 8-K............................................................. 31
2 3 ITEM 1. FINANCIAL STATEMENTS KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except par value amounts) (Unaudited)
March 31, 2001 December 31, 2000 -------------- ----------------- ASSETS Current Assets: Cash and cash equivalents $ -- $ -- Trade receivables, net of allowances for returns and doubtful accounts of $10,465 and $8,868 for 2001 and 2000, respectively 73,264 80,315 Inventories 194,950 195,640 Property and plant held for sale 19,970 19,932 Prepaid expenses 2,912 2,673 Income tax receivable 3,917 3,928 Deferred tax assets 40,718 40,718 --------- --------- Total current assets 335,731 343,206 Notes receivable 3,557 3,435 Equipment under operating leases, net 101,708 98,555 Property, plant and equipment, net 19,845 19,896 Goodwill, net 94,579 95,766 Deferred financing charges 4,966 5,403 Deferred tax asset -- -- Other assets 6,893 7,214 --------- --------- Total Assets $ 567,279 $ 573,475 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short-term debt $ 162,685 $ 167,277 Current maturities of long-term debt 200 200 Accounts payable 44,518 36,343 Accrued expenses 30,164 31,459 Capital lease obligations 9,515 9,597 --------- --------- Total current liabilities 247,082 244,876 Long-term debt, less current maturities 34,737 34,937 Convertible subordinated notes 140,250 140,250 Deferred tax liabilities 9,009 11,944 --------- --------- Total Liabilities 431,078 432,007 Stockholders' Equity: Common stock, $.001 par value; 50,000 shares authorized; 11,911 shares issued and outstanding in 2001 and 2000 12 12 Additional paid-in capital 122,871 122,871 Retained earnings 15,006 20,338 Loans receivable from directors and officers (1,641) (1,734) Accumulated other comprehensive loss (47) (19) --------- --------- Total Stockholders' Equity 136,201 141,468 --------- --------- Total Liabilities and Stockholders' Equity $ 567,279 $ 573,475 ========= =========
See accompanying notes to condensed consolidated financial statements 3 4 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
Three Months Ended March 31, --------------------------- 2001 2000 -------- -------- Sales revenues, net $ 76,483 $ 67,835 Rental revenues 5,460 6,636 -------- -------- Total revenues 81,943 74,471 Cost of goods sold 57,404 48,334 Depreciation of equipment under operating leases 4,097 5,638 Selling, general and administrative expenses 17,755 11,592 Depreciation and amortization 2,235 1,551 Restructuring and other charges 1,472 -- -------- -------- Total operating expenses 82,963 67,115 Operating (loss) income (1,020) 7,356 Interest expense, net of interest income 7,245 6,297 -------- -------- (Loss) income before income taxes (8,265) 1,059 Income tax (benefit) expense (2,934) 395 -------- -------- Net (loss) income $ (5,331) $ 664 ======== ======== (Loss) earnings per common share - basic $ (0.45) $ 0.06 ======== ======== (Loss) earnings per common share - diluted $ (0.45) $ 0.06 ======== ======== Weighted average number of common shares outstanding - basic 11,911 11,911 ======== ======== Weighted average number of common shares outstanding - diluted 11,911 11,973 ======== ========
See accompanying notes to condensed consolidated financial statements 4 5 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Three Months Ended March 31, ---------------------------- 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (5,331) $ 664 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 2,235 1,551 Depreciation of equipment under operating leases 4,097 5,638 Amortization of deferred financing costs 552 519 Deferred income taxes (2,935) 1,590 Changes in operating assets and liabilities: Decrease in trade receivables, net 5,610 7,278 Increase in inventories (1,826) (13,253) (Increase) decrease in equipment under operating leases (1,091) 5,079 Increase in prepaid expenses and other current assets (238) (2,319) Decrease in income tax receivable 10 -- Decrease in other assets 19 483 Increase in accounts payable 6,231 2,345 (Decrease) increase in accrued expenses (1,007) 382 Decrease in other current liabilities (81) -- Decrease in income taxes payable -- (1,388) -------- -------- Net cash provided by operating activities 6,245 8,569 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition earn-out payments (1,333) Purchase of property, plant and equipment (1,028) (1,034) -------- -------- Net cash used in investing activities (1,028) (2,367) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement (4,791) (5,759) Debt repayment, including capital lease obligation -- Proceeds from the issuance of common stock -- Net loans to directors and officers 94 (42) Payment of deferred financing costs (520) -- -------- -------- Net cash used in financing activities (5,217) (5,801) -------- -------- NET INCREASE IN CASH & CASH EQUIVALENTS -- 401 CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD -- 272 -------- -------- CASH & CASH EQUIVALENTS, END OF PERIOD $ -- $ 673 ======== ========
(continued) See accompanying notes to condensed consolidated financial statements 5 6 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)
Three Months Ended March 31, ---------------------------- 2001 2000 -------- -------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 5,334 $ 4,593 ======= ======== Income taxes $ -- $ -- ======= ========
See accompanying notes to condensed consolidated financial statements 6 7 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The accompanying condensed consolidated financial statements include the accounts of Kellstrom Industries, Inc. and its subsidiaries (the "Company") after elimination of intercompany accounts and transactions. The Company has ownership in wholly-owned subsidiaries as well as a 50% ownership in KAV Inventory LLP ("KAV"), a joint-venture formed on December 1, 2000 with Aviation Sales Company. Due to the fact that the Company does not exercise control over KAV, the Company does not consolidate the accounts of KAV. These statements have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). The condensed consolidated balance sheet as of December 31, 2000 has been derived from audited financial statements. In order to prepare the financial statements in conformity with generally accepted accounting principles, management has made a number of estimates and assumptions relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of management of the Company, the condensed consolidated financial statements reflect all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the condensed consolidated financial position of the Company as of March 31, 2001, the condensed consolidated results of operations for the three month periods ended March 31, 2001 and 2000, and the condensed consolidated statements of cash flows for the three month periods ended March 31, 2001 and 2000. The results of operations for such interim periods are not necessarily indicative of the results for the full year. NOTE 2 - LIQUIDITY The Company is highly leveraged. Furthermore, the Company's liquidity and ability to meet its obligations as they become due in 2001 are subject to, among other things, continued access to the Senior Revolving Credit Facility and compliance with the terms and covenants of the Company's debt agreements. The Company's senior debt requires it to maintain specified financial ratios and satisfy certain financial tests. In March 2000, the Company amended the financial covenants under its Senior Credit Facility (as defined below) and the Key Notes (as defined below). The new quarterly debt covenants are adjusted each quarter to reflect forecasted improvements in the Company's business model. A breach of any of the financial covenants in the Company's debt instruments could result in a default under these debt instruments. Upon the occurrence of an event of default under the senior debt, the respective lenders could elect to declare all amounts outstanding, together with accrued interest, to be immediately due and payable. Substantially all of the Company's assets are pledged as collateral security for the Senior Credit Facility. If the Company were unable to repay all outstanding amounts under its senior debt, the lenders 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 the Company's Senior Credit Facility, and thereafter, any of the Company's other liabilities. In addition, the Company may be prevented from making new borrowings or drawing down further on its Senior Credit Facility. At March 31, 2001, the Company was in compliance with the financial covenants under its Senior Credit Facility and the Key Notes. 7 8 The Company does not currently believe that it will have sufficient available liquid resources to repay the principal balance of the Convertible Subordinated Notes (as defined below) at maturity. Other than cash flow from operations, the Company's primary source of cash is its Senior Credit Facility. The commitments under the Senior Credit Facility expire on the earlier of December 14, 2003 or six months before the first maturity of the Convertible Subordinated Notes if the Company has not secured a commitment to refinance the Convertible Subordinated Notes satisfactory to the lenders under the Senior Credit Facility. The Convertible Subordinated Notes mature in October 2002 ($54.0 million) and June 2003 ($86.3 million). Furthermore, the Senior Credit Facility prohibits prepayment of the Convertible Subordinated Notes. In addition, the Company believes that there is uncertainty regarding its ability to refinance the Convertible Subordinated Notes. The Company's ability to repay or refinance any Convertible Subordinated Notes and to meet its other financial obligations, depends on the availability of new sources of funding, which will in turn depend on the Company's operating performance, the state of the financial markets and other factors at the time that the Company wants to repay or refinance these outstanding notes. Accordingly, the Company makes no assurance that it will be able to meet its obligations to repay or refinance the Convertible Subordinated Notes, and the Senior Credit Facility indebtedness, when they become due. If the Company is unable to repay or refinance the Convertible Subordinated Notes, the Company will be forced to adopt an alternative strategy that may include actions such as reducing or delaying planned acquisition activity, selling assets, restructuring or refinancing its indebtedness or seeking additional capital. The Company has commenced an exchange offer for all $54.0 million of its outstanding series of 5 3/4% convertible subordinated notes due October 15, 2002 and all $86.3 million of its outstanding series of 5 1/2% convertible subordinated notes due June 15, 2003 (collectively, the "old notes"). Under the offer, holders can elect to exchange their old notes for either new 8 1/2% senior subordinated notes due 2008 or new 6% convertible subordinated notes due 2008 (collectively, the "new notes"). Holders will receive $1,000 principal amount of new notes for each $1,000 principal amount of their old notes, and will receive accrued and unpaid interest on their old notes in cash. The new 8 1/2% senior subordinated notes will rank equal in right of payment to the Company's existing senior subordinated notes, which were issued in November 2000. Both the new 8 1/2% senior subordinated notes and the 6% convertible subordinated notes will rank senior in right of payment to any old notes remaining outstanding after completion of the offer. No more than $30 million principal amount of new 8 1/2% senior subordinated notes will be issued in exchange for old notes. If the 8 1/2% note option is oversubscribed, the $30 million of 8 1/2% notes will be issued in exchange for old notes of either series tendered for the 8 1/2% note option, depending on the total participation of that series in the offer. The balance of the old notes tendered for the 8 1/2% note option over $30 million will be exchanged for new 6% convertible subordinated notes. There can be no assurance that the exchange offer will be successful. 8 9 The Company's ability to maintain compliance with the covenants and terms of its debt agreements, and its ability to service its debt and to satisfy its other obligations will depend upon, among other factors, the Company's operating performance, including its ability to implement its business strategy, which will be affected by prevailing economic conditions and financial, business and other factors, many of which are beyond its control. If the Company is unable to maintain compliance with its debt agreements or service its indebtedness, it will be forced to adopt an alternative strategy that may include actions such as reducing or delaying planned acquisition activity, selling assets, restructuring or refinancing its indebtedness or seeking additional capital. This could impact the carrying values and classification of the Company's assets and liabilities. NOTE 3 - RESTRUCTURING CHARGES The Company has reorganized its operations and organization structure from four product-oriented divisions to two customer/market focused business units: the Commercial Business Unit and the Defense Business Unit. In connection with the restructuring plan, the Company eliminated approximately 220 positions ranging from warehouse staff to vice president, of which 120 positions were eliminated prior to December 31, 2000 and 100 positions were eliminated in the first quarter of 2001. Employee termination costs related to those positions eliminated in 2000 and 2001 are reflected in the charges summarized in the table below. In connection with the reorganization, the Company recorded restructuring and other charges in the first quarter of 2001 of approximately $1.5 million. 9 10 The following table displays the activity and balances of the accrued restructuring and other charges for the quarter ended March 31, 2001 (in thousands):
Additional Accrual Charges Amount Paid Accrual 12/31/00 Accrued Q1 2001 3/31/01 -------- ----------- ----------- ------- Employee termination costs $ 107 $ 944 $ (956) $ 95 Facilities exit costs 1,262 172 (384) 1,050 Other 285 356 (356) 285 ------ ------ ------- ------ Total $1,654 $1,472 $(1,696) $1,430 ====== ====== ======= ======
NOTE 4 - ACQUISITIONS During the third quarter of 2000, the Company completed two acquisitions for $5.9 million in cash, $2.5 million in payments due in 2000 and 2001, plus up to $11.7 million cash consideration which may be paid in the form of an earn-out payable over ten years based on certain specified criteria. On December 1, 2000, the Company acquired the aircraft and engine parts resale business of Aviation Sales Company ("AVS"), which had been operated through AVS' subsidiary, Aviation Sales Distribution Company ("AVSDC"). AVSDC was a leading provider of aviation inventory and inventory management services. AVSDC sold aircraft spare parts and provided inventory management services to commercial passenger airlines, air cargo carriers, maintenance and repair facilities and other redistributors throughout the world. The aggregate purchase (net of assumed liabilities) paid by the Company to AVSDC for the assets was approximately $21.7 million (which included $13.7 million for a subordinated note issued by the JV described below) and warrants which the Company may issue to other entities to purchase up to 220,000 10 11 shares of the Company's common stock. In connection with the transaction, the Company acquired a portion of AVSDC's non-inventory assets and assumed a portion of AVSDC's accounts payable and accrued expenses. Also, in connection with the acquisition, the Company and AVS established an off-balance sheet joint venture, KAV Inventory LLC ("KAV"), which acquired substantially all of the inventory of AVSDC for an aggregate purchase price of approximately $148.6 million, of which approximately $105.5 million was paid in cash, $27.4 million was paid by delivery of two 14% five-year senior subordinated notes (each in the original principal amount of $13.7 million) and approximately $15.7 million which was paid by delivery of a 14% five-year subordinated note. One of the $13.7 million senior subordinated notes was purchased by the Company as part of the acquisition. These acquisitions were accounted for using the purchase method of accounting for business combinations and accordingly, those companies' operating results have been included in the Company's results of operations since the dates of acquisition. NOTE 5 - EARNINGS PER SHARE Diluted earnings per share for the three month periods ended March 31, 2001 and 2000 were calculated as follows (in thousands): Three Months Ended March 31, ------------------- 2001 2000 ------- ------- Net income $(5,331) $ 664 ------- ------- Net income available to common and common equivalent shares $(5,331) $ 664 ======= ======= Weighted average number of common shares outstanding - basic 11,911 11,911 Dilutive common stock equivalents from stock options and warrants based on the treasury stock method -- 62 ------- ------- Weighted average number of common shares outstanding - diluted 11,911 11,973 ======= ======= At March 31, 2001, options and warrants to purchase 4,279,856 shares of common stock were outstanding but were not included in the computation of diluted EPS because their inclusion would have been antidilutive. At March 31, 2000, options and warrants to purchase 3,687,436 shares of common stock were outstanding but were not included in the computation of diluted EPS because their exercise price was greater than the average market price of the common shares during the period. NOTE 6 - SEGMENT REPORTING During the First Quarter of 2001, the Company combined its Commercial Engine Parts, Whole Engine and Aircraft, and Airframe Avionics and Rotables segments into the Commercial segment. The Commercial segment is involved in the business of purchasing, overhauling (primarily through subcontractors), reselling and leasing of aircraft parts, aircraft engines and engine parts. The Commercial segment specializes in providing engines and engine parts for large turbo-fan engines manufactured by CFM International, General Electric, Pratt & Whitney and Rolls Royce; leasing and reselling whole engines and aircraft; and selling a wide variety of aircraft rotables and expendable components including flight data recorders, electrical and mechanical equipment and radar and navigation systems. The Defense segment is an after-market reseller of aircraft parts and turbojet engines and engine parts for helicopters and large transport aircraft. The segment's primary focus is on the Lockheed Martin C-130 Hercules aircraft, a widely used military transport aircraft, the Allison (Rolls Royce) T56/501 engine, which powers this aircraft and the Allison 250, with approximately 16,000 units actively in use by helicopters. The Company entered the small engine segment in 1997 with the acquisition of Aero Support. The acquisition of Certified on April 29, 1999 enhanced the Company's presence in this market segment. 11 12 The Company has not historically allocated certain selling, general and administrative expenses, interest expense or income taxes to its business segments. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. (In thousands) Three Months Ended March 31, ----------------------- 2001 2000 ------- ------- REVENUES Commercial $ 66,073 $ 57,276 Defense 15,870 17,195 -------- -------- Total revenue $ 81,943 $ 74,471 ======== ======== GROSS MARGIN Commercial $ 14,734 $ 14,404 Defense 5,708 6,095 -------- -------- Total gross margin $ 20,442 $ 20,499 ======== ======== OPERATING INCOME Commercial $ (350) $ 6,582 Defense 2,429 2,715 Unallocated (3,099) (1,941) -------- -------- Total Operating Income $ (1,020) $ 7,356 ======== ======== INVENTORIES AND EQUIPMENT UNDER LEASE Commercial $247,802 $301,192 Defense 48,856 46,275 -------- -------- Total Inventories and Equipment Under Lease $296,658 $347,467 ======== ======== NOTE 7 - COMPREHENSIVE INCOME (LOSS) The Company's total comprehensive income (loss), comprised of net income (loss) and foreign currency translation adjustments, for the three month periods ended March 31, 2001 and 2000 was as follows: (In thousands) Three Months Ended March 31, --------------------- 2001 2000 ------- ----- Net income (loss) $(5,331) $664 Foreign currency translation adjustments (28) (6) ------- ---- Other comprehensive income (loss), net of taxes (28) (6) ------- ---- Total comprehensive income (loss) $(5,359) $658 ======= ==== NOTE 8 - OTHER MATTERS The Company is not aware of any material legal proceedings pending against the Company or any of its property. However, the Company may become party to various claims, legal actions and complaints arising in the ordinary course of business or otherwise. The Company cannot determine whether such actions would have a material impact on the financial condition, results of operations or cash flows of the Company. In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), as amended, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statements of financial position and measure those instruments at fair value. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 on January 1, 2001, did not have an impact on the company's consolidated financial position, results of operations or cash flows. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE KELLSTROM INDUSTRIES, INC. (THE "COMPANY") UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE HEREIN. IN ADDITION, REFERENCE SHOULD BE MADE TO THE COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO AND RELATED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDED IN THE COMPANY'S MOST RECENT ANNUAL REPORT ON FORM 10-K. This report and the documents that are incorporated by reference into this report contain "forward looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements concern expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Statements preceded by, followed by, or that include the words "believes," "expects," "anticipates," or similar expressions are generally considered to be forward-looking statements. Specifically, this report and the documents incorporated into this report by reference contain forward-looking statements, including the following: * the Company's beliefs regarding growth and trends in the airline industry; * the Company's strategies, plans and objectives and expectations concerning the Company's future market position, operations, cash flow, margins, revenue, profitability, liquidity and capital resources; * the Company's ability to repay its 5 3/4% convertible subordinated notes due October 15, 2002 (the "5 3/4% Notes") and its 5 1/2% convertible subordinated notes due June 15, 2003 (the "5 1/2% Notes," and together with the 5 3/4% Notes, the "Convertible Subordinated Notes") and other indebtedness when due; * the Company's ability to manage its substantial debt and comply with the financial covenants in its debt instruments; * the Company's plans to integrate acquired inventories and businesses; * the Company's plans to improve financial controls, management controls, reporting systems and procedures; and * the Company's possible strategic acquisition growth involving inventory acquisition and acquisition of complementary businesses when appropriate. The forward-looking statements reflect the Company's current view about future events and are subject to risks, uncertainties and assumptions. The Company wishes to caution readers that certain important factors may have affected and could in the future affect its actual results and could cause actual results to differ significantly from those expressed in any forward-looking statement. The following important factors, in addition to factors the Company discusses elsewhere in this report and in the section "Risk Factors" in the Company's most recent Annual Report on Form 10-K, and in the documents that are incorporated into this report by reference, could prevent the Company from achieving its goals, and cause the assumptions underlying the forward-looking statements and the actual results to differ materially from those expressed in or implied by those forward-looking statements: * continued net losses; * adverse consequences relating to the Company's substantial debt; * the Company's ability to comply with the financial covenants contained in its Senior Debt Facilities; * restrictions on the Company's business and operations imposed by its credit facility with Bank of America, N.A. (the "Senior Credit Facility") and the 13% senior subordinated notes due 2007 held by Key Principal Partners, L.L.C. (the "Key Notes"); 13 14 * the Company's ability to effectively integrate acquired companies; * further write-downs of the Company's inventory; * fluctuations in demand for the Company's products, which are dependent upon the condition of the airline industry; * the Company's ability to acquire adequate inventory and to obtain favorable pricing for its inventory; * the Company's ability to arrange for the servicing of its inventory by third-party contractors before resale or lease; * possible product liability claims; * customer concentrations; and * competitive pricing for the Company's products. GENERAL The Company is a leading aviation inventory management company. The Company's net revenues have increased from $180.0 million for the year ended December 31, 1998 to $354.0 million for the year ended December 31, 2000. The increase in revenues is the result of a number of factors, including the expansion of the Company's product lines, customer base and market share, increases in the Company's internal growth, acquisitions in existing and adjacent markets and significant capital investments. The Company has completed several acquisitions during the period from 1998 to 2000. These acquisitions were accounted for using the purchase method of accounting for business combinations and accordingly, those companies' operating results have been included in the Company's results of operations since the date of acquisition. RESULTS OF OPERATIONS CONTINUING DEVELOPMENTS IN THE COMPANY'S MARKET ENVIRONMENT Economic and other factors that are affecting the airline industry have negatively impacted, and may continue to negatively impact, the Company's business. Pricing of the inventory the Company needs for its business is affected to a degree by the overall economic condition of the airline industry, which has historically been volatile. The demand for after-market engines and aircraft and engine parts is driven primarily by flying hours or cycles. These parts must be serviced or replaced at scheduled intervals. As a result, the demand for after-market parts is a function of the volume of worldwide air traffic. Additionally, factors such as the price of fuel affect the aircraft parts market, since older aircraft (into which repaired or overhauled aircraft parts are most often placed) become less economically viable as the price of fuel increases. During a downturn in the aviation industry, there may be reduced overall demand for the equipment the Company provides, lower selling prices for its products and increased credit risk associated with doing business with industry participants. The airframe and engine parts aftermarket has experienced a downturn during 2000, which has continued into 2001. As a result, a number of companies in the industry have encountered financial difficulties. Consequently, many companies within the industry have been forced to sell inventory at reduced prices in order to generate cash. The Company's gross margin and fair value of inventory have been negatively affected by these deteriorating conditions. Additionally, according to reports by a few large airlines, during the first quarter of 2001, the airline industry has begun to experience a slowdown in overall traffic, which the Company's management believes has 14 15 reduced demand for aftermarket parts. As a result, during the fourth quarter of 2000, the Company recorded an inventory write-down and an impairment of equipment under operating leases totaling $50.6 million. The Company expects to continue to incur losses for at least the first half and for the full year of fiscal 2001. In addition, the Company expects 2001 revenues to be significantly lower than pro forma revenues for 2000. AVSDC ACQUISITION On December 1, 2000, the Company acquired the aircraft and engine parts resale business of AVS, which had been operated through AVS' AVSDC subsidiary, for approximately $21.7 million in cash. In connection with the transaction, the Company acquired a portion of AVSDC's non-inventory assets and assumed a portion of AVSDC's accounts payable and accrued expenses. Also, in connection with the acquisition, the Company and AVS established the JV, an off-balance sheet joint venture which acquired substantially all of the inventory of AVSDC for a purchase price of approximately $148.6 million. In connection with the acquisition, the JV entered into the Consignment Agreement with the Company pursuant to which the Company will have the right to sell the inventory acquired by the JV. The Consignment Agreement provides for a consignment fee to Kellstrom of 20% of net sales until certain of the JV's debt instruments have been paid, and 35% thereafter. AVSDC was a leading provider of aviation inventory and inventory management services. AVSDC sold aircraft spare parts and provided inventory management services to commercial passenger airlines, air cargo carriers, maintenance and repair facilities and other redistributors throughout the world. The Company's need to integrate the parts distribution business of AVSDC places substantial demands on the Company's management, systems and resources. Integration of the parts distribution business of AVSDC will require that the Company further improve financial controls, management controls, reporting systems and procedures on a timely basis, implement new systems as necessary and expand, train and manage the Company's workforce. While the Company had expected to integrate the acquisition of AVS's parts distribution business into its existing business on a reasonably rapid basis, that integration is taking longer than expected. The Company's failure to effectuate the integration of the AVS parts distribution business into its business in the near future could have a material adverse affect on the Company's operations, financial condition or liquidity. STRATEGIC RESTRUCTURING During the fourth quarter of 2000, the Company initiated the restructuring of its operations in conjunction with the acquisition of the parts business of AVSDC. The Company has continued the restructuring of its operations during the first quarter of 2001. The Company has reorganized from four product-oriented divisions to two customer/market focused business units; the Commercial business unit and the Defense business unit. In connection with the restructuring plan, the Company eliminated approximately 120 positions during the fourth quarter of 2000 and 100 positions during the first quarter of 2001. Additionally, the Company is actively pursuing the disposition of seven facilities, which are either owned or leased by the Company. The Company will move all inventory and most of its operations into the new 545,000 square foot facility in Miramar, Florida which was leased as part of the acquisition of the parts business of AVSDC. As a result of this initiative, the Company recorded restructuring and other charges of $3.0 million and $1.5 million in the fourth quarter of 2000 and the first quarter of 2001, respectively, primarily related to facilities closure costs and personnel severance costs. 15 16 For the periods indicated, the following table sets forth the percentage of certain income statement items to total revenues derived from the Company's condensed consolidated statements of earnings. Percentage of Total Revenues ---------------------------- Three Months Ended March 31, ---------------------------- 2001 2000 ----- ----- Revenue: Sales revenues, net 93.3% 91.1% Rental revenues 6.7% 8.9% Total revenues 100.0% 100.0% Operating expenses: Cost of goods sold 70.1% 64.9% Depreciation of equipment under operating leases 5.0% 7.6% Selling, general and administrative expenses 21.7% 15.6% Depreciation and amortization expense 2.7% 2.1% Restructuring charges 1.8% 0.0% Total operating expenses 101.2% 90.1% Operating (loss) income (1.2)% 9.9% Interest expense (net of interest income) 8.8% 8.5% (Loss) income before income taxes (10.1)% 1.4% Income taxes (3.6)% 0.5% Net (loss) income (6.5)% 0.9% THREE MONTHS ENDED MARCH 31, 2001 AND 2000 Consolidated sales revenues increased by 13% to $76.5 million for the three months ended March 31, 2001 as compared to $67.8 million for the three months ended March 31, 2000. Sales revenues from the Company's Commercial segment increased by $8.8 million. The increase in sales in the Company's Commercial segment was primarily due to the impact of the AVSDC acquisition partially offset by decreases in revenue from the sale of whole engine and aircraft of $14.0 million due to deteriorated market conditions. Sales revenues from the Company's Defense segment decreased to $15.9 million as compared with $17.2 million for the three months ended March 31, 2001 and March 31, 2000, respectively due to what the Company's management believes are short-term market fluctuations. Rental revenues from the Company's Commercial segment decreased by 16.7% to $5.5 million for the three months ended March 31, 2001 as compared to $6.6 million for the three months ended March 31, 2000. The decrease in rental revenues was primarily due to a reduction in the size of the aircraft and engine lease portfolio. Cost of goods sold increased by 18.8% to $57.4 million for the three months ended March 31, 2001 as compared to $48.3 million for the three months ended March 31, 2000. Gross profit margin on sales decreased to 24.9% for the three months ended March 31, 2001 as compared with 28.8% for the three months ended March 31, 2000. Gross profit margins in the Company's Commercial segment decreased to 22.3% for the three months ended March 31, 2001 as compared to 25.1% for the three months ended March 31, 2000. The decrease in margins was largely attributable to market conditions as described above. Gross profit margins in the Company's Defense segment was relatively unchanged at 36.0% for the three months ended March 31, 2001 as compared to 35.5% for the three months ended March 31, 2000. 16 17 Depreciation of equipment under operating leases decreased by 27% to $4.1 million for the three months ended March 31, 2001 as compared to $5.6 million for the three months ended March 31, 2000 due to the decrease in the Company's aircraft and engine lease portfolio. Gross profit margin on rental revenues increased to 25.0% in 2001 from 15.0% in 2000. The increase in the gross profit margin was primarily due to improved utilization. Selling, general and administrative expenses increased by 53.2% for the three months ended March 31, 2001 as compared to the three months ended March 31, 2000. As a percentage of total revenues, selling, general and administrative expenses increased to 21.7% in 2001 as compared with 15.6% in 2000. The increase in selling, general and administrative expenses was primarily due to (i) increased personnel costs of $3.3 million in connection with the acquisition of AVSDC and the integration of such business into Kellstrom and (ii) increased bad debt expense of $0.8 million as the Company's revenues and customer base continues to grow coupled with the financial difficulties encountered by participants in the industry. Depreciation and amortization expense increased by 37.5% to $2.2 million for the three months ended March 31, 2001 as compared to $1.6 million for the three months ended March 31, 2000. The increase in depreciation and amortization expense was primarily due to amortization of goodwill related to the Company's recent acquisition and increased depreciation expense associated with the Company's investment in facilities and infrastructure. Interest expense (net of interest income) increased by 14.3% to $7.2 million for the three months ended March 31, 2001 as compared to $6.3 million for the three months ended March 31, 2000. The increase in interest expense was primarily driven by an increase in the Company's average debt levels during the first quarter of 2001 as compared with the first quarter of 2000. The Company's effective tax rate for the three months ended March 31, 2001 was 35.5% as compared with 37.3% for the three months ended March 31, 2000. The Company had a net loss for the three months ended March 31, 2001 of $5.3 million as compared with net income of $0.7 million for the three months ended March 31, 2000. Basic and diluted loss per common share for the three months ended March 31, 2001 was $0.45 as compared with basic and diluted earnings per common share of $0.06 for the three months ended March 31, 2000. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, the Company's liquidity and capital resources included working capital of $88.6 million. At March 31, 2001, total outstanding debt, including capital lease obligations, was $347.4 million as compared to $352.3 million as of December 31, 2000. As of March 31, 2001, the outstanding principal balance on the Company's Convertible Subordinated Notes was $140.3 million and the Company had contractual lines of credit totaling up to $256.7 million, of which $169.0 million was outstanding and $22.2 million was available based on borrowing base limitations. The $140.3 million aggregate principal balance of the Convertible Subordinated Notes is due for repayment in 2002 and 2003. Based on the Company's expectations regarding the prospects of its industry and the general economic outlook for the foreseeable future, the Company does not currently believe that it will have sufficient available liquid resources to repay the principal balance of the Convertible Subordinated Notes at maturity in October 2002 ($54.0 million) and June 2003 ($86.3 million). Other than cash flow from operations, the Company's primary source of cash is its Senior Credit Facility. The commitments under the Senior Credit Facility expire on the earlier of December 14, 2003 or six months before the first maturity of the Convertible Subordinated Notes if the Company has not secured a commitment to refinance the Convertible Subordinated Notes satisfactory to the lenders under the Senior Credit Facility. Furthermore, the Senior Credit Facility prohibits prepayment of the Convertible Subordinated Notes. In addition, the Company believes that there is uncertainty regarding its ability to refinance the Convertible Subordinated Notes. The Company's ability to repay or refinance any Convertible Subordinated Notes 17 18 and to meet its other financial obligations, depends on the availability of new sources of funding, which will in turn depend on the Company's operating performance, the state of the financial markets and other factors at the time that the Company wants to repay or refinance these outstanding notes. Accordingly, the Company makes no assurance that it will be able to meet its obligations to repay or refinance the Convertible Subordinated Notes when they become due. If the Company is unable to repay or refinance the Convertible Subordinated Notes, the Company will be forced to adopt an alternative strategy that may include actions such as reducing or delaying planned acquisition activity, selling assets, restructuring or refinancing its indebtedness or seeking additional capital. To refinance and extend the maturity of the Convertible Subordinated Notes, the Company has commenced an exchange offer for all $54 million of its outstanding 5 3/4% Notes and all $86.3 million of its outstanding 5 1/2% Notes. Under the offer, holders can elect to exchange their Convertible Subordinated Notes for either new 8 1/2% senior subordinated notes due 2008 or new 6% convertible subordinated notes due 2008 (collectively, the "New Notes"). Holders will receive $1,000 principal amount of New Notes for each $1,000 principal amount of their Convertible Subordinated Notes, and will receive accrued and unpaid interest on their Convertible Subordinated Notes in cash. While the Company commenced the exchange offer for the Convertible Subordinated Notes on March 8, 2001, there can be no assurance that the exchange offer will be successful. If the exchange offer is successful, the Company's interest cost will increase. The Company has extended the deadline for the pending exchange offer for the Convertible Subordinated Notes to May 25, 2001. The Company is highly leveraged. Furthermore, the Company's liquidity and ability to meet its obligations as they become due in 2001 are subject to, among other things, continued access to the senior secured revolving credit facility and compliance with the terms and covenants of the Company's debt agreements. The Company's senior debt requires it to maintain specified financial ratios and satisfy certain financial tests. In March 2001, the Company amended the financial covenants under its Senior Credit Facility and the Key Notes. The new quarterly debt covenants are adjusted each quarter to reflect forecasted improvements in the Company's business model. At March 31, 2001, the Company was in compliance with the financial covenants under the Senior Credit Facility and the Key Notes. While no assurance can be made, the Company believes it will comply with the new covenants under the Senior Credit Facility and the Key Notes during 2001. If the Company subsequently believes it will not continue to comply with such covenants, the Company will seek an appropriate waiver or amendment from the lenders thereunder. There can be no assurance that the Company will be able to obtain such waiver or amendment on acceptable terms or at all. A breach of any of the financial covenants in the Company's debt instruments could result in a default under these debt instruments. Upon the occurrence of an event of default under the senior debt, the respective lenders could elect to declare all amounts outstanding, together with accrued interest, to be immediately due and payable. Substantially all of the Company's assets are pledged as collateral security for the Senior Credit Facility. If the Company were unable to repay all outstanding amounts under its senior debt, the lenders 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 the Company's Senior Credit Facility, and thereafter, any of the Company's other liabilities. In addition, the Company may be prevented from making new borrowings or drawing down further on its Senior Credit Facility. Cash flows provided by operating activities for the three months ended March 31, 2001 was $6.2 million compared with $8.6 million provided by operating activities for the three months ended March 31, 2000. The primary sources of cash from operating activities were non-cash expenses of $6.8 million included in net income, an increase in accounts payable of $6.2 million and a decrease in accounts receivable of $5.6 million partially offset by a net loss of $5.3 million, a non-cash deferred tax benefit of $2.9 million included in net income and increases in inventory and equipment under operating leases of $1.8 million and $1.1 million, respectively. Cash flows used in investing activities for the three months ended March 31, 2001 was $1.0 million compared with $2.4 million for the three months ended March 31, 2000. The primary use of cash for investing activities purchases of property, plant and equipment of $1.0 million. Cash flows used in financing activities for the three months ended March 31, 2001 was $5.2 million compared with $5.8 million for the three months ended March 31, 2000. The primary use of cash from financing activities is a decrease in borrowings under the Company's line of credit agreement of $4.8 million. 18 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk is limited primarily to the fluctuating interest rates associated with variable rate indebtedness outstanding under the Company's $256.7 million senior credit facility. The senior credit facility, which expires in 2003, bears interest at the bank's prime rate plus 0-50 basis points or, at the Company's option, LIBOR plus 150-250 basis points. These variable interest rates are subject to interest rate changes in the United States and Eurodollar markets. The Company does not currently use, and has not historically used, derivative financial instruments to hedge against such market interest rate risk. At March 31, 2001, the Company had approximately $169.0 million in variable rate indebtedness outstanding under the credit facility, representing approximately 48% of the Company's total debt outstanding, at an average interest rate of 7.56% as of March 31, 2001. An increase in interest rates by 1% would have a $1.1 million annual impact on net income. 19 20 PART II ITEM 1. LEGAL PROCEEDINGS. The Company is not aware of any material legal proceedings pending against the Company or any of its property. However, the Company may become party to various claims, legal actions and complaints arising in the ordinary course of business or otherwise. The Company cannot determine whether such actions would have a material impact on the financial condition, results of operations or cash flows of the Company. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 5. OTHER INFORMATION. (A) GUARANTOR/NON-GUARANTOR FINANCIAL STATEMENTS - UNAUDITED The following consolidating financial information presents balance sheet, income statement and cash flow information related to the Company's business. Each Guarantor, as defined, is a direct or indirect wholly owned subsidiary of the Company and has fully and unconditionally guaranteed the 8.5% senior subordinated notes issued by the Company, on a joint and several basis. The Non-Guarantors are the Company's foreign subsidiaries. Separate financial statements and other disclosures concerning the Guarantors have not been presented because management believes that such information is not material to investors. 20 21 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES BALANCE SHEET INFORMATION March 31, 2001 (In thousands) (Unaudited)
Kellstrom Industries, Guarantor Non-Guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ------------- ------------ ------------ ASSETS Current asset: Cash and cash equivalents $ (7) $ -- $ 7 $ -- $ -- Trade receivables 57,206 15,963 95 73,264 Intercompany receivable 231,864 -- -- (231,864) -- Inventories 146,094 48,856 -- 194,950 Equipment under operating leases -- -- -- -- Property held for sale 15,259 4,711 -- 19,970 Prepaid expenses and other current assets 2,702 26 184 2,912 Income tax receivable 3,917 -- -- 3,917 Deferred tax assets-current 31,047 9,671 -- 40,718 --------- --------- --------- --------- --------- Total current assets 488,082 79,227 286 (231,864) 335,731 Equipment under operating leases, net 101,708 -- -- 101,708 Property, plant and equipment, net 17,749 1,987 109 19,845 Goodwill, net 69,765 24,814 -- 94,579 Notes receivables 3,557 -- -- 3,557 Other assets 7,071 4,787 1 11,859 Deferred tax assets-noncurrent -- -- -- -- --------- --------- --------- --------- --------- Total Assets $ 687,932 $ 110,815 $ 396 $(231,864) $ 567,279 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term notes payable $ 162,685 $ -- $ -- $ 162,685 Current maturities of long-term debt 200 -- -- 200 Accounts payable 37,288 7,220 10 -- 44,518 Accrued expenses 26,270 3,850 44 30,164 Income tax payable -- -- -- -- Other current liabilities-current 9,506 -- 9 9,515 Deferred tax liability-current -- -- -- -- Intercompany payable 194,258 37,596 10 (231,864) -- --------- --------- --------- --------- --------- Total current liabilities 430,207 48,666 73 (231,864) 247,082 Long-term debt, less current maturities 34,737 -- -- 34,737 Convertible subordinated notes 140,250 -- -- 140,250 Deferred tax liabilities-non current 9,009 -- -- 9,009 --------- --------- --------- --------- --------- Total Liabilities 614,203 48,666 73 (231,864) 431,078 Stockholders' Equity: Common stock 11 -- 1 -- 12 Additional paid-in capital 87,666 34,655 550 -- 122,871 Retained earnings/(Accumulated deficit) (12,271) 27,505 (228) -- 15,006 Loans receivable from directors and officers (1,641) -- -- (1,641) Foreign currency translation adjustment (36) (11) -- (47) --------- --------- --------- --------- --------- Total Stockholders' Equity 73,729 62,149 323 -- 136,201 --------- --------- --------- --------- --------- Total Liabilities and Stockholders' Equity $ 687,932 $ 110,815 $ 396 $(231,864) $ 567,279 ========= ========= ========= ========= =========
21 22 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF OPERATIONS INFORMATION For the Three Months Ended March 31, 2001 (In thousands) (Unaudited)
Kellstrom Industries, Guarantor Non-Guarantor Ending Inc. Subsidiaries Subsidiaries Eliminations Balance ----------- ------------ ------------- ------------ ------- Sales of aircraft and engine parts, net $ 60,577 $ 15,870 $ 36 $ -- $ 76,483 Rental revenues 5,460 -- -- -- 5,460 -------- -------- -------- ---- --------- Total revenues 66,037 15,870 36 -- 81,943 Cost of Goods Sold 47,242 10,162 -- -- 57,404 Inventory write-down -- -- -- -- -- Depr. of equip. under operating leases 4,097 -- -- -- 4,097 SG&A 14,748 2,723 284 -- 17,755 Depreciation and amortization 1,754 467 14 -- 2,235 Restructuring Charges 1,383 89 -- -- 1,472 -------- -------- -------- ---- --------- Total operating expenses 69,224 13,441 298 -- 82,963 Operating income (3,187) 2,429 (262) -- (1,020) Interest expense - net of interest income 7,292 (47) -- -- 7,245 -------- -------- -------- ---- --------- Income before taxes (10,479) 2,476 (262) -- (8,265) Income taxes (3,720) 879 (93) -- (2,934) -------- -------- -------- ---- --------- Net income $ (6,759) $ 1,597 $ (169) $ -- $ (5,331) ======== ======== ======== ==== =========
22 23 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF CASH FLOWS INFORMATION For the Three Months Ended March 31, 2001 (In thousands) (Unaudited)
Kellstrom Industries, Guarantor Non-Guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ (6,759) $ 1,597 $ (169) $ -- $ (5,331) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,754 467 14 -- 2,235 Depreciation of equipment under operating leases 4,097 -- -- -- 4,097 Amortization of deferred financing costs 552 -- -- -- 552 Deferred income taxes (17,775) 14,840 -- -- (2,935) Changes in operating assets and liabilities: (Increase) decrease in trade receivables, net (41,790) 47,463 (63) -- 5,610 (Increase) decrease in inventories (73,395) 71,569 -- -- (1,826) Increase in equipment under operating leases (1,091) -- (1,091) Decrease (increase) in prepaid expenses and other current assets (476) 328 (90) -- (238) Decrease (increase) in income tax receivable 10 -- -- -- 10 Decrease (increase) in other assets (5,881) 5,902 (2) -- 19 Increase (decrease) in accounts payable 24,407 (17,446) 5 (735) 6,231 Increase (decrease) in accrued expenses 18,516 (19,517) (6) -- (1,007) Increase (decrease) in other current liabilities 9,506 (9,596) 9 -- (81) Increase (decrease) in income taxes payable -- -- -- -- -- -------- -------- -------- -------- -------- Net cash used in operating activities (88,325) 95,607 (302) (735) 6,245 -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired -- -- -- -- Acquisition earn-out payments -- -- -- Purchase of property, plant and equipment (711) (317) (1,028) Investment in KAV receivable -- -- -------- -------- -------- -------- -------- Net cash used in investing activities (711) (317) -- -- (1,028) -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement (4,791) (4,791) Advances to/From Parent -- Debt repayment, including capital lease obligation -- -- Proceeds from the issuance of debt -- -- Proceeds from the issuance of convertible subordinated notes -- Proceeds from repayment of loans to directors and officers 94 94 Payment of deferred financing costs (520) (520) -------- -------- -------- -------- -------- Net cash provided by financing activities (5,217) -- -- -- (5,217) -------- -------- -------- -------- -------- NET INCREASE IN CASH & CASH EQUIVALENTS (94,253) 95,290 (302) (735) 0 CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD -- -- -- -- -- -------- -------- -------- -------- -------- CASH & CASH EQUIVALENTS, END OF PERIOD $(94,253) $ 95,290 $ (302) $ (735) $ 0 ======== ======== ======== ======== ========
23 24 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES BALANCE SHEET INFORMATION December 31, 2000 (In thousands) (Unaudited)
Kellstrom Industries, Guarantor Non-Guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ------------- ------------ ------------ ASSETS Current asset: Cash and cash equivalents $ (12,012) $ 9,683 $ 83 $ 2,246 $ -- Trade receivables 16,857 63,426 32 80,315 Intercompany receivable 267,086 (10,352) (41) (256,693) -- Inventories 75,215 120,425 -- 195,640 Property held for sale 12,601 7,331 -- -- 19,932 Prepaid expenses and other current assets 2,225 354 94 2,673 Income tax receivable 3,928 -- -- 3,928 Deferred tax assets-current 7,082 33,636 -- 40,718 --------- --------- --------- --------- --------- Total current assets 372,982 224,503 168 (254,447) 343,206 Equipment under operating leases, net -- 98,555 -- 98,555 Property, plant and equipment, net 10,197 9,596 103 19,896 Goodwill, net 50,528 45,238 -- 95,766 Notes receivables -- 3,435 -- 3,435 Deferred financing costs 5,403 -- -- 5,403 Other assets 1,928 5,286 -- 7,214 --------- --------- --------- --------- --------- Total Assets $ 441,038 $ 386,613 $ 271 $(254,447) $ 573,475 ========= ========= ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 167,277 $ -- $ -- $ 167,277 Current maturities of long-term debt 200 -- -- 200 Accounts payable 10,937 24,666 5 735 36,343 Accrued expenses 8,042 23,367 50 31,459 Income tax payable -- -- -- -- Other current liabilities-current -- 9,597 -- 9,597 Intercompany payable 124,696 130,889 (403) (255,182) -- --------- --------- --------- --------- --------- Total current liabilities 311,152 188,519 (348) (254,447) 244,876 Long-term debt, less current maturities 34,937 -- -- 34,937 Convertible subordinated notes 140,250 -- -- 140,250 Deferred tax liabilities-non current 2,819 9,125 -- 11,944 --------- --------- --------- --------- --------- Total Liabilities 489,158 197,644 (348) (254,447) 432,007 Stockholders' Equity: Common stock 10 1 1 -- 12 Additional paid-in capital 3,148 119,172 551 -- 122,871 Retained earnings/(Accumulated deficit) (49,544) 69,757 125 -- 20,338 Loans receivable from directors and officers (1,734) -- -- (1,734) Foreign currency translation adjustment -- 39 (58) (19) --------- --------- --------- --------- --------- Total Stockholders' Equity (48,120) 188,969 619 -- 141,468 --------- --------- --------- --------- --------- Total Liabilities and Stockholders' Equity $ 441,038 $ 386,613 $ 271 $(254,447) $ 573,475 ========= ========= ========= ========= =========
24 25 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENT OF OPERATIONS INFORMATION For the Three Months Ended March 31, 2000 (In thousands) (Unaudited)
Kellstrom Industries, Guarantor Non-Guarantor Ending Inc. Subsidiaries Subsidiaries Eliminations Balance ----------- ------------ ------------- ------------ ------- Sales of aircraft and engine parts, net $ 20,285 $ 47,121 $ 429 $ -- $ 67,835 Rental revenues -- 6,636 -- -- 6,636 -------- -------- -------- ---- -------- Total revenues 20,285 53,757 429 -- 74,471 Cost of Goods Sold 13,371 34,963 -- -- 48,334 Inventory write-down -- -- -- -- -- Depr. of equip. under operating leases -- 5,638 -- -- 5,638 SG&A 5,448 6,024 120 -- 11,592 Depreciation and amortization 740 811 -- -- 1,551 Non-recurring expenses -- -- -- -- -- -------- -------- -------- ---- -------- Total operating expenses 19,559 47,436 120 -- 67,115 Operating income 726 6,321 309 -- 7,356 Interest expense - net of interest income 6,461 (164) -- -- 6,297 -------- -------- -------- ---- -------- Income before taxes (5,735) 6,485 309 -- 1,059 Income taxes (2,139) 2,419 115 -- 395 Income from Continuing Operations (3,596) 4,066 194 -- 664 Extraordinary Loss, Ext. of Debt, net -- -- -- -- -------- -------- -------- ---- -------- Net income $ (3,596) $ 4,066 $ 194 $ -- $ 664 ======== ======== ======== ==== ========
25 26 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS INFORMATION For the Three Months Ended March 31, 2000 (In thousands) (Unaudited)
Kellstrom Industries, Guarantor Non-Guarantor Inc. Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ (3,596) $ 4,066 $ 194 $ -- $ 664 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 740 811 -- -- 1,551 Depreciation of equipment under operating leases -- 5,638 -- -- 5,638 Restructuring and other charges -- -- -- Write-down of inventory and leases -- -- -- Amortization of deferred financing costs 519 -- -- -- 519 Deferred income taxes 1,590 -- -- -- 1,590 Loss on early retirement of debt -- -- Loss on sales of investment securities -- -- -- -- -- Changes in operating assets and liabilities: (Increase) decrease in trade receivables, net 12,695 (5,417) -- -- 7,278 (Increase) decrease in inventories 7,527 (20,780) -- -- (13,253) Increase in equipment under operating leases 5,079 5,079 Decrease (increase) in prepaid expenses and other current assets (3,591) (252) 13 1,511 (2,319) Decrease (increase) in income tax receivable -- -- Decrease (increase) in other assets (252) 735 -- -- 483 Increase (decrease) in accounts payable (14) 2,359 -- -- 2,345 Increase (decrease) in accrued expenses (4,455) 4,845 (8) -- 382 Increase (decrease) in income taxes payable (1,388) (1,388) -------- -------- -------- -------- -------- Net cash used in operating activities 9,775 (2,916) 199 1,511 8,569 -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions, net of cash acquired -- -- -- -- Acquisition earn-out payments -- (1,333) (1,333) Purchase of property, plant and equipment (517) (517) (1,034) Investment in KAV receivable -- -- -------- -------- -------- -------- -------- Net cash used in investing activities (517) (1,850) -- -- (2,367) -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under line of credit agreement (5,759) (5,759) Advances to/From Parent -- Debt repayment, including capital lease obligation -- -- Proceeds from the issuance of debt -- -- Proceeds from the issuance of convertible subordinated notes -- Proceeds from repayment of loans to directors and officers (42) (42) Payment of deferred financing costs -- -- -------- -------- -------- -------- -------- Net cash provided by financing activities (5,801) -- -- -- (5,801) -------- -------- -------- -------- -------- NET INCREASE IN CASH & CASH EQUIVALENTS 3,457 (4,766) 199 1,511 401 CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD -- 272 -- -- 272 -------- -------- -------- -------- -------- CASH & CASH EQUIVALENTS, END OF PERIOD $ 3,457 $ (4,494) $ 199 $ 1,511 $ 673 ======== ======== ======== ======== ========
26 27 (B) PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED The condensed consolidated statement of operations of the Company for the 3 months ended March 31, 2001 are the Company's actual results, as they reflect the operations of AVSDC for the entire period presented. The pro forma condensed consolidated statement of operations of the Company for the three months ended march 31, 2000 are based on historical financial statements of the Company and have been adjusted to reflect the acquisition of AVSDC as though the companies had combined at the beginning of the period being reported. The pro forma condensed consolidated financial information does not purport to be indicative of results that would have occurred had the acquisitions been in effect for the period presented, nor does it purport to be indicative of the results that will be obtained in the future. The pro forma consolidated financial information is based on certain assumptions and adjustments described in the notes hereto and should be read in conjunction therewith. 27 28 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES Pro Forma Condensed Consolidated Statements of Operations (In thousands, except per share amounts) (Unaudited)
Three Months Ended March 31, ----------------------------- 2001 2000 --------- --------- Actual Pro Forma --------- --------- Sales revenues, net $ 76,483 $ 130,449 Rental revenues 5,460 6,636 --------- --------- Total revenues 81,943 137,085 Cost of goods sold (57,404) (99,747) Depreciation of equipment under operating leases (4,097) (5,638) Selling, general and administrative expenses (17,755) (20,235) Depreciation and amortization (2,235) (2,615) Restructuring charges (1,472) -- --------- --------- Total operating expenses (82,963) (128,235) Operating income (1,020) 8,850 Interest expense, net of interest income (7,245) (7,118) --------- --------- Income before income taxes (8,265) 1,732 Income taxes 2,934 2,103 --------- --------- Net (loss) income $ (5,331) $ 3,835 ========= ========= (Loss) earnings per common share - basic $ (0.45) $ 0.32 ========= ========= (Loss) earnings per common share - diluted $ (0.45) $ 0.31 ========= ========= Weighted average number of common shares outstanding - basic 11,911 11,911 ========= ========= Weighted average number of common shares outstanding - diluted 11,911 12,341 ========= =========
Unaudited - See accompanying notes to pro forma condensed consolidated statements of earnings. 28 29 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES Pro Forma Condensed Consolidated Statements of Operations Three Months Ended March 31, 2000 (In thousands, except per share amounts) (Unaudited)
Historical ----------------------------- Pro Forma Pro Forma Kellstrom AVSDC Adjustments Combined --------- --------- ----------- --------- Sales revenues, net $ 67,835 $ 64,170 $ (1,556) $ 130,449 Rental revenues 6,636 -- -- 6,636 --------- --------- --------- --------- Total revenues 74,471 64,170 (1,556) 137,085 Cost of goods sold (48,334) (51,743) 1,240 (99,747) (910) Inventory write-down -- -- Depreciation of equipment under operating leases (5,638) -- -- (5,638) Selling, general and administrative expenses (11,592) (10,805) 2,162 (20,235) Restructuring and other charges -- -- -- -- Depreciation and amortization (1,551) (823) (241) (2,615) --------- --------- --------- --------- Total operating expenses (67,115) (63,371) 2,251 (128,235) Operating income 7,356 799 695 8,850 Interest expense, net of interest income (6,297) (8,587) (821) (7,118) 8,587 --------- --------- --------- --------- Income before income taxes 1,059 (7,788) 8,461 1,732 Income taxes (395) 2,495 3 2,103 --------- --------- --------- --------- Net income 664 (5,293) 8,464 3,835 ========= ========= ========= ========= Earnings per common share - basic $ 0.06 $ 0.32 ========= ========= Earnings per common share - diluted $ 0.06 $ 0.31 ========= ========= Weighted average number of common shares outstanding - basic 11,911 11,911 ========= ========= Weighted average number of common shares outstanding - diluted 11,973 12,341 ========= =========
Unaudited - See accompanying notes to pro forma condensed consolidated statement of earnings 29 30 KELLSTROM INDUSTRIES, INC. AND SUBSIDIARIES Notes to Pro Forma Condensed Consolidated Statements of Operations Three Months Ended March 31, 2000 (In thousands) (Unaudited) (A) For the purpose of presenting the pro forma condensed consolidated statement of earnings, the following adjustments have been made for the AVSDC acquisition:
Increase (decrease) in income: Reversal of sales between Kellstrom and AVSDC $ (1,556) Reversal of cost of goods sold between Kellstrom and AVSDC 1,240 Adjustment to reflect terms under the consignment agreement between Kellstrom and KAV (i) (910) Elimination of redundant personnel (iv) 2,162 Amortization of goodwill and deferred financing costs (ii) (241) Interest expense on debt incurred to finance the acquisition (821) Reduction in interest expense due to pay-off of AVSDC debt 8,587 -------- 8,461 Tax effect of pro forma adjustments and impact of acquisition on the provision for income taxes (iii) 3 -------- Net adjustments $ 8,464 ========
(i) - Adjustment to reflect terms under the consignment agreement between Kellstrom and KAV was calculated based on historical sales and adjusting the gross margin to arrive at a 18% margin based on the 20% consignment fee stipulated in the consignment agreement adjusted for estimated repair and overhaul costs. (ii) - Amortization period for goodwill is 30 years. Amortization period for deferred financing costs is over the remaining life of the debt instrument. (iii) - Pro forma income tax expense adjusted to reflect Kellstrom consolidated effective tax rate. (iv) - In connection with the acquisition, the Company implemented several initiatives designed to reduce the operating costs of the combined Company. These initiatives resulted in the identification of approximately 220 employees whose jobs were terminated and seven facilities which will be closed. In connection with the acquisition, the Company is expected to incur expenses associated with the prepayment of the ELAS note of $1.3 million, net of tax benefit. (B) The Company is expected to incur expenses associated with the acquisition of approximately $1.9 million, net of tax. 30 31 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits. 10.1 - Amended and Restated Employment Agreement dated December 31, 2000 between Kellstrom and Fred von Husen. (b) Reports on Form 8-K. The Company filed a Report on Form 8-K/A dated February 16, 2001, which amended the Form 8-K filed with the Commission on December 18, 2000, relating to the acquisition by the Company of AVSDC. The Form 8-K/A amended the information referred to in Item 7 of the Form 8-K. 31 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 15, 2001 KELLSTROM INDUSTRIES, INC. (Registrant) /s/ Oscar E. Torres ----------------------------------- Oscar E. Torres Chief Financial Officer (principal financial and accounting officer) 32 33 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 10.1 Amended and Restated Employment Agreement dated December 31, 2000 between Kellstrom and Fred von Husen. 33 EX-10.1 2 g69066qex10-1.txt AMENDED & RESTATED EMPLOYMENT AGREEMENT 1 Exhibit 10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (the "Agreement") is entered into as of December 31, 2000, between Kellstrom Industries, Inc., a Delaware corporation, having its principal place of business at 3701 Flamingo Road, Miramar, FL 33127 (the "Company"), and Fred von Husen, an individual residing at 2770 N.E. 15 St., #202, Ft. Lauderdale, FL 33304 (the "Employee"). RECITALS The Employee and the Company are parties to that certain Employment Agreement entered into in October, 1996 (the "Prior Employment Agreement"), pursuant to which the Employee is employed by the Company as its Executive Vice President. The Company desires to provide for the continued employment of the Employee by the Company and the Employee desires to continue such employment, on the terms and conditions set forth herein. TERMS OF AGREEMENT In consideration of the above recitals and the mutual promises herein contained, the Company and the Employee hereby agree as follows: 1. DEFINITIONS. (a) The "Base Company Bonus" shall mean $125,000. (b) The "Board" shall mean the Board of Directors of the Company. (c) "Change of Control" shall mean (i) any transaction that has the result that shareholders of the Company immediately before such transaction cease to own at least 51% of (x) the voting stock of the Company or (y) of any entity that results from the participation of the Company in a reorganization, liquidation or any other form of corporate transaction; (ii) a merger, consolidation, reorganization, liquidation or dissolution in which the Company does not survive; or (iii) a sale, lease, exchange or other disposition of all or substantilly all the property and assets of the Company. (d) The "Effective Date" shall mean December 31, 2000. (e) The "Employment Period" shall mean the period commencing on the Effective Date and continuing until the fifth year anniversary of the Effective Date, unless earlier terminated in accordance with the terms of this Agreement. If not earlier terminated, and in the event the Company wishes to extend this Agreement beyond the fifth year of the Period, this 1 2 Agreement shall be extended at the Company's option on a month-to-month basis until such time as a new Agreement is executed. (f) The "Executive Committee" shall mean the Executive Committee of the Board of Directors of the Company. (g) "GAAP" shall mean generally accepted accounting principles in the United States as in effect from time to time. (h) "Net Income" shall mean, with respect to any period, actual net income for such period as determined by the Company in its sole discretion in accordance with GAAP. 2. EMPLOYMENT PERIOD. The Company hereby agrees to employ the Employee, and the Employee hereby agrees to be employed by the Company, for the duration of the Employment Period and pursuant to the other terms and conditions provided herein. This Agreement shall terminate at the end of the Employment Period, unless earlier terminated under Section 5 below. 3. TERMS OF EMPLOYMENT. (a) POSITION AND DUTIES. During the Employment Period the Employee shall serve as Executive Vice President of the Company. The Employee shall perform such duties as the Board or the Chief Executive Officer or other senior officers of the Company shall from time to time determine. In the performance of his duties, the Employee shall comply with the stated policies of the Company. (b) LOCATION. The principal place of employment of the Employee shall be the principal offices of the Company. (c) COMPENSATION. (1) BASE SALARY. The Employee's annual salary (the "Salary") shall be a rate of no less than $280,000 per annum for the duration of the Employee's employment hereunder. The Employee shall be considered for increases in his Salary during the Employment Period in the sole discretion of the Board (or the Executive Committee). The Salary shall be paid in regular intervals in accordance with the Company's payroll practices. (2) COMPANY BONUS. Subject to subsection (A) below, for each calendar year during the Employment Period commencing with the year ending December 31, 2001, at the end of which year the Employee is employed by the Company, the Employee shall be eligible to be paid the Base Company Bonus, pro-rated upward or downward, based on a plan determined annually by the Board (or the Executive Committee), reliant upon Net Income, cash flow, or other criteria. The actual sum may be more, less or none, based on the Board's structure of the calculation of the plan. 2 3 (A) For any calendar year regarding which the Employee is entitled to a bonus under the foregoing provisions of this subsection (2) but during which year the Employee did not work the entire calendar year, unless otherwise provided herein, the Employee shall be entitled to a bonus equal to the product of the bonus, as calculated under the foregoing provisions, multiplied by a fraction, the numerator of which is the number of months during such calendar year that the Employee was employed by the Company and the denominator of which is twelve. (3) WITHHOLDING, ETC. The payment of any Salary and bonus to the Employee shall be subject to all applicable withholding and payroll taxes, and such other deductions as may be required under the Company's employee benefit plans. (d) BENEFITS. In addition to the compensation payable to the Employee as set forth in Section 3(c) above, during the Employment Period the Employee shall be eligible for similar incentive, stock option grants, savings, welfare (including without limitation medical and dental insurance) plans, practices, policies and programs applicable on or after the Effective Date to other employees of the Company as determined in the discretion of the Board (or the Executive Committee). (e) VACATION. During the Employment Period, the Employee shall be entitled to paid vacation in accordance with the policies and practices applicable on or after the Effective Date to other employees of the Company, PROVIDED that the Employee shall be entitled to a minimum of twenty (20) paid business days of vacation per full calendar year (pro rated if the Employee serves for less than the full calendar year). Vacation accrued but unused at the end of a calendar year may be carried over into the following calendar year or years, PROVIDED that unused vacation days shall be accrued up to a maximum of six weeks. All earned, unused and accrued vacation will be paid to the Employee at the termination of this Agreement. (f) HOLIDAYS & PERSONAL/SICK LEAVE. The Employee shall be entitled to all holidays that are prescribed by the Company's policies and practices. The Employee shall be entitled to six (6) days paid personal/sick leave per year (pro rated if the Employee serves for less than the full calendar year). Personal/sick days accrued but unused at the end of a calendar year may be carried over into the following calendar year or years, PROVIDED that unused personal/sick days shall be accrued up to a maximum of six (6) weeks, according to current policy, which is subject to change at the sole discretion of the Company. All earned and unused personal/sick days will not be paid to the Employee at the termination of Employment, according to current policy, unless required by prevailing wage and hour laws. (g) AUTOMOBILE. While the Employee is actively employed with the Company, the Company shall provide to the Employee an allowance for an automobile, based on a plan determined annually by the Board (or the Executive Committee) (see Attachment 1, current AUTOMOBILE BENEFIT) for use by the Employee in connection with the performance of his duties hereunder. 3 4 (h) EXPENSES. The Company shall pay or reimburse the Employee for reasonable expenses incurred or paid by him during the Employment Period in the performance of his services under this Agreement upon presentation of expense statements or such other supporting information as may be required for other employees of the Company in accordance with the Company's policy. (i) PENSION PLAN. The Company shall contribute an amount equal to 5% of the Salary towards the accumulating investment plan/pension plan selected and established by the Employee. 4. EMPLOYEE'S OBLIGATIONS AND REPRESENTATIONS. (a) During the Employment Period, and excluding any periods of vacation and sick leave to which the Employee is entitled, the Employee agrees to devote substantially all of his attention and time during normal business hours to the business and affairs of the Company and to perform faithfully and efficiently the responsibilities assigned to the Employee by the Company. (b) The Employee represents and warrants to the Company that there are no agreements or arrangements, whether written or oral, in effect which would prevent the Employee from rendering the service required of him hereunder to the Company during the Employment Period. The Employee further represents, warrants and agrees with the Company that as of the Effective Date he has not made and will not make during the Employment Period any commitment or do any act in conflict with this Agreement, or take any action now or in the future that might divert from the Company any opportunity which would be in the scope of any then present business of the Company or any subsidiary thereof. 5. TERMINATION. (a) DEATH. This Agreement shall terminate automatically upon the Employee's death. If the Employee's employment is terminated by reason of the Employee's death, the Company shall have no further obligations to the Employee's legal representatives under this Agreement, other than (i) those obligations accrued, earned or vested by the Employee as of the date of his death, (ii) that portion of any bonus determined pursuant to Section 3(c)(2) of this Agreement in respect of a prior calendar year that had been deferred, which amount shall be paid to the Employee's legal representatives as soon as practicable, and (iii) with respect to the calendar year in which the Employee's death occurs, in the event that a bonus would have been payable to the Employee pursuant to Section 3(c)(2) of this Agreement in respect of such calendar year had the Employee not died, the Employee's legal representatives shall be entitled to receive a pro-rated amount of such bonus based on a fraction in which the numerator is the number of days the Employee remained employed with the Company in the calendar year in which the Employee died and the denominator is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which the Employee dies. 4 5 (b) DISABILITY. If the Company determines in good faith that the Employee has a "disability" (as defined below), it may give the Employee written notice of its intention to terminate the Employee's employment. In such event, the Employee's employment with the Company shall terminate effective on the 60th day after receipt by the Employee of such notice. No such notice of termination by reason of disability shall be given until the Employee has experienced a period of three (3) consecutive months of disability and the disability is continuing. The notice of termination shall not be effective if the Employee returns to full-time performance of his duties prior to the expiration of the 60 day notice period. For purposes of this Agreement, "disability" shall mean a physical or mental condition which, three (3) months after its commencement, is determined by a physician selected by the Company to be a total and permanent condition which substantially prevents the Employee from performing the services to be provided by him hereunder. The Employee shall be entitled to all compensation and benefits provided for under this Agreement during the three month waiting period for the disability determination and during the 60 day notice of termination period. In the event that the Company provides disability benefits for the Employee, such benefits shall, (1) not commence until after the employment of the Employee has been terminated (2) survive any termination of this Agreement as prescribed by the Company's then current benefit plans and the Company has ceased paying the Employee compensation pursuant to the foregoing sentence. If the Employee's employment is terminated by reason of the Employee's disability, this Agreement shall terminate without further obligations to the Employee or the Employee's legal representatives under this Agreement, other than (i) those obligations accrued, earned or vested by the Employee as of the date of the termination, (ii) that portion of any bonus determined pursuant to Section 3(c)(2) of this Agreement in respect of a prior calendar year that had been deferred, which amount shall be paid to the Employee's legal representatives as soon as practicable, and (iii) with respect to the calendar year in which the Employee's employment is terminated, in the event that a bonus would have been payable to the Employee pursuant to Section 3(c)(2) of this Agreement in respect of such calendar year had the Employee's employment not terminated, the Employee shall be entitled to a pro-rated amount of such bonus based on a fraction in which the numerator is the number of days in the calendar year in which the Employee was terminated that the Employee was employed with the Company and which were prior to the period of the Employee's disability and the denominator is 365, with such bonus payment to be paid in one cash lump sum paid as soon as practicable following delivery of audited financial statements for the year in which the Employee's employment is terminated. (c) CAUSE. During the Employment Period, the Company may terminate the Employee's employment for cause, as determined by the Board (or the Executive Committee) and as defined below. For purposes of this Agreement, "cause" shall mean: (i) an act or acts of fraud, embezzlement or any other act by the Employee that would constitute a felony under the laws of the State of Florida; (ii) repeated violations by the Employee of his obligations under Section 4a of this Agreement or a breach by the Employee of his representations or obligations under any of Sections 3(a), 4(b), 6, 7 or 8 of this Agreement; 5 6 (iii) the indictment of the Employee of a crime, if the Company reasonably believes such indictment would impair the Employee's ability to perform his services under this Agreement; (iv) willful and gross misconduct by the Employee in the performance of his duties hereunder; (v) the commission by the Employee of an act (other than good faith exercise of business judgment in the exercise of his responsibilities pursuant to this Agreement) resulting in material damage to the Company; or (vi) repeated gross harassment, malicious ridicule, or malicious statements that repudiate the integrity or professional standing of another Employee. If the Employee's employment is terminated for cause, this Agreement shall terminate without further obligations to the Employee under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of the termination. The Employee shall not be entitled to any bonus in respect of the year of termination in the event the Employee's employment is terminated for cause pursuant to this Section 5(c). (d) INVOLUNTARY TERMINATION. Notwithstanding anything herein to the contrary, the Company shall have the right, at any time upon notice to the Employee, to terminate the Employee's employment. If during the Employment Period the Company terminates the Employee's employment other than for cause or disability it shall be deemed to be an involuntary termination and the Company shall pay to the Employee the following amounts: (i) to the extent not theretofore paid, the Company shall pay the Employee's Salary through the date of such involuntary termination and, when calculated, the pro-rated bonus (if any) as set forth in Section 3(c)(2)(A) above, in each case payable as and when such Salary and bonus (if any) would otherwise have been paid to the Employee; and (ii) the Company shall pay in one cash lump sum an amount equal to four (4) months salary as severance pay; or, in the case of an involuntary termination following the occurrence of a Change of Control, an amount equal to twelve (12) months salary as severance pay. Payment to be made to Employee within fifteen (15) days of the last day of active employment. (e) VOLUNTARY TERMINATION. The Employee agrees to provide the Company with thirty (30) days' written notice prior to voluntarily terminating his employment. At the end of such 30-day period, this Agreement shall terminate automatically and the Company shall have no further obligations to the Employee under this Agreement, other than those obligations accrued, earned or vested by the Employee as of the date of the termination. The Employee shall not be entitled to any bonus in respect of the year of termination in the event the Employee's employment is terminated pursuant to this Section 5(e). 6 7 (f) GOOD REASON. During the Employment Period, the Employee may terminate his employment for "good reason" as defined below. For purposes of this Agreement, "good reason" shall mean: (i) the assignment to the Employee of any duties inconsistent in any respect with Employee's position, duties and responsibilities as set forth in Section 3(a) of this Agreement or any action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose any isolated, insubstantial and inadvertent action by the Company which is not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (ii) any failure by the Company to comply with any of the provisions of Sections 3(c) through 3(h) of this Agreement regarding the Employee's compensation, benefits, expenses, fringe benefits, vacation, holidays and sick leave other than an isolated, insubstantial and inadvertent action by the Company which is not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Employee; (iii) the Company's requiring the Employee to be based at any office or location other than that described in Section 3(b) of this Agreement, except for travel reasonably required in the performance of the Employee's responsibilities; or (iv) any failure by the Company to comply with and satisfy Section 10 of this Agreement with respect to successors. In the event that the Employee terminates his employment for good reason as defined in this Section 5(f), it shall be deemed to be an "involuntary termination" as set forth in Section 5(d) above and the Employee shall be entitled to all payments and obligations set forth in Sections 5(d)(i) and 5(d)(ii) of this Agreement as if the Employee's employment had been involuntarily terminated. 6. CONFIDENTIALITY. (a) ACKNOWLEDGMENT AND PURPOSES. The Employee acknowledges that during the Employment Period he will learn, develop and have access to Confidential Information relating to the business and affairs of the Company and its affiliates. As used in this Agreement, "Confidential Information" shall mean any and all trade secrets and other confidential information concerning the Company and/or its affiliates including, without limitation, information regarding the operations, future plans, projected and historical sales, marketing, costs, production, growth and distribution, customer lists, customer information, information relating to governmental relations and information relating to products or services of such companies, in each case whether patentable or not. The Company is engaged in a highly competitive business; its competitive position depends in great measure upon the ability to develop or acquire and maintain the confidentiality of Confidential Information; and it may have expended and is likely to continue to expend 7 8 considerable efforts and resources in the development or acquisition of Confidential Information. Based upon the foregoing, the Employee recognizes that the unauthorized disclosure of Confidential Information in violation of the terms hereof is likely to result in serious and irrevocable harm to the Company. (b) RESTRICTIONS ON THE USE OF CONFIDENTIAL INFORMATION. The Employee agrees and covenants as follows: (i) All documents and other materials made or compiled by or made available to the Employee prior to the date hereof or at any time hereafter, including during the Employment Period, by the Company or any of its affiliates and any copies thereof, whether or not containing Confidential Information, are and shall be the property of the Company or its affiliates and shall, at the request of the Company or its affiliates, be delivered to the Company by the Employee immediately upon the conclusion of his engagement as an employee. Except as required in connection with the services to be performed hereunder, the Employee agrees not to remove from the premises of the Company or any of its affiliates, without permission, any papers or drawings belonging to the Company or its affiliates, including those prepared or worked on by him. The Employee will treat as trade secrets all Confidential Information acquired by him prior to the date hereof or at any time hereafter, including during the Employment Period, and shall not at any time use any Confidential Information for his own benefit nor disclose it or any part of it to any other person, firm or corporation not connected with the Company or its affiliates (a) without the prior written consent of the Company, or (b) unless such disclosure is required by law or in response to a legal order or (c) unless such Confidential Information has become generally available to the public other than through the breach by the Employee of the terms hereof. (ii) All ideas, reports, and other creative works conceived by the Employee during the Employment Period and relating to Confidential Information, shall be disclosed to the Company and shall be the sole property of the Company. 7. NON-COMPETITION. The Employee agrees that during the Non-Compete Period (as defined below) he will not, within the continental United States, or any other country in which the Company has operations, directly or indirectly, engage or participate or make any financial investments in or become employed by or render advisory or other services to or for any person, firm or corporation, or in connection with any business activity which directly or indirectly is in competition with any of the business operations or activities of the Company or any of its affiliates as of the date of termination of his employment, whether such companies are presently existing or hereafter acquired. Nothing herein contained, however, shall restrict the Employee from making any investments in any company (but without otherwise participating in the activities of such company) whose stock is listed on a national securities exchange or actively traded in the over-the-counter market, as long as such investment does not give him the right to control or influence the policy decisions of any such business or enterprise which is or might be directly or indirectly in competition with any of such business operations or activities of the Company or its affiliates. For purposes of this Section, the Non-Compete Period shall mean the period beginning on the date hereof and ending: 8 9 (i) If the Company shall terminate the Employee's employment with the Company "for cause" under Section 5(c) of this Agreement or the Employee shall voluntarily terminate his employment with the Company other than for "good reason" pursuant to Section 5(f) of this Agreement, two (2) years following the last day on which the Employee is actively employed by the Company; or (ii) If the Company shall terminate the Employee's employment with the Company other than "for cause" under Section 5(c) of this Agreement or the Employee shall involuntarily terminate his employment with the Company for "good reason" pursuant to Section 5(f) of this Agreement, four (4) months (or, if any such termination of the Employee's employment with the Company occurs following a "Change of Control" of the Company, one (1) year) following the last day on which the Employee is actively employed by the Company; provided, however, that the Company shall have the right exercisable by delivery of written notice to the Employee at least thirty (30) days prior to the date on which such Non-Compete Period would otherwise have ended to extend such period for up to an additional eight (8) months (unless such termination of the Employee's employment with the Company occurs following a "Change of Control" of the Company) by agreeing to pay the Employee an amount equal to one twelfth of the Employee's Base Salary in effect on the last day of the Employee's employment by the Company for each month by which the Company desires to extend such period. 8. RESTRICTION ON SOLICITATION. The Employee will observe the following restrictions for a period of two (2) years from the termination of Employment for any reason: (i) directly or indirectly solicit, raid, entice or induce any employee of the Company or any of its affiliates to become an employee of any person, firm or corporation which is, directly or indirectly, in competition with the business or activities of the Company or any of its affiliates; or (ii) directly or indirectly approach any such employee for these purposes; or (iii) authorize or knowingly approve the taking of such actions by other persons on behalf of any such person, firm or corporation, or assist any such person, firm or corporation in taking such action; or (iv) directly or indirectly solicit, raid, entice or induce any person, firm or corporation who or which on the date hereof is, or at the time during his employment with the Company or any of its affiliates shall be, a customer of the Company or any of its affiliates, to become a customer for the same or similar products which it purchased from the Company or any of its affiliates, of any other person, firm or corporation, and the Employee shall not approach any such customer for such purpose or authorize or knowingly approve the taking of such actions by any other person. 9. REMEDIES. The Employee hereby acknowledges that in the event of a breach by him of the provisions of Sections 6, 7 or 8 of this Agreement, the Company would suffer irreparable harm for which there would be no adequate remedy at law. Accordingly, the 9 10 Employee agrees that in such event, in addition to any other remedies which the Company may have in law or in equity for money damages or other relief, the Company shall be entitled to temporary and/or injunctive relief to enforce the provisions hereof. In addition, the parties hereto agree and acknowledge if any provision of Section 6, 7 or 8 as applied to any party or to any circumstance is adjudged by a court to be invalid or unenforceable, the same shall in no way affect any other circumstance or the validity or enforceability of any other provision of this Agreement. If any such provision, or any part thereof, is held to be unenforceable because of the duration of such provision or the area covered thereby, the parties agree that the court making such determination shall have the power to reduce the duration and/or area of such provision, and/or to delete specific words or phrases, and in its reduced form, such provision shall then be enforceable and shall be enforced. 10. SUCCESSORS. This Agreement is personal to the Employee and without the prior written consent of the Company shall not be assignable by the Employee. The Company may assign its rights and obligations hereunder, provided that the Company will require the assignee to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such assignment had taken place. 11. BINDING ARBITRATION. In the event that the Company and the Employee cannot agree on an interpretation of any provision of this Agreement, or in the event that either of the parties fails to make any payments or otherwise fulfill any obligations required by the terms of this Agreement, the Company and the Employee agree to resolve any such dispute through arbitration in Broward County, Florida, under the then-current rules of the American Arbitration Association in the State of Florida. For the purposes of confirming any such award and entering judgment thereon, each party hereby submits to the exclusive jurisdiction and venue of the State and Federal courts located in Broward County, Florida. In the event the Employee prevails in an arbitration with the Company, any legal fees, expenses or other costs incurred by the Employee in connection with such arbitration shall be borne by the Company. 12. MISCELLANEOUS. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Florida. Each party to this Agreement hereby irrevocably (a) accepts and consents to the exclusive personal jurisdiction of the courts of Broward County, Florida or in the U.S. District Court for the Southern District of Florida for the purpose of any suit, action or proceeding against the Employee, the Company, Kellstrom or any affiliate of Kellstrom arising out of, or relating in any way to, this Agreement or the Company's employment of the Employee, (b) waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such suit, action or proceeding or any judgment entered by any court in respect thereof brought in such courts and (c) waives any claim that any suit, action or proceedings brought in such courts has been brought in an inconvenient forum. Each party further agrees that service of process, summons, notice or document by U.S. registered mail in accordance with this Agreement shall be effective service of process for any action, suit or proceeding brought against a party in any such court. 10 11 (b) The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (c) All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been given if sent by facsimile transmission, delivered by overnight or other carrier service, or mailed, certified first class mail, postage prepaid, return receipt requested, to the parties hereto at the following addresses: If to the Company, to: Kellstrom Industries, Inc. 3701 Flamingo Road Miramar, FL 33127 Attn: Chief Executive Officer Telecopier: (954) 858-2449 If to the Employee, to: Fred von Husen 2770 N.E. 15 St., #202 Ft. Lauderdale, FL 33304 or to such other address as either party shall have furnished to the other in accordance herewith. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) A party's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. (f) This Agreement embodies the entire agreement between the Company and the Employee and supersedes all prior agreements and understandings (including, without limitation, the Prior Employment Agreement), oral or written, with respect to the subject matter hereof. (g) This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which, together, shall constitute one and the same instrument. [signatures on following page] 11 12 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first above written. KELLSTROM INDUSTRIES, INC. By: ----------------------------------------- Name: Zivi R. Nedivi Title: President and Chief Executive Officer EMPLOYEE --------------------------------------------- Fred von Husen 12 13 ATTACHMENT 1 EVP - AUTOMOBILE BENEFIT The Company's current Automobile Benefit plan, as determined by the Board (or the Executive Committee) provides for the following in connection with the performance of the Employee's duties: o An automobile allowance, thru payroll, in the amount of $575.00 semi-monthly ($13,800.00 annualized), to cover the automobile lease or purchase and insurance; o Reimbursement for fuel, yearly registration fees and routine maintenance (e.g., oil changes, tire rotations and other scheduled service items) thru an Expense Report and; o A $3,000.00 maximum reimbursement ($1,000.00 maximum per year of lease or purchase), thru payroll, for documented "up-front fees" (e.g., security deposits, taxes, dealer preparation, etc.) The Employee, NOT THE COMPANY, will be responsible for: o Major repairs or maintenance; o Tolls, unless incurred as a result of a business trip exceeding the Employee's "regular" roundtrip work commute and; o Any "termination fees" (e.g., excess mileage costs, unreasonable wear and tear, disposition fees, etc.) This benefit ceases upon termination of active employment. It is subject to change annually and is in the sole discretion of the Board (or the Executive Committee). - ----------------------- Fred von Husen - ----------------------- Date 13 -----END PRIVACY-ENHANCED MESSAGE-----