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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
XXXXXXXXXX, X.X. 00000
------------------------
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number 0-22371
------------------------
XXXXXXX AIRCRAFT HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 00-0000000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
0000 XXXXXXXXX XXXXXX, XXXXX 000, XX XXXXXXX, XX 00000
(Address, including zip code, of principal executive offices)
(000) 000-0000
(Registrant's telephone number, including area code)
------------------------
(NOT APPLICABLE)
(Former address and telephone number of principal executive offices, if changed
since last report)
------------------------
Indicate by check xxxx 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. /X/ Yes / / No
The number of shares of Registrant's Common Stock, $.01 par value,
outstanding as of July 31, 1998 was 7,524,740 shares.
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XXXXXXX AIRCRAFT HOLDINGS, INC.
INDEX
PAGE
-----
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997............................ 1
Consolidated Statements of Operations for the three months and six months ended June 30, 1998 and
1997........................................................................................... 2
Consolidated Statements of Stockholders' Equity for the six months ended June 30, 1998........... 3
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997............ 4
Condensed Notes to Consolidated Financial Statements............................................. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............ 11
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................................ 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................. 15
ITEM 5. OTHER INFORMATION................................................................................ 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits......................................................................................... 16
Reports on Form 8-K.............................................................................. 16
i
ITEM 1. FINANCIAL STATEMENTS
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents............. $ 2,337 $ 206
Accounts receivable, net.............. 25,857 18,152
Inventories........................... 35,109 25,976
Income taxes refundable............... 4,368 --
Prepaid expenses and other current
assets.............................. 2,875 782
----------- ------------
Total current assets................ 70,546 45,116
Property and equipment, net............. 23,815 14,054
Other assets, principally intangibles,
net................................... 101,248 39,967
----------- ------------
Total assets...................... $195,609 $ 99,137
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term borrowings................. $ 90 $ 568
Current portion of long-term
obligations......................... 857 858
Accounts payable...................... 8,157 8,032
Accrued expenses...................... 11,597 6,911
Income taxes payable.................. 3,175 3,975
----------- ------------
Total current liabilities........... 23,876 20,344
----------- ------------
Long-term liabilities
Long-term obligations................. 93,027 37,412
Other long-term liabilities........... 523 96
Deferred income taxes................. 521 1,758
----------- ------------
Total long-term liabilities......... 94,071 39,266
----------- ------------
Commitments and contingencies........... -- --
Stockholders' equity
Undesignated preferred stock, $.01 par
value, 10,000,000 shares authorized;
none issued and outstanding......... -- --
Common stock, $.01 par value,
9,924,950 shares authorized;
7,524,740 and 5,318,563 shares
issued and outstanding as of June
30, 1998 and December 31, 1997,
respectively........................ 75 53
Additional paid-in capital............ 85,928 51,057
Accumulated deficit................... (8,084) (11,444)
Accumulated other comprehensive income
(deficit)........................... (257) (139)
----------- ------------
Total stockholders' equity.......... 77,662 39,527
----------- ------------
Total liabilities and
stockholders' equity............ $195,609 $ 99,137
----------- ------------
----------- ------------
The accompanying notes are an integral part of the consolidated financial
statements.
1
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ---------- ----------
(UNAUDITED) (UNAUDITED)
Revenues................................ $ 29,854 $ 28,130 $ 58,982 $ 54,248
Cost of sales........................... 20,134 20,916 40,275 41,023
----------- ----------- ---------- ----------
Gross profit........................ 9,720 7,214 18,707 13,225
----------- ----------- ---------- ----------
Operating expenses
Selling, general and administrative
expenses............................ 5,302 3,838 10,181 7,222
Amortization of intangible assets..... 382 203 761 410
----------- ----------- ---------- ----------
Total operating expenses............ 5,684 4,041 10,942 7,632
----------- ----------- ---------- ----------
Income from operations.................. 4,036 3,173 7,765 5,593
Other expenses (income)
Interest expense...................... 383 692 1,169 2,284
Terminated debt offering expenses..... 600 -- 600 --
Other expenses (income)............... (41) 132 (70) 14
Minority interest..................... 28 24 40 55
----------- ----------- ---------- ----------
Income before provision for income taxes
and extraordinary item................ 3,066 2,325 6,026 3,240
Provision for income taxes.............. 1,394 871 2,666 1,157
----------- ----------- ---------- ----------
Income before extraordinary item........ 1,672 1,454 3,360 2,083
Extraordinary loss from debt
refinancing, net of income tax
benefit............................... -- 2,078 -- 2,078
----------- ----------- ---------- ----------
Net income (loss)....................... 1,672 (624) 3,360 5
Adjustment to redemption value of
mandatorily redeemable common stock
warrants.............................. -- (2,203) -- (2,203)
Cumulative convertible preferred stock
dividends............................. -- (62) -- (442)
----------- ----------- ---------- ----------
Net income (loss) applicable to common
stockholders.......................... $ 1,672 $ (2,889) $ 3,360 $ (2,640)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Income per common share
Basic
Income (loss) before extraordinary
item.............................. $ .23 $ (.18) $ .53 $ (.25)
Extraordinary loss from debt
refinancing....................... -- (.47) -- (.91)
----------- ----------- ---------- ----------
Net income (loss)................... $ .23 $ (.65) $ .53 $ (1.16)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Diluted
Income (loss) before extraordinary
item.............................. $ .22 $ (.18) $ .50 $ (.25)
Extraordinary loss from debt
refinancing....................... -- (.47) -- (.91)
----------- ----------- ---------- ----------
Net income (loss)................... $ .22 $ (.65) $ .50 $ (1.16)
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Weighted average number of common and
dilutive common equivalent shares
outstanding
Basic............................... 7,421 4,442 6,376 2,276
Diluted............................. 7,734 4,442 6,687 2,276
Pro forma for the Recapitalization, as
adjusted for the Initial Public
Offering
Income applicable to common
stockholders........................ $ 1,672 $ 1,568 $ 3,360 $ 2,983
Income per common share
Basic............................... $ .23 $ .30 $ .53 $ .56
Diluted............................. $ .22 $ .28 $ .50 $ .53
Weighted average number of common and
dilutive common equivalent shares
outstanding
Basic................................. 7,421 5,302 6,376 5,302
Diluted............................... 7,734 5,576 6,687 5,576
The accompanying notes are an integral part of the consolidated financial
statements.
2
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK COMMON STOCK
-------------------------- ---------------------- ADDITIONAL ACCUMULATED OTHER
NUMBER OF NUMBER OF PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME (DEFICIT)
------------- ----------- --------- ----------- ----------- ------------ -----------------
Balance, December 31, 1997.... -- $ -- 5,318,563 $ 53 $ 51,057 $ (11,444) $ (139)
Comprehensive income
Net income (Unaudited)...... -- -- -- -- -- 3,360 --
Translation adjustment
(Unaudited)............... -- -- -- -- -- -- (118)
Stock option compensation
expense (Unaudited)......... -- -- -- -- 78 -- --
Sale of common stock
(Unaudited)................. -- -- 2,206,177 22 34,793 -- --
--- ----- --------- --- ----------- ------------ -----
Balance, June 30, 1998
(Unaudited)................. -- $ -- 7,524,740 $ 75 $ 85,928 $ (8,084) $ (257)
--- ----- --------- --- ----------- ------------ -----
--- ----- --------- --- ----------- ------------ -----
TOTAL
---------
Balance, December 31, 1997.... $ 39,527
---------
Comprehensive income
Net income (Unaudited)...... 3,360
Translation adjustment
(Unaudited)............... (118)
---------
3,242
Stock option compensation
expense (Unaudited)......... 78
Sale of common stock
(Unaudited)................. 34,815
---------
Balance, June 30, 1998
(Unaudited)................. $ 77,662
---------
---------
The accompanying notes are an integral part of the consolidated financial
statements.
3
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
---------- ----------
(UNAUDITED)
Cash flows from operating activities
Net income.............................................................................. $ 3,360 $ 5
Adjustments to reconcile net income to net cash (used for) provided by operating
activities
Depreciation and amortization......................................................... 2,966 2,656
Extraordinary loss from debt refinancing.............................................. -- 2,078
Deferred income taxes................................................................. (1,219) 439
Unrealized (gain) loss on forward foreign exchange contracts.......................... (71) 302
Other, net............................................................................ (88) 55
Changes in assets and liabilities
Accounts receivable................................................................. (2,154) (946)
Inventories......................................................................... (3,058) (2,265)
Prepaid expenses and other assets................................................... (643) 368
Accounts payable.................................................................... (1,451) 1,278
Accrued expenses.................................................................... 2,316 (940)
Income taxes payable................................................................ (778) (62)
---------- ----------
Net cash (used for) provided by operating activities.............................. (820) 2,968
---------- ----------
Cash flows from investing activities
Purchase of stock of Avtech Corporation, net of cash acquired........................... (83,599) --
Purchase of net assets of Xxxxxxxx Industries Inc., net of cash acquired................ (2,145) --
Capital expenditures.................................................................... (1,102) (2,253)
Other, net.............................................................................. 175 --
---------- ----------
Net cash used for investing activities............................................ (86,671) (2,253)
---------- ----------
Cash flows from financing activities
Sale of common stock and application of the net proceeds
Net proceeds from the sale of common stock............................................ 34,815 29,220
Net borrowings (repayments) under senior credit facility.............................. (34,815) 12,334
Repayment of debt..................................................................... -- (42,160)
Revolving line of credit borrowings to finance acquisitions............................. 85,744 --
Net borrowings under revolving line of credit agreements................................ 5,358 1,879
Principal payments on capitalized lease and other long-term obligations................. (1,156) (1,048)
Promissory note principal payments...................................................... -- (956)
Payment of deferred financing costs..................................................... (311) --
Other, net.............................................................................. (18) 31
---------- ----------
Net cash provided by (used for) financing activities.............................. 89,617 (700)
---------- ----------
Effect of foreign currency translation on cash............................................ 5 (34)
---------- ----------
Net increase (decrease) in cash and cash equivalents...................................... 2,131 (19)
Cash and cash equivalents at beginning of period.......................................... 206 320
---------- ----------
Cash and cash equivalents at end of period................................................ $ 2,337 $ 301
---------- ----------
---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
4
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--CONSOLIDATED FINANCIAL STATEMENTS
The information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the audited financial statements and notes thereto included in
the Company's Form 10-K for the year ended December 31, 1997.
The consolidated financial information as of June 30, 1998 and for the three
months and six months ended June 30, 1998 and 1997 is unaudited. In the opinion
of the Company, the unaudited financial information is presented on a basis
consistent with the audited financial statements and contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for such interim periods. The results of operations for interim
periods are not necessarily indicative of results of operations for the full
year. Certain reclassifications have been made to prior periods' financial
information to conform to the 1998 presentation.
NOTE 2--SALE OF COMMON STOCK
In April 1998, the Company sold 2,206,177 shares of common stock for $17.00
per share ("Follow-On Equity Offering"). Net proceeds from the Follow-On Equity
Offering of $34,815,000 were used to partially repay borrowings outstanding
under the Company's senior credit facility.
NOTE 3--INCOME PER COMMON SHARE
As described in the Company's Form 10-K for the year ended December 31,
1997, the holders of certain securities agreed to a plan for the
recapitalization of the Company (the "Recapitalization") during 1997. Completion
of the Recapitalization was a condition to the consummation of the Company's
initial public offering (the "IPO") and, was effective concurrent therewith. The
IPO was consummated on April 16, 1997. Since the Company's historical capital
structure is not indicative of its structure after the Recapitalization and IPO,
pro forma income per share is presented for 1997 and reflects the
Recapitalization, the IPO and the application of the proceeds therefrom, as if
both had occurred January 1, 1997.
Income per common share ("EPS") has been computed pursuant to the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
which became effective after December 15, 1997; all periods prior thereto have
been restated to conform with the provisions of this statement.
The following table provides a reconciliation of both income and the number
of common shares used in the computations of "basic" EPS, which utilizes the
weighted average number of common shares
5
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3--INCOME PER COMMON SHARE (CONTINUED)
outstanding without regard to dilutive potential common shares, and "diluted"
EPS, which includes all such shares. All amounts are in thousands, except per
share data, and are unaudited.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------- ---------------------------------
1997 1997
---------------------- ----------------------
1998 AS REPORTED PRO FORMA 1998 AS REPORTED PRO FORMA
--------- ----------- --------- --------- ----------- ---------
Income (loss) applicable to common shares-- Numerator
Before extraordinary item.......................... $ 1,672 $ 1,454 $ 1,568 $ 3,360 $ 2,083 $ 2,983
Adjustment to redeemable warrant redemption
value............................................ -- (2,203) -- -- (2,203) --
Preferred stock dividends.......................... -- (62) -- -- (442) --
--------- ----------- --------- --------- ----------- ---------
Income (loss) applicable to common shares
(basic)........................................ 1,672 (811) 1,568 3,360 (562) 2,983
Cumulative convertible preferred stock dividends... -- -- -- -- -- --
--------- ----------- --------- --------- ----------- ---------
Income (loss) applicable to common shares
(diluted)...................................... $ 1,672 $ (811) $ 1,568 $ 3,360 $ (562) $ 2,983
--------- ----------- --------- --------- ----------- ---------
--------- ----------- --------- --------- ----------- ---------
Shares--Denominator
Weighted average common shares outstanding
(basic).......................................... 7,421 4,442 5,302 6,376 2,276 5,302
Add dilutive effect of
Preferred stock outstanding prior to
conversion..................................... -- 320 -- -- 1,126 --
Common stock options............................. 313 274 274 311 274 274
Warrants outstanding prior to cancellation,
conversion or exercise......................... -- 198 71 -- 445 71
Less antidilutive effect of potential common
shares........................................... -- (792) (71) -- (1,845) (71)
--------- ----------- --------- --------- ----------- ---------
Weighted average common shares outstanding
(diluted)...................................... 7,734 4,442 5,576 6,687 2,276 5,576
--------- ----------- --------- --------- ----------- ---------
--------- ----------- --------- --------- ----------- ---------
EPS--Income (loss) before extraordinary item
Basic.............................................. $ .23 $ (.18) $ .30 $ .53 $ (.25) $ .56
Diluted............................................ $ .22 $ (.18) $ .28 $ .50 $ (.25) $ .53
Pro forma for the Recapitalization and IPO assumes each occurred on January
1, 1997. Therefore, pro forma income per common share is computed using pro
forma income before adjustment to redemption value of redeemable warrants and
preferred stock dividends. Pro forma income also reflects the sale by the
Company of 2,700,000 shares of common stock in the IPO and the application of
the net proceeds therefrom.
6
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--ACQUISITIONS
AVTECH
On June 26, 1998, the Company purchased substantially all of the common
stock of Avtech Corporation ("Avtech"). Avtech is a manufacturer of avionics
components and an avionics systems integrator for the commercial and high-end
corporate jet aircraft industries.
The total purchase price was $84,693,000 in cash at closing, including an
estimated $1,250,000 of acquisition related costs. The acquisition was financed
with borrowings under the Company's senior credit facility. The acquisition was
accounted for as a purchase and the $57,911,000 difference between the purchase
price and the fair value of the net assets acquired was recorded as goodwill and
is being amortized on a straight-line basis over 30 years.
The consolidated balance sheet as of June 30, 1998 reflects the Avtech
assets and liabilities acquired and the consolidated results of operations
include the operating results of Avtech subsequent to June 25, 1998.
XXXXXXXX
On June 30, 1998, the Company purchased certain assets, subject to certain
liabilities assumed, of Xxxxxxxx Industries Inc. ("Xxxxxxxx"). Xxxxxxxx is a
manufacturer of seats for high-end corporate jet aircraft.
The total purchase price was $2,314,000 in cash at closing, including an
estimated $141,000 of acquisition related costs, plus contingent consideration
aggregating a maximum $2,000,000 payable over four years based on future
attainment of defined performance criteria during each of the years in the four-
year period ending December 31, 2002. The acquisition was financed with
borrowings under the Company's senior credit facility. The acquisition was
accounted for as a purchase and the $2,068,000 difference between the purchase
price, excluding contingent consideration, and the fair value of the net assets
acquired was recorded as goodwill and is being amortized on a straight-line
basis over 30 years. The amount of contingent consideration paid in the future,
if any, will increase goodwill and will be amortized prospectively over the
remaining period of the initial 30-year term.
The consolidated balance sheet as of June 30, 1998 reflects the Xxxxxxxx
assets and liabilities acquired and the consolidated results of operations
include the operating results of Xxxxxxxx subsequent to June 29, 1998.
PRO FORMA RESULTS OF OPERATIONS FOR ACQUISITIONS, RECAPITALIZATION, IPO AND
FOLLOW-ON EQUITY OFFERING
Unaudited pro forma consolidated results of operations are presented in the
table below for the year ended December 31, 1997 and the six months ended June
30, 1997 and 1998. For all periods presented, the results of operations are pro
forma for the Recapitalization, the IPO, the Follow-On Equity Offering (Note 2),
and the application of the net proceeds therefrom. For the year ended December
31, 1997 and six months ended June 30, 1997, the results are also pro forma as
if the Avtech and Xxxxxxxx acquisitions, and the Audio International acquisition
(which occured on November 14, 1997), were consummated on January 1, 1997. For
the six months ended June 30, 1998, the results are pro forma as if the Avtech
and
7
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4--ACQUISITIONS (CONTINUED)
Xxxxxxxx acquisitions were consummated on January 1, 1997. Amounts are in
thousands, except per share data.
PRO FORMA
----------------------------------
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, --------------------
1997 1998 1997
------------ --------- ---------
Revenues..................................................................... $ 160,054 $ 81,846 $ 79,590
Income before extraordinary item............................................. 5,279 4,356 2,877
Income applicable to common stockholders, before extraordinary item.......... 5,279 4,356 2,877
Pro forma income per common share, before extraordinary item
Basic...................................................................... $ .70 $ .58 $ .38
Diluted.................................................................... .68 .56 .37
Pro forma weighted average number of common shares outstanding
Basic...................................................................... 7,510 7,525 7,509
Diluted.................................................................... 7,812 7,836 7,782
The above information reflects adjustments for depreciation, amortization,
general and administrative expenses and interest expense based on the new cost
basis and debt structure of the Company. In 1997, income excludes the effect of
a $2,078,000 extraordinary loss incurred in connection with the Company's debt
refinancing.
NOTE 5--INVENTORIES
Inventories are comprised of the following (amounts in thousands):
DECEMBER 31,
1997
JUNE 30, ------------
1998
------------
(UNAUDITED)
Raw material............................ $21,440 $14,224
Work-in process......................... 5,072 4,655
Finished goods.......................... 8,597 7,097
------------ ------------
Total inventories................... $35,109 $25,976
------------ ------------
------------ ------------
NOTE 6--LONG-TERM OBLIGATIONS; SENIOR CREDIT FACILITY
In April 1998, the Company used the net proceeds from the Follow-On Equity
Offering to partially repay borrowings outstanding under the Senior Credit
Facility. In May 1998, the Senior Credit Facility was amended to provide for a
$105 million revolving line of credit. The revolving line of credit is subject
to automatic reductions of up to $45 million upon the incurrence of additional
indebtedness permitted under the loan plus $500,000 per month from October 31,
1998 through May 31, 1999 and $1 million per month thereafter. The maximum
interest rate margins were increased 0.25% to 1.00% above the prime rate or
2.25% above the IBOR rate and the maximum commitment fee was increased to 0.425%
on the unused portion of the Senior Credit Facility. In June 1998, the Company
borrowed funds under the Senior Credit Facility to finance the Avtech and
Xxxxxxxx acquisitions.
8
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7--INCOME TAXES
During the three months and six months ended June 30, 1998, the Company
reduced its deferred tax asset valuation allowance by $68,000 and $115,000,
respectively, to reflect the book benefit of federal net operating loss
carryforwards not previously recognized. Approximately $2,205,000 of the
Company's loss carryforwards remained at June 30, 1998 for federal income tax
purposes. No benefit for the remaining loss carryforwards has been recognized in
the consolidated financial statements.
NOTE 8--COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For the Company, comprehensive income consists of its
reported net income or loss and the change in the foreign currency translation
adjustment during a period. The Company adopted SFAS 130 for the year ending
December 31, 1998 and has reclassified earlier periods to reflect application of
the statement.
NOTE 9--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. It also requires that gains or losses resulting from changes in the
values of those derivatives be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. The Company is
required to adopt SFAS 133 for its fiscal year beginning January 1, 2000.
Management believes the adoption of SFAS 133 will not have a material impact on
the Company's consolidated financial position or results of operations.
NOTE 10--DEFINITIVE MERGER AGREEMENT; TENDER OFFER
On July 17, 1998, the Company announced that it had signed a definitive
merger agreement (the "Merger Agreement") with an affiliate of DLJ Merchant
Banking Partners II, which contemplates a cash tender offer by the affiliate for
all of the shares of common stock of the Company at $23.00 per share. As a
result of the pending tender offer, the Company terminated a debt offering and
recorded a $600,000 pre-tax charge as of June 30, 1998 for the estimated costs
incurred.
On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware
Chancery Court on behalf of a purported class of stockholders of the Company
against the Company, its directors, Xxxxxxxxx, Xxxxxx & Xxxxxxxx, Inc. and
certain of its affiliates, alleging, among other things, that the directors had
breached their fiduciary duties by entering into the Merger Agreement without
engaging in an auction or "active market check" and, therefore, did not
adequately inform themselves in agreeing to terms that are unfair and inadequate
from the standpoint of the Company's stockholders. On July 24, 1998, the
plaintiffs amended the complaint by repeating the allegations in the initial
complaint and adding allegations that: (i) the Company's
Solicitation/Recommendation Statement of Schedule 14D-9 (the "14D-9") contained
material misstatements or omissions including: (a) inadequate disclosure of any
future equity participation by management after the transaction is consummated;
(b) no disclosure of any efforts to shop the Company; (c) incomplete financial
information and projections; and (d) incomplete disclosure of the basis
9
XXXXXXX AIRCRAFT HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 10--DEFINITIVE MERGER AGREEMENT; TENDER OFFER (CONTINUED)
for the fairness opinion delivered by the Company's financial advisor; (ii) the
termination fees are unreasonable; and (iii) the directors who approved the
Merger Agreement had conflicts of interest. The complaint seeks a preliminary
and permanent injunction barring defendants from proceeding with the transaction
or, if the transaction is consummated, an order rescinding it or awarding
damages, together with interest, and an award of attorneys' fees and litigation
expenses. The Company believes the action is without merit.
The Company expects to incur various expenses estimated to range between
$1.5 million and $2.0 million (pre-tax) if the tender offer and acquisition are
consummated. Under certain circumstances, the Company may incur an additional
$6.9 million (pre-tax) of fees if the Company terminates the tender offer and
proposed acquisition. While the exact timing, nature and amount of these
expenses are subject to change, the Company anticipates a one-time pre-tax
charge will be recorded in the quarter in which the tender offer is either
consummated or terminated, possibly resulting in a net loss for such quarter.
NOTE 11--LITIGATION
On August 5, 1998, the Company and its chief executive officer were served
in an action filed in state court in California by the Company's chief financial
officer and secretary claiming that he is due additional compensation in the
form of stock options, and claiming fraud, negligent misrepresentation and
breach of contract in connection therewith. The action seeks not less than $1.5
million plus punitive damages and costs. The action is in the early stages of
development and discovery has not yet been conducted; the Company intends to
vigorously defend against the claim.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased $1.7 million, or 6.1%, to $29.8 million for
the three months ended June 30, 1998 from $28.1 million for the three months
ended June 30, 1997. Revenues increased primarily due to the inclusion of $4.3
million of revenues from Audio International, Inc. which was acquired on
November 14, 1997. This sales increase was somewhat offset by the sales decrease
to Boeing of $0.7 million, which management believes is related primarily to
Boeing's production problems, and the sales decrease of $0.8 million to
Matsushita.
GROSS PROFIT. Gross profit increased $2.5 million, or 34.7%, to $9.7
million for the three months ended June 30, 1998 from $7.2 million for the three
months ended June 30, 1997. Gross profit as a percentage of revenues increased
to 32.6% for the three months ended June 30, 1998 from 25.6% for the three
months ended June 30, 1997. This increase was attributable to an improvement in
gross profit as a percentage of revenues from increased sales of higher margin
product and lower material costs, as well as $0.8 million realized on the bulk
sale of certain inventory items.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased $1.5 million, or 38.1%, to $5.3
million for the three months ended June 30, 1998 from $3.8 million for the three
months ended June 30, 1997. SG&A expenses as a percentage of revenues increased
to 17.8% for the three months ended June 30, 1998 from 13.6% for the three
months ended June 30, 1997. SG&A expenses increased primarily due to the
inclusion of SG&A expenses from Audio International, Inc. which was acquired on
November 14, 1997.
INTEREST EXPENSE. Interest expense decreased $0.3 million, or 44.7%, to
$0.4 million for the three months ended June 30, 1998 from $0.7 million for the
three months ended June 30, 1997. The decrease resulted from the repayment of a
substantial portion of the Company's debt with the net proceeds from the
Follow-On Equity Offering in April 1998.
OTHER EXPENSE, NET. Other expenses, not including interest, increased $0.4
million to $0.6 million for the three months ended June 30, 1998. The primary
reason for the increase was the inclusion of costs associated with the
terminated debt offering.
PROVISION FOR INCOME TAXES. During the three months ended June 30, 1998,
the Company increased its provision for income taxes by $0.5 million primarily
due to higher income before taxes, net of a reduction in its deferred tax
valuation allowance of $0.1 million to reflect the book benefit of federal net
operating loss carryforwards not previously recognized. Approximately $2.2
million of the net operating loss carryforwards are available at June 30, 1998
for federal income tax purposes.
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During the three months ended
June 30, 1998, the Company did not have any extraordinary charges. During the
three months ended June 30, 1997, the Company incurred a $2.1 million
extraordinary charge, net of an estimated $1.4 million income tax benefit, as a
result of refinancing the Company's debt with the net proceeds from its initial
public offering. The extraordinary charge is comprised of: (i) a $1.9 million
write-off of deferred financing costs; (ii) a $1.2 million write-off of
unamortized original issued discounts; (iii) a $0.3 million charge for a
prepayment penalty and expenses; and (iv) a $0.1 million write-off of the
unamortized portion of an interest rate cap agreement.
NET INCOME (LOSS). Net income increased $2.3 million to $1.7 million for
the three months ended June 30, 1998 from a net loss of $0.6 million for the
three months ended June 30, 1997. The increase is a result of the factors
described above.
11
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net income applicable
to common stockholders increased $4.6 million to $1.7 million for the three
months ended June 30, 1998 from a net loss applicable to common stockholders of
$2.9 million for the three months ended June 30, 1997. The increase resulted
from the factors described above, as well as the absence of the $2.2 million
increase in the redemption value of mandatorily redeemable common stock warrants
during the three months ended June 30, 1997.
PRO FORMA INCOME, AS ADJUSTED. Pro forma income, as adjusted before
extraordinary item, increased $0.1 million to $1.7 million for the three months
ended June 30, 1998 from $1.6 million for the three months ended June 30, 1997
as a result of the factors described above. Pro forma income, as adjusted,
reflects the Recapitalization and the IPO and the application of the net
proceeds therefrom, as if each had occurred as of January 1, 1997 (Note 3). The
pro forma results exclude an extraordinary charge incurred in April 1997 as a
result of the repayment of debt with the net offering proceeds.
BOOKINGS AND BACKLOG. Bookings increased $4.8 million, or 14.9%, to $33.1
million for the three months ended June 30, 1998 compared to $28.3 million for
the same period in 1997. The increase in bookings for 1998 includes $4.4 million
attributable to Audio International, Inc., which was acquired in November 1997.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
REVENUES. Revenues increased $4.7 million, or 8.7%, to $59.0 million for
the six months ended June 30, 1998 from $54.3 million for the six months ended
June 30, 1997. Revenues increased primarily due to the inclusion of $9.0 million
of revenues from Audio International, Inc. which was acquired on November 14,
1997. This revenue increase was partially offset by a decrease in sales to
Boeing of $2.6 million, which management believes was primarily related to
Boeing's production difficulties, and a decrease in sales to Matsushita of $2.2
million.
GROSS PROFIT. Gross profit increased $5.5 million, or 41.5%, to $18.7
million for the six months ended June 30, 1998 from $13.2 million for the six
months ended June 30, 1997. Gross profit as a percentage of revenues increased
to 31.7% for the six months ended June 30, 1998 from 24.4% for the six months
ended June 30, 1997. The increase in gross profit was attributable to increased
sales of higher margin products and lower material costs, as well as $0.8
million realized on the bulk sale of certain inventory items.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased $3.0 million, or 41.0%, to $10.2
million for the six months ended June 30, 1998 from $7.2 million for the six
months ended June 30, 1997. SG&A expenses as a percentage of revenues increased
to 17.3% for the six months ended June 30, 1998 from 13.3% for the six months
ended June 30, 1997. SG&A expenses increased primarily due to the inclusion of
SG&A expenses from Audio International, Inc. which was acquired on November 14,
1997.
OPERATING INCOME. Operating income increased $2.2 million to $7.8 million
for the six months ended June 30, 1998 from $5.6 million for the six months
ended June 30, 1997. Operating income as a percentage of revenues increased to
13.2% for the six months ended June 30, 1998 from 10.3% for the six months ended
June 30, 1997. The increase in operating income resulted from the factors
described above.
INTEREST EXPENSE. Interest expense decreased $1.1 million, or 48.8%, to
$1.2 million for the six months ended June 30, 1998 from $2.3 million for the
six months ended June 30, 1997. The decrease resulted from the repayment of a
substantial portion of the Company's debt with the net proceeds from the
Follow-On Equity Offering in April 1998.
OTHER EXPENSE, NET. Other expense, not including interest expense,
increased $0.5 million to $0.6 million during the six months ended June 30,
1998. The primary reason for the increase was the inclusion of costs associated
with the terminated debt offering.
12
PROVISION FOR INCOME TAXES. During the six months ended June 30, 1998, the
Company increased its provision for income taxes by $1.5 million primarily due
to higher income before taxes, net of a reduction in its deferred tax valuation
allowance of $0.1 million to reflect the book benefit of federal net operating
loss carryforwards not previously recognized. Approximately $2.2 million of the
net operating loss carryforwards are available at June 30, 1998 for federal
income tax purposes.
EXTRAORDINARY LOSS FROM DEBT REFINANCING. During the six months ended June
30, 1998, the Company did not have any extraordinary charges. During the six
months ended June 30, 1997, the Company incurred a $2.1 million extraordinary
charge, net of an estimated $1.4 million income tax benefit, as a result of
refinancing the Company's debt with the proceeds from its initial public
offering.
NET INCOME. Net income increased $3.4 million to $3.4 million for the six
months ended June 30, 1998 from a nominal net income for the six months ended
June 30, 1997. The increase is a result of the factors described above.
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS. Net income applicable
to common stockholders increased $6.0 million to $3.4 million for the six months
ended June 30, 1998 from a net loss applicable to common stockholders of $2.6
million for the six months ended June 30, 1997. The increase resulted from the
factors described above, as well as the absence of the $2.2 million increase in
the redemption value of mandatorily redeemable common stock warrants during the
six months ended June 30, 1997.
PRO FORMA INCOME, AS ADJUSTED. Pro forma income, as adjusted before
extraordinary item, increased $0.4 million to $3.4 million for the six months
ended June 30, 1998 from $3.0 million for the six months ended June 30, 1997 as
a result of the factors described above. Pro forma income, as adjusted, reflects
the Recapitalization and the IPO and the application of the net proceeds
therefrom, as if each had occurred as of January 1, 1997 (Note 3). The pro forma
results exclude an extraordinary charge incurred in April 1997 as a result of
the repayment of debt with the net offering proceeds.
BOOKINGS AND BACKLOG. Bookings increased $6.1 million, or 11.0%, to $61.8
million for the six months ended June 30, 1998 compared to $55.7 million for the
same period in 1997. The increase in bookings for 1998 includes $9.4 million
attributable to Audio International Inc., which was acquired in November 1997.
As of June 30, 1998, the Company had a sales order backlog of $84.5 million
which includes $31.4 million from Avtech Corporation, compared to $49.0 million
as of December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, the Company used cash for operating
activities of $0.8 million. The Company used $5.8 million in cash for working
capital. The Company's accounts receivable consist of trade receivables and
unbilled receivables, which are recognized pursuant to the percentage of
completion method of accounting for long-term contracts. Accounts receivable
increased $2.2 million for the six months ended June 30, 1998 due to higher
sales. Inventories increased by $3.1 million for the six months ended June 30,
1998, primarily in anticipation of higher sales during the remainder of 1998.
Accounts payable decreased by $1.5 million for the six months ended June 30,
1998, primarily as a result of a change to a new gold supplier that offered
substantial discounts for prompter payment.
Net cash used in investing activities was $86.7 million during the six
months ended June 30, 1998. Of this amount, $83.6 was used for the Avtech
acquisition and $2.1 million for the Xxxxxxxx acquisition (both net of cash
acquired). The total purchase price for the Xxxxxxxx acquisition included
additional contingent consideration with a maximum of $2.0 million payable
between 1999 and 2002.
Capital expenditures of $1.1 million were made during the six months ended
June 30, 1998. The Company anticipates total capital expenditures of
approximately $4.5 million in 1998.
Net cash provided by financing activities was $89.6 million for the six
months ended June 30, 1998. On April 1, 1998, the Company completed the
Follow-On Equity Offering and sold 2,206,117 shares of
13
common stock for $17.00 per share. Net proceeds from the Follow-On Equity
Offering totaled $34.8 million. The Company also increased its borrowings under
its revolving line of credit by $85.7 million for the six months ended June 30,
1998 to finance the acquisitions of Avtech Corporation and Xxxxxxxx Industries
Inc. on June 26, 1998 and June 30, 1998, respectively.
Cash increased $2.1 million for the six months ended June 30, 1998 due to
the factors described above. In May 1998, the Company amended its existing
Credit Facility, which expires in 2002, to further increase the revolving line
to $105.0 million. The amendment was subject to the fulfillment of certain
conditions, including the consummation of the Avtech acquisition, with mandatory
reductions of up to $45.0 million from the proceeds of certain indebtedness, and
automatic reductions on the last day of each month in the monthly amount of $0.5
million from October 31, 1998 through May 31, 1999 and $1.0 million thereafter
(See Note 6 to the consolidated financial statements). Availability under the
Credit Facility was $12.2 million and working capital aggregated $46.7 million
as of June 30, 1998. The Company believes that the current levels of working
capital and amounts available under the Credit Facility will enable it to meet
its foreseeable short-term and long-term liquidity requirements.
ANTICIPATED CHARGE FOR DEFINITIVE MERGER AGREEMENT AND TENDER OFFER FEES AND
EXPENSES
The Company expects to incur various expenses estimated to range between
$1.5 million and $2.0 million (pre-tax) if the tender offer and acquisition are
consummated (See Note 10 to the consolidated financial statements). Under
certain circumstances, the Company may incur an additional $6.9 million
(pre-tax) of fees if the Company terminates the tender offer and proposed
acquisition. While the exact timing, nature and amount of these expenses are
subject to change, the Company anticipates a one-time pre-tax charge will be
recorded in the quarter in which the tender offer is either consummated or
terminated, possibly resulting in a net loss for such quarter. The Company
believes the fees and expenses will not have a significant adverse effect on its
liquidity or working capital.
FORWARD-LOOKING STATEMENTS
Management's discussion and analysis of financial condition and results of
operations that are not historical facts are forward-looking statements. Such
forward-looking statements in this document are made pursuant to the safe harbor
provisions of the Securities Act of 1933 and the Securities Exchange Act of
1934. Forward-looking statements involve a number of risks and uncertainties.
For a discussion of certain risks and uncertainties that may affect the actual
results of any forward-looking information contained herein, refer to the
section entitled "Risk Factors" included in Item 1, "Description of Business,"
in the Company's Form 10-K for the year ended December 31, 1997.
14
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 5, 1998, the Company and R. Xxxx XxXxxxx, its Chief Executive
Officer, were served in an action filed in state court in California by Xxxxxx
X. Xxxxxx claiming that he is due additional compensation in the form of stock
options, and claiming fraud, negligent misrepresentation and breach of contract
in connection therewith. The action seeks not less than $1.5 million plus
punitive damages and costs. The action is in the early stages of development and
discovery has not yet been conducted; the Company intends to vigorously defend
against the claim. Xx. Xxxxxx has been placed on administrative leave with pay.
The Company's board of directors has appointed Xxxx X. Xxxxxx, the Company's
Vice President of Planning & Business Development, as the interim Chief
Financial Officer and acting Secretary of the Company.
On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware
Chancery Court on behalf of a purported class of stock holders of the Company
against the Company, its directors, Xxxxxxxxx, Lufkin & Xxxxxxxx, Inc., and
certain of its affiliates, alleging, among other things, that the directors had
breached their fiduciary duties in connection with entering into the Merger
Agreement described in Item 5, "Other Information," below. See Item 5 for a
description of the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 17, 1998 the Company held its annual meeting of stockholders. X. X.
XxxXxxxxx and Xxxxxxxx X. Xxxxx, incumbent members of the board of directors,
were re-elected as Class I directors for a term of three years (or until their
respective successors are duly elected and qualified). The terms of office of
each of the remaining directors, Xxxxx X. Xxxxxxx, Xxxx X. Xxxxxx, R. Xxxx
XxXxxxx and Xxxxxxxx X. Xxxxxxx, continued after the meeting. A total of
5,422,672 shares were voted at the meeting, in person or by proxy, as follows:
ELECTION OF XX. XXXXXXXXX ELECTION OF XX. XXXXX
----------------------------------- -----------------------------------
For 5,412,572 For 5,422,472
Withhold 10,100 Withhold 200
---------- ----------
Total 5,422,672 Total 5,422,672
---------- ----------
---------- ----------
No other business was submitted to the stockholders for a vote at the annual
meeting.
ITEM 5. OTHER INFORMATION
DEFINITIVE MERGER AGREEMENT; TENDER OFFER
On July 17, 1998, the Company announced that it had signed a definitive
merger agreement (the "Merger Agreement") with an affiliate of DLJ Merchant
Banking Partners II, which contemplates a cash tender offer by the affiliate for
all of the shares of common stock of the Company at $23.00 per share. As a
result of the pending tender offer, the Company terminated a debt offering and
recorded a $600,000 pre-tax charge as of June 30, 1998 for the estimated costs
incurred.
On July 21, 1998, TAAM Associates, Inc. commenced an action in Delaware
Chancery Court on behalf of a purported class of stockholders of the Company
against the Company, its directors, Xxxxxxxxx, Xxxxxx & Xxxxxxxx, Inc. and
certain of its affiliates, alleging, among other things, that the directors had
breached their fiduciary duties by entering into the Merger Agreement without
engaging in an auction or "active market check" and, therefore, did not
adequately inform themselves in agreeing to terms that are unfair and inadequate
from the standpoint of the Company's stockholders. On July 24, 1998, the
plaintiffs amended the complaint by repeating the allegations in the initial
complaint and adding allegations that:
15
(i) the Company's Solicitation/Recommendation Statement of Schedule 14D-9 (the
"14D-9") contained material misstatements or omissions including: (a) inadequate
disclosure of any future equity participation by management after the
transaction is consummated; (b) no disclosure of any efforts to shop the
Company; (c) incomplete financial information and projections; and (d)
incomplete disclosure of the basis for the fairness opinion delivered by the
Company's financial advisor; (ii) the termination fees are unreasonable; and
(iii) the directors who approved the Merger Agreement had conflicts of interest.
The complaint seeks a preliminary and permanent injunction barring defendants
from proceeding with the transaction or, if the transaction is consummated, an
order rescinding it or awarding damages, together with interest, and an award of
attorneys' fees and litigation expenses. The Company believes the action is
without merit.
The Company expects to incur various expenses estimated to range between
$1.5 million and $2.0 million (pre-tax) in connection with the tender offer.
Under certain circumstances, the Company may incur an additional $6.9 million
(pre-tax) of fees if the Company terminates the tender offer and proposed
acquisition. While the exact timing, nature and amount of these expenses are
subject to change, the Company anticipates a one-time pre-tax charge will be
recorded in the quarter in which the tender offer is either consummated or
terminated, possibly resulting in a net loss for such quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
20.1 Final Prospectus of the Company dated April 2, 1998 (incorporated by reference
to the Company's Form 10-Q filed May 14 1998, Registration No. 333-47457) *
27 Financial Data Schedule **
99.7 Solicitation/Recommendation Statement dated July 22, 1998 (incorporated by
reference to the Company's Schedule 14D-9 filed July 22, 1998) *
------------------------
* Previously filed
** Filed herewith
b. Reports on Form 8-K
On June 5, 1998, the Company filed a Form 8-K Current Report with respect to
the signing of a definitive agreement to acquire Avtech Corporation.
On July 10, 1998, the Company filed a Form 8-K Current Report with respect
to its consummation of the acquisitions of Avtech Corporation and Xxxxxxxx
Industries, Inc.
On July 21, 1998, the Company filed a Form 8-K Current Report with respect
to the Company signing a definitive merger agreement with an affiliate of
DLJ Merchant Banking Partners II, which contemplates a cash tender offer by
the affiliate for all of the shares of common stock of the Company at $23.00
per share.
16
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.
XXXXXXX AIRCRAFT HOLDINGS, INC.
(Registrant)
August 11, 1998 By: /s/ XXXX X. XXXXXX
-----------------------------------------
Name: Xxxx X. Xxxxxx
Title: INTERIM CHIEF FINANCIAL OFFICER AND
ACTING SECRETARY
17
