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UNITED STATES
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 SEPTEMBER 30, 2002
OR
[ ] 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 1-12380
AVIALL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 65-0433083
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2750 REGENT BOULEVARD 75261-9048
DFW AIRPORT, TEXAS (Zip Code)
(Address of principal executive offices)
(972) 586-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of common stock, par value $.01 per share, outstanding at
November 8, 2002 was 18,837,933.
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1
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
AVIALL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Net sales $ 221,951 127,816 582,663 392,104
Cost of sales 182,817 98,251 463,911 303,862
------------ ------------ ------------ ------------
Gross profit 39,134 29,565 118,752 88,242
Operating and other expenses:
Selling and administrative expenses 23,102 22,029 71,628 65,216
Unusual items -- 926 -- 926
Interest expense 5,600 2,647 16,843 7,508
------------ ------------ ------------ ------------
Earnings from continuing operations before income taxes 10,432 3,963 30,281 14,592
Provision for income taxes 3,510 1,857 11,053 6,215
------------ ------------ ------------ ------------
Earnings from continuing operations 6,922 2,106 19,228 8,377
Discontinued operations:
Gain on disposal (net of income tax expense of $131
in 2001) -- 244 -- 244
------------ ------------ ------------ ------------
Earnings from discontinued operations -- 244 -- 244
------------ ------------ ------------ ------------
Net earnings 6,922 2,350 19,228 8,621
Less deemed dividend from beneficial conversion
feature -- -- (20,533) --
Less preferred stock dividends (1,061) -- (3,114) --
------------ ------------ ------------ ------------
Net earnings (loss) applicable to common shares $ 5,861 2,350 (4,419) 8,621
============ ============ ============ ============
Basic net earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.22 0.11 (0.24) 0.45
Earnings from discontinued operations -- 0.01 -- 0.01
------------ ------------ ------------ ------------
Net earnings (loss) $ 0.22 0.12 (0.24) 0.46
============ ============ ============ ============
Weighted average common shares 18,472,479 18,495,281 18,412,992 18,480,302
============ ============ ============ ============
Diluted net earnings (loss) per share:
Earnings (loss) from continuing operations $ 0.22 0.11 (0.24) 0.45
Earnings from discontinued operations -- 0.01 -- 0.01
------------ ------------ ------------ ------------
Net earnings (loss) $ 0.22 0.12 (0.24) 0.46
============ ============ ============ ============
Weighted average common and potentially dilutive
common shares 29,154,004 18,757,428 27,090,311 18,655,098
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
2
AVIALL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 6,922 2,350 19,228 8,621
Other comprehensive income (loss):
Cumulative effect of change in accounting principle-
adoption of SFAS 133 (net of income tax benefit
of $165) -- -- -- (262)
Fair value adjustment of derivative instruments
(net of income tax expense (benefit) of $12
and $(76)) -- 19 -- (119)
-------- -------- -------- --------
Comprehensive income $ 6,922 2,369 19,228 8,240
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
3
AVIALL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 5,392 2,526
Receivables 106,616 75,134
Inventories 291,648 241,635
Prepaid expenses and other current assets 2,504 2,567
Deferred income taxes 21,842 21,842
------------- -------------
Total current assets 428,002 343,704
------------- -------------
Property and equipment 31,768 33,460
Goodwill 46,843 46,843
Intangible assets 49,794 44,503
Deferred income taxes 39,195 49,369
Other assets 13,490 15,350
------------- -------------
Total assets $ 609,092 533,229
============= =============
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,673 3,591
Revolving line of credit 107,648 107,706
Accounts payable 114,258 51,090
Accrued expenses 27,015 31,659
------------- -------------
Total current liabilities 251,594 194,046
------------- -------------
Long-term debt, net of unamortized discount of $10,123 at
September 30, 2002 77,941 89,557
Other liabilities 13,426 14,623
Commitments and contingencies -- --
Convertible redeemable preferred stock (160,000 shares authorized;
48,217 shares and 45,110 shares issued and outstanding at
September 30, 2002 and December 31, 2001, respectively;
$1,000 aggregate liquidation preference per share) 43,286 40,161
Shareholders' equity:
Common stock ($.01 par value, 80,000,000 shares authorized;
20,845,820 shares and 20,497,992 shares issued at September 30,
2002 and December 31, 2001, respectively) 208 205
Additional paid-in-capital 360,198 328,022
Accumulated deficit (109,090) (104,671)
Unearned compensation - restricted stock (682) (965)
Treasury stock, at cost (2,007,887 shares and 2,002,002 shares at
September 30, 2002 and December 31, 2001, respectively) (27,789) (27,749)
------------- -------------
Total shareholders' equity 222,845 194,842
------------- -------------
Total liabilities, convertible redeemable preferred stock
and shareholder $ 609,092 533,229
============= =============
See accompanying notes to consolidated financial statements.
4
AVIALL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2002 2001
--------- ---------
OPERATING ACTIVITIES:
Net earnings $ 19,228 8,621
Unusual items -- 926
Gain on disposal of discontinued operations -- (244)
Depreciation and amortization 12,774 8,313
Deferred income taxes 10,181 5,720
Compensation expense on restricted stock awards 283 170
Changes in:
Receivables (31,482) (670)
Inventories (50,013) (36,215)
Accounts payable 63,168 (6,029)
Accrued expenses (4,068) 462
Other, net (1,214) 1,088
--------- ---------
Net cash provided by (used for) operating activities 18,857 (17,858)
--------- ---------
INVESTING ACTIVITIES:
Purchase of distribution rights (9,219) (13,532)
Capital expenditures (4,307) (12,751)
Sales of property, plant and equipment 131 6
--------- ---------
Net cash used for investing activities (13,395) (26,277)
--------- ---------
FINANCING ACTIVITIES:
Debt repaid (1,794) (5,257)
Net change in revolving credit facility (1,251) 48,021
Issuance of common stock 585 85
Debt issue costs paid (89) (1,037)
Purchase of treasury stock (40) --
Cash dividends paid on redeemable preferred stock (7) --
--------- ---------
Net cash (used for) provided by financing activities (2,596) 41,812
--------- ---------
Change in cash and cash equivalents 2,866 (2,323)
Cash and cash equivalents, beginning of period 2,526 4,865
--------- ---------
Cash and cash equivalents, end of period $ 5,392 2,542
========= =========
CASH PAID FOR INTEREST AND INCOME TAXES:
Interest $ 13,399 6,922
Income taxes $ 430 1,724
NON CASH INVESTING AND FINANCING ACTIVITIES:
Dividends on redeemable preferred stock $ 23,640 --
Issuance of warrants $ 11,060 --
See accompanying notes to consolidated financial statements.
5
AVIALL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, these financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three- and nine-
month periods ended September 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Annual Report on Form 10-K for Aviall, Inc. for the year
ended December 31, 2001.
NOTE 2 - ACCOUNTING POLICY
During the second quarter of 2002, we changed our classification of
inventory obsolescence and inventory shrinkage from selling and administrative
expenses to cost of sales. Prior periods have been reclassified to reflect this
change.
NOTE 3 - SEGMENT INFORMATION
The following tables present information by operating segment (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
NET SALES 2002 2001 2002 2001
--------- --------- --------- --------- ---------
Aviall Services $ 215,078 121,194 562,450 372,191
ILS 6,873 6,622 20,213 19,913
--------- --------- --------- ---------
Total net sales $ 221,951 127,816 582,663 392,104
========= ========= ========= =========
PROFIT
Aviall Services $ 15,875 6,171 47,678 20,403
ILS 2,424 2,562 7,065 7,794
--------- --------- --------- ---------
Reportable segment profit 18,299 8,733 54,743 28,197
Corporate (2,267) (2,123) (7,619) (6,097)
Interest expense (5,600) (2,647) (16,843) (7,508)
--------- --------- --------- ---------
Earnings from continuing operations before income taxes $ 10,432 3,963 30,281 14,592
========= ========= ========= =========
6
NOTE 4 - EARNINGS PER SHARE
A reconciliation of the numerator and denominator of the basic and diluted
net earnings per share, or EPS, calculations for net earnings follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
NUMERATOR (IN THOUSANDS) 2002 2001 2002 2001
------------------------ ------------ ------------ ------------ ------------
Net earnings $ 6,922 2,350 19,228 8,621
Preferred stock dividends (1,061) -- (23,647) --
------------ ------------ ------------ ------------
Net earnings (loss) available for distribution 5,861 2,350 (4,419) 8,621
Undistributed earnings allocated to participating
preferred stockholders (1,791) -- -- --
------------ ------------ ------------ ------------
Net earnings (loss) for purposes of computing
basic net earnings (loss) per share 4,070 2,350 (4,419) 8,621
Preferred stock dividends 1,061 -- 23,647 --
Undistributed earnings allocated to participating
preferred stockholders 1,791 -- -- --
------------ ------------ ------------ ------------
Net earnings for purposes of computing diluted
net earnings per share $ 6,922 2,350 19,228 8,621
============ ============ ============ ============
DENOMINATOR
------------
Weighted average common shares outstanding
for purposes of computing basic net earnings
(loss) per share 18,472,479 18,495,281 18,412,992 18,480,302
Effect of dilutive securities:
Stock options 612,513 262,147 349,210 174,796
Restricted stock rights 225,791 -- 214,178 --
Warrants 1,712,534 -- 1,263,603 --
Convertible redeemable preferred stock 8,130,687 -- 6,850,328 --
------------ ------------ ------------ ------------
Weighted average common shares outstanding
for purposes of computing diluted net earnings
per share 29,154,004 18,757,428 27,090,311 18,655,098
============ ============ ============ ============
For the three months ended September 30, 2002, basic EPS is computed by
allocating income available for distribution to the common and preferred
shareholders using the "two-class" method prescribed by Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." Net earnings
are reduced by dividends to preferred and common shareholders to arrive at net
earnings available for distribution. These earnings are then allocated between
the common and preferred shareholders based on the weighted average common and
preferred shares outstanding, on an as-converted basis. Diluted EPS is computed
using the if-converted method by dividing net earnings by the weighted average
number of common and dilutive potential common shares outstanding during the
period.
For the three months ended September 30, 2001 and the nine month periods
ended September 30, 2002 and 2001, basic EPS is computed by dividing net
earnings (loss) available for distribution by the weighted average number of
common shares outstanding during the period. Diluted EPS is computed by dividing
net earnings (loss) by the weighted average number of common and dilutive
potential common shares outstanding during the period. Quarterly and
year-to-date computations of per share amounts are made independently;
therefore, the sum of per share amounts for the quarters may not equal per share
amounts for the year.
Diluted EPS was not dilutive, or lower than basic, for the three months and
nine months ended September 30, 2002. Therefore, diluted EPS for the three
months and nine months ended September 30, 2002 is presented equal to basic EPS.
7
NOTE 5 - CONVERTIBLE REDEEMABLE PREFERRED STOCK
On March 15, 2002 following stockholder approval, our Series B Senior
Convertible Participating Preferred Stock, or Series B Redeemable Preferred
Stock, was automatically converted into 45,110 shares of Series D Senior
Convertible Participating Preferred Stock, or Series D Redeemable Preferred
Stock, which as of March 15, 2002 was convertible into 7,777,584 shares of
common stock. Upon conversion of the Series B Redeemable Preferred Stock, we
recorded a $20.5 million deemed dividend reflecting the difference between the
$8.44 closing market price of our common stock on the New York Stock Exchange on
March 15, 2002 and the $5.80 conversion price of the Series D Redeemable
Preferred Stock negotiated in December 2001, multiplied by the total number of
shares of common stock into which the Series D Redeemable Preferred Stock could
have been converted on March 15, 2002.
Dividends on the Series D Redeemable Preferred Stock are payable quarterly
in additional shares of Series D Redeemable Preferred Stock on a cumulative
basis at an annual rate of 9.0%. On September 30, 2002, we issued an additional
1,059 shares of Series D Redeemable Preferred Stock and recorded $1.1 million in
payment of the quarterly dividend due September 30, 2002. As of September 30,
2002, there were 48,217 shares of Series D Redeemable Preferred Stock
outstanding, which were convertible into 8,313,274 shares of common stock.
Unless previously converted into common stock, we must redeem all
outstanding shares of Series D Redeemable Preferred Stock on June 21, 2008 for
$1,000 per share, plus accrued and unpaid dividends, if any.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets",
or SFAS 142. SFAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. The statement eliminates amortization of
goodwill and intangible assets with indefinite lives and requires a transitional
impairment test of these assets within six months of the date of adoption and an
annual impairment test thereafter and in certain circumstances. We have
completed the transitional impairment tests of goodwill and intangible assets
with indefinite lives as of January 1, 2002, and no impairment was noted. We
will perform our next impairment test in the fourth quarter and thereafter at
least annually.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------------------ --------------------------------
AVIALL AVIALL
(IN THOUSANDS) SERVICES ILS TOTAL SERVICES ILS TOTAL
-------------- -------- -------- -------- -------- -------- --------
Balance as of beginning of period $ 42,692 4,151 46,843 44,424 4,336 48,760
Year-to-date amortization -- -- -- (1,732) (185) (1,917)
-------- -------- -------- -------- -------- --------
Balance as of end of period $ 42,692 4,151 46,843 42,692 4,151 46,843
======== ======== ======== ======== ======== ========
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ----------------------
(IN THOUSANDS, EXCEPT SHARE DATA) 2002 2001 2002 2001
--------------------------------- --------- --------- --------- ---------
Reported net earnings $ 6,922 2,350 19,228 8,621
Add: Goodwill amortization, net of income tax expense -- 255 -- 825
--------- --------- --------- ---------
Adjusted net earnings $ 6,922 2,605 19,228 9,446
========= ========= ========= =========
Basic net earnings (loss) per share:
Reported net earnings (loss) $ 0.22 0.12 (0.24) 0.46
Goodwill amortization, net of income tax expense -- 0.01 -- 0.04
--------- --------- --------- ---------
Adjusted net earnings (loss) $ 0.22 0.13 (0.24) 0.50
========= ========= ========= =========
Diluted net earnings (loss) per share:
Reported net earnings (loss) $ 0.22 0.12 (0.24) 0.46
Goodwill amortization, net of income tax expense -- 0.01 -- 0.04
--------- --------- --------- ---------
Adjusted net earnings (loss) $ 0.22 0.13 (0.24) 0.50
========= ========= ========= =========
8
Included in intangible assets in the accompanying consolidated balance
sheets are distribution rights, as follows:
(IN THOUSANDS) SEPTEMBER 30, 2002 DECEMBER 31, 2001
-------------- ------------------ ------------------
Gross carrying amount $ 60,473 51,254
Accumulated amortization (10,679) (6,751)
------------------ ------------------
$ 49,794 44,503
================== ==================
Amortization expense of definite lived intangible assets amounted to $1.3
million and $1.1 million for the three months ended September 30, 2002 and 2001,
respectively, and $3.9 million and $2.6 million for the nine months ended
September 30, 2002 and 2001, respectively.
Estimated amortization expense of definite lived intangible assets for each
of the five succeeding years is as follows (in thousands):
YEARS ENDING DECEMBER 31,
-------------------------
2002 $5,458
2003 $6,120
2004 $6,120
2005 $6,120
2006 $6,120
NOTE 7 - DEBT
On March 15, 2002 following stockholder approval, we issued to our senior
unsecured noteholders warrants exercisable for an aggregate of 1,750,000 shares
of our common stock (subject to adjustment for antidilution events) at an
exercise price of $0.01 per share. We valued the warrants using an option
pricing model and recorded an $11.1 million discount on our senior unsecured
notes. This discount is being amortized over the term of the senior unsecured
notes.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with
the information set forth under Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations on pages 20 through 32 of our
Annual Report on Form 10-K for the year ended December 31, 2001.
CRITICAL ACCOUNTING POLICIES
For a discussion of our critical accounting policies refer to Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies included in our Annual Report on Form
10-K for the year ended December 31, 2001 and to Note 2 of the consolidated
financial statements accompanying this report. Except as disclosed in Note 2 of
the consolidated financial statements accompanying this report, there have been
no material changes to the critical accounting policies discussed in our Form
10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS-THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2001
NET SALES. Net sales for Aviall Services were $215.1 million, an increase
of $93.9 million or 77.5%, from the $121.2 million recorded in the third quarter
of 2001. Sales in the government/military segment increased $89.9 million, while
sales in the general/corporate aviation segment improved by $10.2 million,
primarily as a result of what management believes to be increased market share.
Sales in the weaker commercial airline segment declined $6.2 million. Sales of
products related to the Rolls-Royce T56/501 D, or RR T56, engine line were
approximately $87.8 million in the third quarter of 2002.
Net sales at Inventory Locator Service, or ILS, of $6.9 million were up
$0.3 million year-over-year.
9
GROSS PROFIT. Gross profit of $39.1 million for the third quarter of 2002
was up $9.6 million, or 32.4%, from the third quarter 2001 level of $29.6
million. As expected, gross profit as a percentage of net sales fell to 17.6%,
reflecting the incorporation of lower-margin RR T56 sales.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $1.1 million to $23.1 million in the third quarter of 2002 from $22.0
million in the third quarter of 2001. The increase in selling and administrative
expenses is largely attributable to the new RR T56 product line and higher
depreciation costs associated with increased spending on technology
infrastructure. This increase in selling and administrative expenses was
partially offset by the implementation of SFAS 142, which reduced goodwill
amortization by $0.5 million in the third quarter of 2002 as compared to the
third quarter of 2001. Selling and administrative expenses as a percentage of
net sales fell 6.8 percentage points to 10.4% in the third quarter of 2002 from
17.2% in the third quarter of 2001.
INTEREST EXPENSE. Interest expense increased $3.0 million to $5.6 million
in the third quarter of 2002 from $2.6 million in the third quarter of 2001. Non
cash interest expense included in the $5.6 million amounted to $1.4 million.
This expected increase was primarily due to our new capital structure, which
resulted in higher borrowings, higher amortization of debt issuance costs and
debt discount, and the higher interest rate on our senior unsecured notes.
INCOME TAX EXPENSE. Income tax expense for the third quarter of 2002 was
$3.5 million and our effective tax rate was 33.6%. Our third quarter 2001 income
tax expense was $1.9 million and our effective tax rate was 46.9%. The reduction
in the effective tax rate year over year resulted primarily from the higher
earnings in the 2002 quarter compared to the same quarter in 2001, the
elimination beginning in 2002 of goodwill expense as a permanent difference and
benefits attributable to the Extra Territorial Income (foreign income)
exclusion.
NET EARNINGS. Net earnings for the third quarter of 2002 were $6.9 million,
an increase of 194.6% compared to the $2.4 million reported in the third quarter
of 2001.
PREFERRED STOCK DIVIDEND. The non cash preferred stock dividend of $1.1
million in September 2002 resulted from the issuance of 1,059 shares of Series D
Redeemable Preferred Stock in payment of the quarterly payable-in-kind dividend
on the Series D Redeemable Preferred Stock due September 30, 2002.
RESULTS OF OPERATIONS-NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2001
NET SALES. Net sales for Aviall Services were $562.5 million, an increase
of $190.3 million or 51.1%, from the $372.2 million recorded in the first nine
months of 2001. Sales in the government/military segment increased $197.3
million, partially offset by a $31.4 million decline in sales to our commercial
airline customers. Aviall Services' net sales for the nine months ended
September 30, 2002 also reflect increased sales of $24.4 million in the
general/corporate aviation segment resulting from market share gains. Sales of
products relating to the RR T56 engine line were approximately $192.4 million in
the first nine months of 2002. The 2002 net sales amounts do not include
approximately $74 million of RR T56 sales (valued at our contractual prices)
made directly by Rolls-Royce to the U.S. military during the RR T56 transition
program, which ended in June 2002. We received full margin for these sales and
assumed responsibility for direct shipments to the U.S. military on
Rolls-Royce's behalf at the end of the second quarter of 2002.
Net sales at ILS were $20.2 million - up slightly year-over-year.
GROSS PROFIT. Gross profit of $118.8 million increased $30.5 million or
34.6% in the first nine months of 2002 compared to $88.2 million in the first
nine months of 2001. Gross profit as a percentage of net sales fell slightly to
20.4%, reflecting the incorporation of lower-margin RR T56 sales. If we include
the approximately $74 million of RR T56 sales (valued at our contractual prices)
made directly by Rolls-Royce, and for which Rolls-Royce paid us a commission
equal to the gross margin we would have recognized on these orders had we
shipped them directly, Aviall's full year gross profit as a percentage of net
sales would have been 18.1%.
10
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
increased $6.4 million to $71.6 million in the first nine months of 2002 as
compared to the first nine months of 2001, but decreased as a percentage of net
sales from 16.6% to 12.3%. The increase in selling and administrative expenses
is largely attributable to the new RR T56 product line, higher depreciation
costs associated with increased spending on technology infrastructure, and the
cost of a special meeting of stockholders held in March 2002. This increase in
selling and administrative expenses was partially offset by the implementation
of SFAS 142, which reduced goodwill amortization by $1.4 million in the first
nine months of 2002 compared to the same period in 2001.
INTEREST EXPENSE. Interest expense increased $9.3 million to $16.8 million
in the first nine months of 2002 from $7.5 million in the first nine months of
2001. Non cash interest expense included in the $16.8 million amounted to $3.4
million. This expected increase was primarily due to our new capital structure,
which resulted in higher borrowings, higher amortization of debt issuance costs
and debt discount, and the higher interest rate on our senior unsecured notes.
INCOME TAX EXPENSE. Income tax expense for the first nine months of 2002
was $11.1 million and our effective tax rate was 36.5%. Income tax expense for
the first nine months of 2001 was $6.2 million and our effective tax rate was
42.6%. The reduction in the effective tax rate year over year resulted primarily
from the higher earnings in the first nine months of 2002 compared to the same
period in 2001, the elimination beginning in 2002 of goodwill expense as a
permanent difference and benefits attributable to the Extra Territorial Income
(foreign income) exclusion. The expected full year 2002 tax rate is 36.5%.
NET EARNINGS. Net earnings for the first nine months of 2002 were $19.2
million, an increase of 123.0% compared to the $8.6 million reported in the
first nine months of 2001.
DEEMED DIVIDEND. The deemed dividend of $20.5 million in 2002 resulted from
the conversion of all of our outstanding Series B Redeemable Preferred Stock
into 45,110 shares of Series D Redeemable Preferred Stock on March 15, 2002. The
deemed dividend reflects the difference between the $8.44 closing market price
of our common stock on the New York Stock Exchange on March 15, 2002 and the
$5.80 conversion price of the Series D Redeemable Preferred Stock negotiated in
December 2001, multiplied by the total number of shares of common stock into
which the Series D Redeemable Preferred Stock could have been converted on March
15, 2002.
PREFERRED STOCK DIVIDEND. The non cash preferred stock dividends of $3.1
million paid during the first nine months of 2002 resulted from the issuance of
3,107 shares of Series D Redeemable Preferred Stock in payment of the quarterly
payable-in-kind dividends on the Series D Redeemable Preferred Stock due in the
first nine months of 2002.
INCOME TAXES
Cash tax payments were $0.2 million and $0.4 million for the three and nine
months ended September 30, 2002, respectively, compared to $0.3 million and $1.7
million for the same periods in 2001. Our cash income tax expense continues to
be substantially lower than the U.S. federal statutory rate through the use of
our large U.S. federal net operating loss. Our cash tax expense is primarily
related to foreign taxes on foreign operations. In order to fully utilize our
$71.2 million deferred tax asset as of December 2001, we must generate $196.2
million of taxable income. As of December 31, 2001, our estimated U.S. federal
net operating loss carryforward was approximately $137.3 million, substantially
expiring in 2009 through 2011. We generated U.S. federal taxable income of $20.0
million, $12.0 million and $15.9 million in 2001, 2000 and 1999, respectively.
Based on current and expected future earnings levels, we believe it is more
likely than not that our U.S. federal net operating losses will be fully
utilized prior to expiration. The net operating losses may not be fully utilized
for several years if we do not achieve expected future earnings levels. If
substantial changes in our ownership should occur, there could be an annual
limitation on the amount of the U.S. federal net operating loss carryforward
that we could utilize. The amount of the annual limitation could vary
significantly based on factors existing at the date of the change in ownership.
11
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW. Net cash flows provided by and (used for) operations were $18.9
million in the first nine months of 2002 compared to $(17.9) million in the
first nine months of 2001. The increase in 2002 resulted primarily from the
gross margin of the new RR T56 contract and an increase in accounts payable
subsequent to the December 2001 initial upfront payment for RR T56 inventory. In
addition, our accounts payable increased by $17.6 million during the third
quarter of 2002 resulting primarily from the new amendment to our existing
Honeywell distribution agreement. Approximately $15.8 million will be paid to
Honeywell during the fourth quarter of 2002 from our cash flow and revolving
credit facility. We expect to sell the inventory related to this amendment
during the next twelve months. Aviall Services inventory turns improved from 2.1
turns in December 2001 to 2.9 turns in September 2002 due to the addition of the
higher turn inventory related to the RR T56 contract and improved turns in our
other inventory product lines since September 2001. The receivables days sales
outstanding for Aviall improved from 62 days in December 2001 to 43 days in
September 2002. The improvement results largely from the favorable receivable
terms in the RR T56 contract. Capital expenditures, primarily for system
enhancements at both Aviall Services and ILS and costs related to the
implementation of the RR T56 contract, were $4.3 million in the first nine
months of 2002 compared to $12.8 million in the first nine months of 2001. As a
result of our better than expected operating performance, we requested and were
granted an amendment to our senior secured credit facility and have requested
and are in the process of obtaining an amendment to our senior unsecured notes
that will enable us to increase our total permitted capital spending from $6.6
million to $9.6 million for 2002. We expect that the amendment to the senior
unsecured notes will be executed by all parties in the near future. We expect
capital expenditures (including non cash capital expenditures) will be $9.6
million for 2002, assuming execution of the pending amendment to the senior
unsecured notes. Net cash flows (used for) and provided by financing
activities were $(2.6) million in the first nine months of 2002 compared to
$41.8 million in the first nine months of 2001. The large increase in 2001
related to additional borrowings to finance two new Honeywell parts distribution
agreements.
In summary, our cash from operating activities improved by $36.7 million to
$18.9 million during the nine month period ended September 30, 2002 compared to
the same period in 2001. This was after investing $18.3 million in working
capital (defined as receivables, inventories and accounts payable) in 2002 as
compared with $42.9 million in the first nine months of 2001. In 2002, we used
this cash to make $13.4 million of investments in distribution rights and net
capital expenditures and paid down $3.0 million of debt, increasing our cash on
hand by $2.9 million since the beginning of the year. In 2001, in the
comparative period, we invested $26.3 million in the same areas of distribution
rights and net capital expenditures. The combined deficit in the first nine
months of 2001 of $44.1 million for both operating and investing activities was
funded by drawing $42.8 million on our debt facilities and using $2.3 million of
our available cash.
Our cash flow during the first nine months of 2002 was stronger than during
the same period in 2001, resulting, we believe, from the 2001 investments in the
new distribution contracts and infrastructure. There is no certainty that this
improvement will continue. The liquidity in the commercial airline sector is
considered by many to be bleak and there is political uncertainty, which could
impact government/military funding for the airframes we support. In addition,
the Company may invest in future distribution agreements requiring inventory
purchases, which may not be as liquid as those we have made over the past two
years.
As expected, our interest expense has more than doubled in the first nine
months of 2002 due to the higher borrowings, amortization of higher debt
issuance costs and debt discount, and the higher interest rate on our senior
unsecured notes.
We believe our cash flow from operations and available credit under our
credit facilities are sufficient to meet our anticipated normal working capital
and operating needs (including increased interest expense) for at least the next
twelve months.
In December 2001, we (i) sold 45,000 shares of Series B Redeemable
Preferred Stock for cash proceeds of $45.0 million, (ii) sold $80.0 million of
Aviall Services' unsecured senior notes due 2007 and (iii) entered into a new
$200.0 million senior secured credit facility. The proceeds from these
transactions were used to (i) pay Rolls-Royce $90.0 million for aftermarket
fulfillment rights and the purchase of the initial parts inventory under the
RR T56 engine parts agreement, (ii) repay our former $160.0 million senior
secured revolving credit facility and term loan and (iii) fund working capital
requirements.
12
CONVERTIBLE REDEEMABLE PREFERRED STOCK. On March 15, 2002 following
stockholder approval, the Series B Redeemable Preferred Stock was automatically
converted into 45,110 shares of Series D Redeemable Preferred Stock, which as of
March 15, 2002 was convertible into 7,777,584 shares of common stock. Upon
conversion of the Series B Redeemable Preferred Stock, we recorded a $20.5
million deemed dividend reflecting the difference between the $8.44 closing
market price of our common stock on the New York Stock Exchange on March 15,
2002 and the $5.80 conversion price of the Series D Redeemable Preferred Stock
negotiated in December 2001, multiplied by the total number of shares of common
stock into which the Series D Redeemable Preferred Stock could have been
converted on March 15, 2002. Dividends on the Series D Redeemable Preferred
Stock are payable quarterly in additional shares of Series D Redeemable
Preferred Stock on a cumulative basis at an annual rate of 9.0%. From March 15,
2002 to September 30, 2002, we issued an additional 3,107 shares of Series D
Redeemable Preferred Stock in payment of the quarterly dividends due March 31,
2002, June 30, 2002 and September 30, 2002. As of September 30, 2002, there were
48,217 shares of Series D Redeemable Preferred Stock outstanding, which were
convertible into 8,313,274 shares of common stock. Without the prior consent of
the holders of our Series D Redeemable Preferred Stock, we are prohibited from,
among other things, incurring certain types of additional debt, making specified
payments and capital expenditures, consolidating, merging with or acquiring
another business, or selling certain of our assets. Unless previously converted
into common stock, we must redeem all outstanding shares of Series D Redeemable
Preferred Stock on June 21, 2008 for $1,000 per share plus accrued and unpaid
dividends, if any. The Series D Redeemable Preferred Stock carries a cumulative
dividend at an annual rate of 9%. Dividends paid on or prior to December 31,
2005 will be paid in kind (in shares of the Series D Redeemable Preferred
Stock). Thereafter the dividend is payable in cash, to the extent funds are
legally available for payment of cash dividends. If we fail to pay cash
dividends after December 31, 2005, we will be required to pay dividends in kind
(shares of Series D Redeemable Preferred Stock).
SENIOR SECURED DEBT TERMS. Our senior secured credit facility consists of a
$200.0 million revolving credit and letter of credit facility due as a balloon
payment in 2006, with availability determined by reference to a borrowing base
calculated using our eligible accounts receivable and inventory. As of September
30, 2002, we had approximately $107.6 million outstanding on our senior secured
credit facility and had issued letters of credit for approximately $0.7 million.
We had $68.7 million available for additional borrowings under this credit
facility and our borrowing base was $177.1 million as of September 30, 2002.
Borrowings under this facility bear interest, at our option, based upon either:
a Eurodollar Rate plus an applicable margin ranging from 2.5% to 3.0% depending
upon our financial ratios, or a Base Rate plus an applicable margin ranging from
1.5% to 2.0% depending upon the same financial ratios. As of September 30, 2002,
the average interest rate on our senior secured credit facility was 4.79%. A
commitment fee of 0.5% is payable quarterly on the unused portion of the credit
facility. Obligations under the new credit facility are collateralized by
substantially all of our domestic assets and 65% of the stock of each of our
foreign subsidiaries. Our credit facility also contains default clauses that
permit the acceleration of all amounts due following the maturity of an event of
default at the discretion of the lenders, and lock-box provisions which apply
our cash collections to outstanding borrowings. Based on the terms of our credit
facility and pursuant to EITF Issue No. 95-22, "Balance Sheet Classification of
Revolving Credit Agreement Obligations Involving Lock-Box Arrangements," we have
classified amounts outstanding under the senior secured credit facility as
current.
We also maintain a revolving credit facility in Canada to balance the
Canadian dollar-denominated net assets of our Canadian subsidiary. The Canadian
$6.0 million credit facility was renewed in April 2002 for a one year term, and
had an outstanding balance at September 30, 2002 equivalent to U.S. $38
thousand.
SENIOR UNSECURED DEBT TERMS. The $80.0 million of senior unsecured notes
bear interest at 14.0% per annum and mature on December 21, 2007, unless
previously redeemed at our option. Of the 14.0% interest rate on the senior
unsecured notes, 13.0% is payable in cash and 1.0% is payable in additional
senior unsecured notes. On September 30, 2002, we paid a cash interest payment
of $2.6 million, and the outstanding principal amount on our senior unsecured
notes increased by $0.2 million to $80.6 million. On March 15, 2002 following
stockholder approval, we issued to our senior unsecured noteholders warrants
exercisable for an aggregate of 1,750,000 shares of our common stock (subject to
adjustment for antidilution events) at an exercise price of $0.01 per share. We
valued the warrants using an option pricing model and recorded an $11.1 million
discount on our senior unsecured notes, which is being amortized over the term
of the senior unsecured notes. After the issuance of the warrants, the effective
interest rate for the senior unsecured notes is 15.3%.
13
In addition, without the prior consent of the holders of our senior
unsecured notes, we are prohibited from, among other things, incurring certain
types of additional debt, making specified payments and capital expenditures,
consolidating, merging with or acquiring another business, or selling certain of
our assets.
We have the option to redeem the senior unsecured notes prior to their
maturity at a premium. However, we do not currently intend to refinance these
notes in 2002 unless a significant event, such as the award of another major
distribution rights contract, exceeds our borrowing capacity. We continue to
explore opportunities to acquire additional product lines with a number of major
original equipment manufacturers but there is no certainty that any of these
discussions will lead to a major new contract in 2002 or beyond.
Additionally, we continually review opportunities for acquiring other
compatible businesses or operations. If a strategic acquisition candidate meets
our quantitative and qualitative thresholds, it is possible that such a
strategic acquisition candidate or a large distribution agreement might require
us to refinance both our senior secured debt and our senior unsecured notes.
COVENANTS. Our senior secured credit facility contains various restrictive
operating and financial covenants, including several that are based on earnings
before interest, taxes, depreciation, amortization, extraordinary gains or
losses, and one-time items, or Adjusted EBITDA. For the nine months ended
September 30, 2002 our Adjusted EBITDA was $56.9 million, representing
respectively, $16.7 million, $20.9 million and $19.3 million in our first,
second and third quarters of 2002. Our minimum Adjusted EBITDA covenant requires
us to generate Adjusted EBITDA of at least $40.0 million during the first nine
months of 2002. On December 31, 2002, our minimum Adjusted EBITDA covenant will
be replaced with a maximum leverage ratio covenant that will measure the ratio
of our outstanding debt to our Adjusted EBITDA for the trailing four quarters.
This maximum leverage ratio covenant will initially be set at 4.25 to 1 on
December 31, 2002, and it will periodically decline until it reaches 2.50 to 1
for December 31, 2004 and all periods thereafter. In addition, on December 31,
2002, we must also comply with a minimum interest coverage ratio covenant that
will measure the ratio of our Adjusted EBITDA for the trailing four quarters to
our interest expense during the trailing four quarters. The minimum interest
coverage ratio covenant will initially be set at 2.50 to 1 on December 31, 2002
and will periodically increase until it reaches 3.50 to 1 for December 31, 2004
and all periods thereafter. Furthermore, we must maintain a tangible net worth
at or above certain levels, including a minimum tangible net worth of $157.9
million on September 30, 2002 and $160.9 million on December 31, 2002. Our
tangible net worth covenant will periodically increase until it reaches $315.3
million on December 31, 2006, at which time it will expire. Finally, we must
limit our capital expenditures to no more than $9.6 million for 2002, $11.3
million for 2003 and $11.0 million for each of 2004, 2005 and 2006.
Our senior unsecured notes also contain various restrictive financial
covenants, several of which are less restrictive than those relating to our
senior secured credit facility. First, our minimum Adjusted EBITDA covenant
requires us to generate Adjusted EBITDA of at least $36.0 million during the
first nine months of 2002. On December 31, 2002, our minimum Adjusted EBITDA
covenant will be replaced with a maximum leverage ratio covenant that will
measure the ratio of our outstanding debt to our Adjusted EBITDA for the
trailing four quarters. This maximum leverage ratio covenant will initially be
set at 4.75 to 1 on December 31, 2002, and it will periodically decline until it
reaches 3.00 to 1 for December 31, 2004 and all periods thereafter. In addition,
on December 31, 2002, we must also comply with a minimum interest coverage ratio
covenant that will measure the ratio of our Adjusted EBITDA for the trailing
four quarters to our interest expense during the trailing four quarters. The
minimum interest coverage ratio covenant will initially be set at 2.00 to 1 on
December 31, 2002 and will periodically increase until it reaches 3.00 to 1 for
December 31, 2004 and all periods thereafter. Furthermore, we must maintain a
tangible net worth at or above certain levels, including a minimum tangible net
worth of $153.0 million on September 30, 2002 and $155.0 million on December 31,
2002. Our tangible net worth covenant will periodically increase until it
reaches $285.0 million on December 31, 2006, at which time it will expire.
Finally, we must limit our capital expenditures to no more than $7.3 million for
2002 ($10.6 million after the expected execution of the pending amendment to the
senior unsecured notes), $12.4 million for 2003 and $12.1 million for each of
2004, 2005 and 2006.
We are currently in compliance in all material respects with, and expect to
continue to be in compliance in all material respects with, the covenants in our
senior secured credit facility and senior unsecured notes for at least the next
twelve months.
CONTRACTUAL OBLIGATIONS. There have been no material changes in our
contractual obligations as set forth in our Form 10-K for the year ended
December 31, 2001.
14
OUTLOOK
We participate in the global aviation aftermarket through Aviall Services
and ILS. Our operations and results of operations are affected by the general
economic cycle, particularly as it influences flight activity in the
government/military, commercial airline and general/corporate aviation segments.
We benefit from our participation in the global aviation aftermarket by
generating revenues from many national economies and by actively participating
in each of their aviation sectors.
The effects of the September 11th terrorist attacks are still being felt
primarily in the U.S. commercial airline sector. The demand for commercial air
travel in the U.S. was significantly reduced in the period immediately following
September 11th, and the current global economic slowdown has also reduced air
travel demand in other regions such as Europe. The lower flight activity and
accompanying accelerated retirement of older aircraft have reduced demand for
some of the new replacement parts we sell, particularly in the commercial
aviation market. Airlines and other aviation firms around the world are
accordingly experiencing large financial losses, and the viability of some of
these firms is questionable. We could be negatively affected if our receivables
from major customers become uncollectible. We regularly review our exposure to
each of these entities in order to determine reserve amounts, if any, that
should be recorded to cover our risk of loss. During the third quarter of 2002,
US Airways Group and Vanguard Airlines each filed for bankruptcy protection.
Aviall Services' net sales to these customers during the first nine months of
2002 were less than one percent of its net sales. We believe our reserves on
accounts receivable as of September 30, 2002 are adequate to cover our exposure
to these customers.
Although ILS experienced a slight decrease in aviation industry-related
subscribers immediately after September 11th, this decrease was partially offset
by an increase in the number of government-related and general/corporate
aviation subscribers. As a result, ILS has not experienced a material adverse
impact on its business as a result of the September 11th terrorist attacks and
related aftermath.
In late December 2001, we were awarded exclusive ten-year worldwide
aftermarket fulfillment rights for the RR T56 series engine, which is primarily
used for military transport aircraft. Under this agreement, we paid $90.0
million for the aftermarket fulfillment rights and the purchase of an initial
inventory of parts. The award is the largest in our history and is expected to
add in excess of $3.0 billion to our net sales over the ten-year life of the
agreement, which began January 2, 2002. Sales associated with this agreement
were originally expected to be at least $250 million in 2002. In fact, sales for
the first nine months of the year were approximately $190.9 million. This net
sales amount does not include approximately $74 million of RR T56 sales (valued
at our contractual prices) made directly by Rolls-Royce to the U.S. military
during the RR T56 transition program, which ended in June 2002. The original
$250 million estimate included the direct sales made by Rolls-Royce to the U.S.
military during the RR T56 transition program.
The RR T56 agreement requires us to purchase approximately $319 million of
RR T56 inventory in 2002, a requirement we have met.
The length of time required for a full recovery of the global commercial
and general/corporate aviation sectors is not known, and the recovery could be
threatened by a number of factors, including slower economic growth or
additional terrorist activity. Generally, domestic business and general aviation
flight activity, with the exception of piston-engine aircraft, has remained
relatively stable after the September 11th restrictions on flying were relaxed.
At the same time, the U.S. military and foreign militaries, which utilize
airframes powered by the RR T56 engine, have significantly increased their
flight activities, especially in connection with increased post-September 11th
military operations around the world. During the first nine months of 2002,
including direct sales of RR T56 parts made by Rolls-Royce, Aviall Services' net
sales would have been derived approximately 47% from government/military sales,
24% from commercial airline sales and 29% from general aviation/corporate sales.
Upon stockholder approval of the issuance of the Series D Redeemable
Preferred Stock, we recorded a $20.5 million non cash deemed dividend reflecting
the difference between the $8.44 closing market price of the common stock on the
New York Stock Exchange on March 15, 2002 and the $5.80 conversion price of the
Series D Redeemable Preferred Stock negotiated in December 2001, multiplied by
the total number of shares of common stock into which the Series D Redeemable
Preferred Stock could have been converted on March 15, 2002. This one-time, non
cash charge reduced retained earnings and increased paid in capital of the
equity accounts and lowered both basic and fully diluted earnings per share for
the first quarter and the first nine months of 2002 and will therefore also
reduce full year earnings per share for 2002.
15
We believe both ILS and Aviall Services are scalable businesses, with
significant portions of their expenses being relatively fixed in the short-term.
While this scalability produces positive results in a growing marketplace as can
be seen by the impact of the RR T56 agreement, in a shrinking marketplace
potential expense reductions can have a long term detrimental effect on our
business prospects arising from delays in capital projects and the longer time
periods required to produce extensive cost reductions.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) that are based
on the beliefs of our management, as well as assumptions and estimates made by,
and information currently available to, our management. When used in this
report, the words "anticipate," "believe," "estimate," "expect," "intend" and
similar expressions, as they relate to us or our management, identify
forward-looking statements. Such statements reflect our current views with
respect to future events and are subject to risks, uncertainties and assumptions
relating to our operations and results of operations as well as those of our
customers and suppliers, including as a result of competitive factors and
pricing pressures, shifts in market demand, general economic conditions and
other factors including, among others, those that effect flight activity in the
commercial, business, government/military, and general/corporate aviation
segments, the business activities of our customers and suppliers and
developments in information and communication technology. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions or
estimates prove incorrect, actual results may vary materially from those
described in the forward-looking statements.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have market risk exposure arising from changes in interest rates and
foreign exchange rates. From time to time, we have used financial instruments to
offset such risks. We do not use financial instruments for trading or
speculative purposes. We have experienced no significant changes in market risk
during the first nine months of 2002. Our market risk is described in more
detail in our Annual Report on Form 10-K for the year ended December 31, 2001.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rule
13a-14(c) of the Securities Exchange Act of 1934, or the Exchange Act.
This term refers to the controls and procedures of a company that are
designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within required time
periods. Our Chief Executive Officer and our Chief Financial Officer
have evaluated the effectiveness of our disclosure controls and
procedures as of a date within 90 days before the filing of this
quarterly report, and they have concluded that as of that date, our
disclosure controls and procedures were effective at ensuring that
required information will be disclosed on a timely basis in our
reports filed under the Exchange Act.
(b) Changes in Internal Controls
We maintain a system of internal controls that are designed to
provide reasonable assurance that our books and records accurately
reflect in all material respects our transactions and that our
established policies and procedures are followed. There were no
significant changes to our internal controls or in other factors that
could significantly affect our internal controls subsequent to the
date of their evaluation by our Chief Executive Officer and our Chief
Financial Officer, including any corrective actions with regard to
significant deficiencies and material weaknesses.
16
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
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
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Amendment No. 1 to the Amended and Restated Credit Agreement,
dated as of September 2002, by and among Aviall, Inc., Aviall
Services, Inc., Citicorp USA, Inc. and the lenders and
issuers party thereto
(b) Reports on Form 8-K
A Form 8-K was filed on July 19, 2002, under Item 5, presenting
the transitional disclosures required by paragraph 61 of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets," or SFAS 142, by presenting adjusted net earnings in our
selected financial data for the three years ended December 31, 2001,
as if SFAS 142 had been adopted at the beginning of each of those
years.
A Form 8-K was filed on August 14, 2002, under Item 9, attaching
copies of the certifications submitted to the SEC by Paul E. Fulchino,
our Chairman, President and Chief Executive Officer, Cornelius Van Den
Handel, our former Vice President and Treasurer and Jacqueline K.
Collier, our Vice President and Controller pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
A Form 8-K was filed on August 15, 2002, under Item 9, announcing
that we issued a press release in which we reaffirmed our earnings
guidance for the year ending December 31, 2002 and responded to recent
developments affecting the airline industry.
17
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.
AVIALL, INC.
November 13, 2002 By: /s/ Colin M. Cohen
-------------------------------------------
Colin M. Cohen
Vice President and Chief Financial Officer
(Principal Financial Officer)
November 13, 2002 /s/ Jacqueline K. Collier
-------------------------------------------
Jacqueline K. Collier
Vice President and Controller
(Principal Accounting Officer)
18
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Paul E. Fulchino, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aviall, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002
By: /s/ Paul E. Fulchino
-----------------------------------------------
Paul E. Fulchino
Chairman, President and Chief Executive Officer
19
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Colin M. Cohen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Aviall, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: November 13, 2002
By: /s/ Colin M. Cohen
------------------------------------------
Colin M. Cohen
Vice President and Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------
10.1 Amendment No. 1 to the Amended and Restated Credit Agreement,
dated as of September 2002, by and among Aviall, Inc., Aviall
Services, Inc., Citicorp USA, Inc. and the lenders and issuers
party thereto